As filed with the Securities and Exchange Commission on September 2, 1999.
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. 44 X
------ -----
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
Amendment No. 44
------
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, PA 19103
215/564-8074
- --------------------------------------------------------------------------
Approximate date of commencement of proposed sale to the public: As soon as
practical after the effective date of the Registration Statement.
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)(1)
( ) on (date) pursuant to paragraph (a)(1)
(X) 75 days after filing pursuant to paragraph (a)(2)
( ) on (date) pursuant to paragraph (a)(2) of rule 485.
If appropriate, check the following box:
( ) this post-effective amendment designates a new effective date
for a previously filed post-effective amendment.
<PAGE>
PRELIMINARY PROSPECTUS DATED SEPTEMBER 2, 1999
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and is not soliciting an offer to buy these securities
in any state where the offer or sale is not permitted.
FRANK RUSSELL INVESTMENT COMPANY
Tax-Managed Funds
Prospectus
Tax-Managed Large Cap Fund* - Class C and S Shares
Tax-Managed Small Cap Fund - Class C and S Shares
Tax Exempt Bond Fund - Class C, E and S Shares
Tax Free Money Market Fund- Class S Shares
December *, 1999
909 A Street, Tacoma, WA 98402 800 - 787-7354 253-627-7001
As with all mutual funds, the Securities and Exchange Commission has neither
determined that the information in this Prospectus is accurate or complete, nor
approved or disapproved of these securities. It is a criminal offense to state
otherwise.
*Formerly Equity T Fund
<PAGE>
TABLE OF CONTENTS
Risk/Return Summary..............................................
Investment Objective, Principal Investment Strategies and .......
Principal Risks
Performance...................................................
Fees and Expenses.............................................
Summary Comparison of the Funds..................................
The Purpose of the Funds--Multi-Style, Multi-Manager
Diversification..................................................
Investment Objective and Principal Investment Strategies.........
Risks............................................................
Management of the Funds..........................................
The Money Managers...............................................
Dividends and Distributions......................................
Taxes .........................................................
How Net Asset Value Is Determined................................
Distribution and Shareholder Servicing Arrangements..............
How to Purchase Shares...........................................
Exchange Privilege...............................................
How to Redeem Shares.............................................
Payment of Redemption Proceeds...................................
Written Instructions.............................................
Account Policies.................................................
Financial Highlights.............................................
Money Manager Information........................................
RISK/RETURN SUMMARY
Investment Objective, Principal Investment Strategies and
Principal Risks
TAX-MANAGED LARGE CAP FUND
(formerly Equity T Fund)
Investment To provide capital growth on an after-tax basis by
Objective investing principally in equity securities.
Principal The Tax-Managed Large Cap Fund invests primarily in
Investment equity securities of large capitalization US
Strategies companies, although the Fund may invest a limited
amount in non-US firms from time to time. The Fund generally
pursues a market-oriented style of security selection. The Fund
seeks to realize capital growth while minimizing shareholder tax
consequences arising from the Fund's portfolio management
activities in two ways: (i) the realization of returns as capital
gains and (ii) the minimization of realization of capital gains and
the offset of any such realization with capital losses. The Fund
intends to be fully invested at all times.
Principal An investment in the Tax-Managed Large Cap Fund, like
Risks any investment, has risks. The value of the Fund
fluctuates and you could lose money. The principal risks of
investing in the Fund are those associated with tax-sensitive
management, investing in equity securities and exposing liquidity
reserves to equity markets. Additionally, the Fund is subject to
the general risk that its service providers' computer systems may
not function accurately on or after January 1, 2000. Please refer
to the "Risks" section later in this Prospectus for further
details.
TAX-MANAGED SMALL CAP FUND
Investment To provide capital growth on an after-tax basis by
Objective investing principally in equity securities of small capitalization
companies.
Principal The Tax-Managed Small Cap Fund invests primarily in
Investment equity securities of US companies, although the Fund
Strategies may invest a limited amount in non-US firms from time
to time. The Fund generally pursues a market-oriented style of
security selection. The Fund seeks to realize capital growth while
minimizing shareholder tax consequences arising from the Fund's
portfolio management activities in two ways: (i) the realization of
returns as capital gains and (ii) the minimization of realization
of capital gains and the offset of any such realization with
capital losses. The Fund intends to be fully invested at all times.
Principal An investment in the Tax-Managed Small Cap Fund, like
Risks any investment, has risks. The value of the Fund
fluctuates and you could lose money. The principal risks of
investing in the Fund are those associated with tax-sensitive
management, investing in equity securities and exposing liquidity
reserves to equity markets. Additionally, the Fund is subject to
the general risk that its service providers' computer systems may
not function accurately on or after January 1, 2000. Please refer
to the "Risks" section later in this Prospectus for further
details.
TAX EXEMPT BOND FUND
Investment To provide a high level of federal tax-exempt current
Objective income by investing primarily in a diversified
portfolio of investment grade municipal securities.
Principal The Tax Exempt Bond Fund concentrates its investments
Investment in investment-grade municipal debt obligations
Strategies providing tax-exempt interest income. The average
weighted duration of the Fund's portfolio typically ranges within
ten percent of the average weighted duration of the Lehman Brothers
1-10 Year Municipal Bond Index, but may vary up to 25% from the
Index's duration. The Fund has no restrictions on individual
security duration. The Fund employs multiple money managers, each
with its own expertise in the municipal bond market.
Principal An investment in the Tax Exempt Bond Fund, like any
Risks investment, has risks. The value of the Fund
fluctuates and you could lose money. The principal risks of
investing in the Fund are those associated with investing in
fixed-income securities, investing in municipal securities and
using a multi-manager approach. Additionally, the Fund is subject
to the general risk that its service providers' computer systems
may not function accurately on or after January 1, 2000. Please
refer to the "Risks" section later in this Prospectus for further
details.
TAX FREE MONEY MARKET FUND
Investment To provide the maximum current income exempt from
Objective 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.
Principal The Tax Free Money Market Fund invests in a portfolio
Investment of high quality short-term debt securities maturing
Strategies in 397 days or less. The dollar-weighted average
maturity of the Fund's portfolio will be 90 days or less. The Fund
invests almost exclusively in investment-grade municipal debt
obligations providing tax-exempt interest income.
Principal An investment in the Tax Free Money Market Fund, like
Risks any investment, has risks. The value of the Fund
fluctuates and you could lose money. The principal risks of
investing in the Fund are those associated with investing in
fixed-income securities, investing in municipal securities and
credit and liquidity enhancements. Additionally, the Fund is
subject to the general risk that its service providers' computer
systems may not function accurately on or after January 1, 2000.
Please refer to the "Risks" section later in this Prospectus for
further details.
An investment in the Fund is not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other government
agency. Although the Fund seeks to preserve the value of your
investment at $1.00 per share, it is possible to lose money by
investing in the Fund.
Performance
The following bar charts illustrate the risks of investing in the Funds by
showing how the performance of each Fund's Class S Shares varies from year to
year over a 10 year period (or, if a Fund has not been in operation for 10
years, since the beginning of operations of such Fund). The highest and lowest
quarterly returns during the periods shown are set forth below each chart. The
return for the other classes of Shares offered by this Prospectus for the Tax
Exempt Bond Fund will differ from the Class S returns shown in the bar chart,
depending upon the fees and expenses of that class. The chart does not reflect
any account maintenance fee or any fee that you may be required to pay upon
redemption of the Fund's shares. Any such charge will reduce your return.
The tables to the right of the bar charts further illustrate the risks of
investing in the Funds by showing how each Fund's average annual returns for 1,
5 and 10 years (or, if a Fund has not been in operation for 10 years, since the
beginning of operations of such Fund) compare with the returns of certain
indexes that measure broad market performance.
Past performance is no indication of future results.
Tax-Managed Large Cap Fund Class S
(formerly Equity T Fund)
- ----------------------------------------------------------------------
Average annual total returns**
for the periods ended
December 31, 1998
- ----------------------------------------------------------------------
Since
1 Year Inception*
- ----------------------------------------------------------------------
Tax-Managed Large Cap 32.08% 31.66%
Fund Class S
S&P 500 Composite Stock 28.76 30.76
Price Index
- ----------------------------------------------------------------------
Best Quarter: 4th - 1998 - 23.71%
Worst Quarter: 3rd - 1998 - (10.12%)
[BAR CHARTS APPEAR WITHIN GRAPH]
32.20% |
| 32.08%
32.10% |
|
32.00% |
|
31.90% |
|
31.80% | |_| Total Return
| 31.73%
31.70% |
|
31.60% |
|
31.50% |--------------------------------------
1997 1998
* The Tax-Managed Large Cap Fund commenced operations on October 7, 1996.
** No returns are shown for Class C Shares of the Tax-Managed
Large Cap Fund because those Shares were not issued during the periods shown.
Had the rule 12b-1 distribution fees and shareholder servicing fees for Class
C Shares have been reflected in the returns shown for Class S Shares, the
returns shown would have been lower.
Tax-Managed Small Cap Fund Class S
Because the Tax-Managed Small Cap Fund was new when this Prospectus was printed,
its performance history and average annual returns are not included. Performance
history and average annual returns will be available for the Tax-Managed Small
Cap Fund after the Fund has been in operation for one year.
Tax Exempt Bond Fund Class S
- ----------------------------------------------------------------------
Average annual total returns*
for the periods ended
December 31, 1998
- ----------------------------------------------------------------------
1 5 10
Year Years Years
- ----------------------------------------------------------------------
Tax Exempt Bond Fund 4.82% 3.98% 5.30%
Class S**
- ----------------------------------------------------------------------
Lehman 1-10 Year
Blended Municipal 5.95% 5.58% NA
Index#
Salomon Smith Barney
3-Month Treasury 5.05% 5.10 5.44
Bill Index.
- ----------------------------------------------------------------------
30-Day Yields Current
for the period ended
December 31, 1998
- ----------------------------------------------------------------------
Tax Exempt Bond Fund 2.97%
Class S*
- ----------------------------------------------------------------------
30-Day Tax Equivalent
Yield for the period
ended December 31, 1998
- ----------------------------------------------------------------------
Tax Exempt Bond Fund 4.92%
Class S*
- ----------------------------------------------------------------------
Best Quarter: 2nd - 1989 - 3.27%
Worst Quarter: 1st - 1994 - (1.59%)
[BAR CHARTS APPEAR WITHIN GRAPH]
9.00% |
|
8.00% |
| 7.64% 7.81%
7.00% |
| 6.95% 6.12% 6.58%
6.00% |
| 5.85%
5.00% |
| 4.92% 4.82%
4.00% |
|
3.00% | 3.07%
|
2.00% |
| |_| Total Return
1.00% |
|
0.00% |--------------------------------------------------------------------
| -0.54%
-1.00% |
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
- ----------
* No returns or yields are shown for Class C or Class E Shares of the Tax
Exempt Bond Fund because those Shares were not issued during the periods
shown. Had the Rule 12b-1 distribution fees and shareholder servicing fees
for Class C Shares and the shareholder servicing fees for Class E Shares been
reflected in the returns shown for Class S Shares, the returns shown would
have been lower.
** The performance of the Tax Exempt Bond Fund prior to January 1, 1999 reflects
a higher advisory fee than is currently borne by the Fund.
# Prior to November 1, 1999, the comparative index for the Tax Exempt Bond Fund
was the Salomon Smith Barney 3-Month Treasury Bill Index. The Fund believes
that the Lehman 1-10 Year Blended Municipal Index is more broadly
representative of the securities and strategies likely to be employed by the
Tax Exempt Bond Fund and provides more useful information as a comparative
basis for evaluation of the Fund's performance.
Tax Free Money Market Fund Class S
- ----------------------------------------------------------------------
Average annual total returns
For the periods ended
December 31, 1998
- ----------------------------------------------------------------------
1 5 10
Year Years Years
- ----------------------------------------------------------------------
Tax Free Money Market 3.36% 3.38% 3.97%
Fund Class S
- ----------------------------------------------------------------------
30-Day Yields Current Effective
for the period ended
December 31, 1998
- ----------------------------------------------------------------------
Tax Free Money Market 2.99%
Fund Class S
- ----------------------------------------------------------------------
7-Day Yields
for the period ended
December 31, 1998
- ----------------------------------------------------------------------
Tax Free Money Market 3.29% 3.34%
Fund Class S
- ----------------------------------------------------------------------
7-Day Tax Equivalent Yield
For the period ended
December 31, 1998
- ----------------------------------------------------------------------
Tax Free Money Market 5.44% 5.53%
Fund Class S
- ----------------------------------------------------------------------
Best Quarter: 2nd - 1998 - 1.62%
Worst Quarter: 1st - 1994 - (0.58%)
To obtain current yield information, please call 1-800-787-7354.
[BAR CHARTS APPEAR WITHIN GRAPH]
| |_| Total Return
7.00% |
| 6.42%
6.00% |
| 5.99%
5.00% |
| 4.84%
4.00% |
| 3.76% 3.61%
3.00% | 3.09% 3.35% 3.36%
| 2.55% 2.83%
2.00% |
|
1.00% |
|
0.00% |--------------------------------------------------------------------
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
Fees and Expenses
These tables describe the fees and expenses that you may pay if you buy and
hold shares of the Funds.
<TABLE>
<CAPTION>
Shareholder Fees (fees paid directly from your investment)
Maximum
Maximum Sales Maximum
Sales Charge Maximum Account
Charge (Load) Deferred Redempt Exchange Maintenance
(Load) Imposed Sales Fees Fees
Imposed on Charge
on Reinvested (Load)
Purchase Dividends
<S> <C> <C> <C> <C> <C> <C>
Each Fund (All None None None None None None
Classes)
</TABLE>
<TABLE>
<CAPTION>
Annual Operating Expenses (expenses that are deducted from the
Fund assets) (% of net assets)
<S> <C> <C> <C> <C> <C> <C>
Other Total Total
Expenses Gross Fee Net
Advisory Distribution (including Annual Waivers Annual
Fee (12b-1) Administrative Fund and Fund
Fees* Fees)** Operating Reimbursements Operating
Expense# Expenses
Tax-Managed Large Cap
Fund--Class C 0.70% 0.75% 0.53% 1.98% -- 1.98%
Tax-Managed Large Cap
Fund--Class S ....... 0.70% 0.00% 0.24% 0.94% -- 0.94%
Tax-Managed Small Cap
Fund--Class C ....... 0.98% 0.75% 0.58% 2.31% (0.03%) 2.28%
Tax-Managed Small Cap
Fund--Class S ....... 0.98% 0.00% 0.33% 1.31% (0.03%) 1.28%
Tax Exempt Bond
Fund--Class C........ 0.30% 0.75% 0.51% l.56% -- 1.56%
Tax Exempt Bond
Fund--Class E........ 0.30% 0.00% 0.51% 0.81% -- 0.81%
Tax Exempt Bond
Fund--Class S ....... 0.30% 0.00% 0.26% 0.56% -- 0.56%
Tax Free Money Market
Fund--Class S........ 0.20% 0.00% 0.18% 0.38% (.10)% 0.28%
</TABLE>
* Pursuant to the rules of the National Association of Securities Dealers,
Inc. (NASD), the aggregate initial sales charges, deferred sales charges
and asset-based sales charges on shares of the Funds may not exceed 6.25%
of total gross sales, subject to certain exclusions. This 6.25% limitation
is imposed on the Class C Shares of the Funds rather than on a per
shareholder basis. Therefore, long-term shareholders of the Class C Shares
may pay more than the economic equivalent of the maximum front-end sales
charges permitted by the NASD.
** Annual Class C and Class E Shares' operating expenses for the Tax Exempt
Bond Fund are based on average net assets expected to be invested during
the year ending December 31, 1999. Annual Class C and Class S Shares'
operating expenses for the Tax-Managed Small Cap Fund and Class C Shares
operating expenses of the Tax-Managed Large Cap Fund are based on average
net assets expected to be invested during those Classes' first twelve month
period of operations. During the course of this period, expenses may be
more or less than the amount shown. "Other Expenses" for Class C and Class
E Shares of the Tax Exempt Bond Fund and Class C Shares of the Tax-Managed
Small Cap Fund and Tax-Managed Large Cap Fund include a shareholder
servicing fee of 0.25% of the average daily net assets of those Funds'
Class C Shares and Class E Shares, respectively. Other Expenses have been
restated to reflect changes to the Funds' Transfer and Dividend Disbursing
Agency Agreement, which became effective June 8, 1998. Prior to December 1,
1998, FRIMCo provided advisory and administrative services to the Funds
pursuant to a single management agreement under which each Fund paid a
single fee. Since then, FRIMCo's advisory and administrative services have
been provided under a separate advisory agreement and administrative
agreement which provide for the fees reflected in the table.
# If you purchase any class of Shares of the Funds through a financial
intermediary, such as a bank or an investment adviser, you may also pay
additional fees to the intermediary for services provided by the
intermediary. You should contact your financial intermediary for
information concerning what additional fees, if any, will be charged. Each
Fund may also pay, in addition to the fee set forth above, a fee which
compensates FRIMCo for managing collateral which the Funds have received in
securities lending and certain other portfolio transactions which are not
treated as net assets of that Fund ( "additional assets ") in determining
the Fund's net asset value per share. The additional fee payable to FRIMCo
will equal an amount of up to 0.07% of each Fund's additional assets on an
annualized basis.
+ FRIMCo has contractually agreed to waive, at least until November 30, 2000
up to the full amount of its 1.03% combined advisory and administrative
fees for the Tax-Managed Small Cap Fund, and to reimburse the Fund to the
extent that Fund-level expenses exceed 1.25% of the average daily net
assets of that Fund on an annual basis. FRIMCo has contractually agreed to
waive, at least until November 30, 2000, 0.10% of its 0.25% combined
advisory and administrative fees for the Tax Free Money Market Fund. The
Funds' Custodian has agreed to waive a portion of its fees for the first
three months of operation for the Tax-Managed Small Cap Fund.
Example
This example is intended to help you compare the cost of investing in each
Fund with the cost of investing in other mutual funds.
The example assumes that you invest $10,000 in the Fund for the time
periods indicated and then redeemed all of your shares at the end of the period.
The example also assumes your investment has a 5% return each year and that
operating expenses remain the same.
Although your actual costs may be higher or lower, under these assumptions
your costs would be:
<TABLE>
<CAPTION>
1 3 5 10
Year Years Years Years
<S> <C> <C> <C> <C>
Tax-Managed Large Cap Fund--Class C.............. $198 $624 $1,094 $2,490
Tax-Managed Large Cap Fund--Class S.............. 94 296 519 1,182
Tax-Managed Small Cap Fund--Class C.............. 228 719 1,260 2,868
Tax-Managed Small Cap Fund--Class S.............. 128 403 707 1,610
Tax Exempt Bond Fund--Class C.................... 156 492 862 1,962
Tax Exempt Bond Fund--Class E.................... 81 255 448 1,019
Tax Exempt Bond Fund--Class S.................... 56 177 309 704
Tax Free Money Market Fund--Class S.............. 28 88 155 352
</TABLE>
SUMMARY COMPARISON OF THE FUNDS
<TABLE>
<CAPTION>
Anticipated Maximum
Equity Debt
Fund Investments Investments Focus
<S> <C> <C> <C>
Tax-Managed Large Cap Fund............ 65-100% 35% Capital growth
Tax-Managed Small Cap Fund............ 65-100% 35% Capital growth
Tax Exempt Bond Fund.................. 0% 100% Maximum current income
Tax Free Money Market Fund............ 0% 100% Maximum current income
</TABLE>
THE PURPOSE OF THE FUNDS--MULTI-STYLE, MULTI-MANAGER
DIVERSIFICATION
The Funds are offered through certain bank trust departments, registered
investment advisers, broker-dealers or other financial services organizations
that have been selected by the Funds' adviser or distributor (Financial
Intermediaries). The Funds are designed to provide a means for investors to use
Frank Russell Investment Management Company's (FRIMCo) 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.
Unlike most investment companies that have a single organization that acts as
both administrator and investment adviser, the Funds divide responsibility for
corporate management and investment advice between FRIMCo and a number of
different money managers.
Three functions form the core of Russell's consulting services:
o Objective Setting: Defining appropriate investment objectives and desired
investment returns, based on a client's unique situation and risk
tolerance.
o 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.
o 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.
The Funds believe investors should seek to hold fully diversified portfolios
that reflect both their own individual investment time horizons and their
ability to accept risk. The Funds 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 employing
a multi-style, multi-manager approach.
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. For this reason, no single manager
has consistently outperformed the market over extended periods. Although
performance cycles tend to repeat themselves, they do not do so predictably.
The Funds believe, however, that it is possible to select managers who have
shown a consistent ability to achieve superior results within subsets or styles
of specific asset classes and investment styles by employing a unique
combination of qualitative and quantitative measurements. The Funds combine
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 the risk of
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.
The Funds conduct their business through a number of service providers, who
act on behalf of the Funds. FRIMCo, the Funds' administrator and investment
adviser, performs the Funds' day to day corporate management and oversees the
Funds' money managers. Each of the Funds' money managers makes all investment
decisions for the portion of the Fund assigned to it by FRIMCo. The Funds'
custodian, State Street Bank, maintains custody of all of the Funds' assets.
FRIMCo, in its capacity as the Funds' transfer agent, is responsible for
maintaining the Funds' shareholder records and carrying out shareholder
transactions. When a Fund acts in one of these areas, it does so through the
service provider responsible for that area.
INVESTMENT OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
TAX-MANAGED LARGE CAP FUND (formerly Equity T Fund)
Investment To provide capital growth on an after-tax basis by
Objective investing principally in equity securities.
Principal The Tax-Managed Large Cap Fund invests primarily in
Investment equity securities of large capitalization US
Strategies companies, although the Fund may invest a limited amount in
non-US firms from time to time.
The Fund generally pursues a market-oriented style of security
selection based on quantitative investment models. This style
emphasizes investments in large capitalization companies that, on a
long-term basis, appear to be undervalued relative to their growth
prospects, and may include both growth and value securities. Under
normal market conditions, the Tax-Managed Large Cap Fund will
invest at least 65 percent of the value of its total assets in
securities that are included in the S&P 500(R) market index.
The Fund seeks to realize capital growth while minimizing
shareholder tax consequences arising from the Fund's portfolio
management activities. In its attention to tax consequences of its
investment decisions, the Fund differs from most equity mutual
funds, which are managed to maximize pre-tax total return without
regard whether their portfolio management activities result in
taxable distributions to shareholders.
The Fund is designed for long-term investors who seek to minimize
the impact of taxes on their investment returns. The Fund is not
designed for short-term investors or for tax-deferred investment
vehicles such as IRAs and 401(k) plans.
The Fund intends to minimize its taxable distributions to
shareholders in two ways:
o First, the Fund strives to realize its returns as capital
gains, and not as investment income, under US tax laws. To
do so, the Fund typically buys stocks with the intention of
holding them long enough to qualify for capital gain tax
treatment.
o Second, the Fund attempts to minimize its realization of
capital gains and to offset any such realization with
capital losses. To do so, when the Fund sells shares of an
appreciated portfolio security, it seeks to minimize the
resulting capital gains by first selling the shares for
which the Fund paid the highest price. Further the Fund
attempts to offset those capital gains with matching capital
losses by simultaneously selling shares of depreciated
portfolio securities.
If large shareholder redemptions occur unexpectedly, the Fund could
be required to sell portfolio securities resulting in its
realization of net capital gains. This could temporarily reduce the
Fund's tax efficiency. Also, as the Fund matures, it may hold
individual securities that have appreciated so significantly that
it would be difficult for the Fund to sell them without realizing
net capital gains.
The Fund selects and holds portfolio securities based on its
assessment of their potential for long term total returns. The Fund
uses a dividend discount model to gauge securities' anticipated
returns relative to their industry peers. This model forecasts the
expected future dividends of individual securities, and calculates
the expected return at the current share price. The Fund identifies
securities that exhibit superior total return prospects. From among
those securities, using a quantitative after-tax model, the Fund
chooses stocks from a variety of economic sectors and industries,
generally in the proportions that those sectors and industries are
represented in the S&P 500 Index.
When the Funds's shares are redeemed, the Fund may realize capital
gains or income, impacting all shareholders. The Fund believes that
multiple purchases and redemptions of Fund shares by individual
shareholders could adversely affect the Fund's strategy of
tax-efficiency and could reduce its ability to contain costs. The
Fund further believes that short-term investments in the Fund are
inconsistent with its long-term strategy. For this reason, the Fund
will apply its general right to refuse any purchases by rejecting
purchase orders from investors whose patterns of purchases and
redemptions in the Fund is inconsistent with the Fund's strategy.
The Fund intends to be fully invested at all times. Although the
Fund, like any mutual fund, maintains liquidity reserves (i.e.,
cash awaiting investment or held to meet redemption requests), the
Fund exposes these reserves to the performance of appropriate
equity markets by investing in stock index futures contracts. This
causes the Fund to perform generally as though its cash reserves
were actually invested in those markets. The Fund may also invest
its liquidity reserves in one or more Frank Russell Investment
Company (FRIC) money market funds.
Additionally, the Fund may lend up to one-third of its portfolio
securities to earn additional income. These loans may be terminated
at any time. The Fund will receive either cash or US government
debt obligations as collateral.
TAX-MANAGED SMALL CAP FUND
Investment To provide capital growth on an after-tax basis by
Objective investing principally in equity securities of small
capitalization companies.
Principal The Tax-Managed Small Cap Fund invests primarily in
Investment equity securities of US companies, although the Fund
Strategies may invest a limited amount in non-US firms from time
to time.
The Fund generally pursues a market-oriented style of security
selection based on quantitative investment models. This style
emphasizes investments in small capitalization companies that, on a
long-term basis, appear to be undervalued relative to their growth
prospects, and may include both growth and value securities. Under
normal market conditions, the Tax-Managed Small Cap Fund will
invest at least 65 percent of its total assets in securities that
are not included in the S&P 500 market index.
The Fund seeks to realize capital growth while minimizing
shareholder tax consequences arising from the Fund's portfolio
management activities. In its attention to tax consequences of its
investment decisions, the Fund differs from most equity mutual
funds, which are managed to maximize pre-tax total return without
regard whether their portfolio management activities result in
taxable distributions to shareholders.
The Fund is designed for long-term investors who seek to minimize
the impact of taxes on their investment returns. The Fund is not
designed for short-term investors or for tax-deferred investment
vehicles such as IRAs and 401(k) plans.
The Fund intends to minimize its taxable distributions to
shareholders in two ways:
o First, the Fund strives to realize its returns as capital
gains, and not as investment income, under US tax laws. To
do so, the Fund typically buys stocks with the intention of
holding them long enough to qualify for capital gain tax
treatment.
o Second, the Fund attempts to minimize its realization of
capital gains and to offset any such realization with
capital losses. To do so, when the Fund sells shares of an
appreciated portfolio security, it seeks to minimize the
resulting capital gains by first selling the shares for
which the Fund paid the highest price. Further the Fund
attempts to offset those capital gains with matching capital
losses by simultaneously selling shares of depreciated
portfolio securities.
If large shareholder redemptions occur unexpectedly, the Fund could
be required to sell portfolio securities resulting in its
realization of net capital gains. This could temporarily reduce the
Fund's tax efficiency. Also, as the Fund matures, it may hold
individual securities that have appreciated so significantly that
it would be difficult for the Fund to sell them without realizing
net capital gains.
The Fund selects and holds portfolio securities based on its
assessment of their potential for long term total returns.
When the Fund's shares are redeemed, the Fund may realize capital
gains or income, impacting all shareholders. The Fund believes that
multiple purchases and redemptions of Fund shares by individual
shareholders could adversely affect the Fund's strategy of
tax-efficiency and could reduce its ability to contain costs. The
Fund further believes that short-term investments in the Fund are
inconsistent with its long-term strategy. For this reason, the Fund
will apply its general right to refuse any purchases by rejecting
purchase orders from investors whose patterns of purchases and
redemptions in the Fund is inconsistent with the Fund's strategy.
The Fund intends to be fully invested at all times. Although the
Fund, like any mutual fund, maintains liquidity reserves (i.e.,
cash awaiting investment or held to meet redemption requests), the
Fund exposes these reserves to the performance of appropriate
equity markets by investing in stock index futures contracts. This
causes the Fund to perform generally as though its cash reserves
were actually invested in those markets. The Fund may also invest
its liquidity reserves in one or more Frank Russell Investment
Company (FRIC) money market funds.
Additionally, the Fund may lend up to one-third of its portfolio
securities to earn additional income. These loans may be terminated
at any time. The Fund will receive either cash or US government
debt obligations as collateral.
TAX EXEMPT BOND FUND
Investment To provide a high level of federal tax-exempt current
Objective income by investing primarily in a diversified portfolio of
investment grade municipal securities.
Principal The Tax Exempt Bond Fund concentrates its investments
Investment in investment-grade municipal debt obligations
Strategies providing tax-exempt interest income. Specifically,
these 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 to obtain
funds to support special government needs or special projects.
The average weighted duration of the Fund's portfolio typically
ranges within ten percent of the average weighted duration of the
Lehman Brothers 1-10 Year Municipal Bond Index, but may vary up to
25% from the Index's duration. The Fund has no restrictions on
individual security duration.
The Fund employs multiple money managers, each with its own
expertise in the municipal bond market. When determining how to
allocate its assets among money managers, the Fund considers a
variety of factors. These factors include a money manager's
investment style and performance record as well as the
characteristics of the money manager's typical portfolio
investments. These characteristics include portfolio biases,
magnitude of sector shifts, and duration movements. The Fund also
considers the manner in which money managers' historical and
expected investment returns correlate with one another.
The Fund may lend up to one-third of its portfolio securities to
earn additional income. These loans may be terminated at any time.
The Fund will receive either cash or US government debt obligations
as collateral.
TAX FREE MONEY MARKET FUND
Investment To provide the maximum current income exempt from
Objective 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.
Principal The Tax Free Money Market Fund invests in a portfolio
Investment of high quality short-term debt securities maturing
Strategies in 397 days or less. The dollar-weighted average maturity of the
Fund's portfolio will be 90 days or less.
An investment in the Fund is not insured or guaranteed by the Federal
Deposit Insurance Corporation or any other government agency. Although the Fund
seeks to preserve the value of your investment at $1,00 per share, it is
possible to lose money by investing in the Fund. The Fund invests almost
exclusively in investment-grade municipal debt obligations providing tax-exempt
interest income. Specifically, these 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 to obtain funds to support special
government needs or special projects.
Some of the securities in which the Fund invests are supported by credit and
liquidity enhancements from third parties. These enhancements are generally
letters of credit from foreign or domestic banks.
RISKS
An investment in the Funds, like any investment, has risks. The value of each
Fund fluctuates, and you could lose money. The following table describes
principal types of risks that the Funds are subject to and lists next to each
description the Funds most likely to be affected by the risk. A Fund that is not
listed may hold portfolio investments that are subject to one or more of the
risks, but will not do so in a way that is expected to principally affect the
performance of the Fund as a whole. Please refer to the Funds' Statement of
Additional Information for a discussion of risks associated with types of
securities held by the Funds and investment practices employed.
Risk Description Relevant
Associated Fund
With
Multi-manager The investment styles employed by a Fund's Tax
Approach money managers may not be Exempt
Complementary. The interplay of the various Bond
strategies employed by a
Fund's multiple money managers may result in
the Fund's holding a
Concentration of certain types of
securities. This concentration may be
Beneficial or detrimental to the Fund's
performance depending upon the
Performance of those securities and the
overall economic environment.
The multiple manager approach could result
in a high level of portfolio
Turnover, resulting in higher Fund brokerage
expenses and increased tax
Liability from the Fund's realization of
capital gains
Tax-Sensitive A Fund's tax-managed equity investment Tax-Managed
Management strategy may not provide as high a Large
return before consideration of federal Cap
income tax consequences as other funds. Tax-Managed
A tax-sensitive investment strategy Small
involves active management and a Fund Cap
may realize capital gains. In response
to market, economic, political or other
conditions, a Fund may temporarily use a
different investment strategy for
defensive purposes. If a Fund does so,
different factors could affect the
Fund's performance and the Fund may not
achieve its investment objective.
Equity The value of equity securities will rise and Tax-Managed
securities fall in response to the activities Large
of the company that issued the stock, Cap
general market conditions, and/or Tax-Managed
economic conditions. Small
Cap
o Value Investments in value stocks are subject to Tax-Managed
Stocks risks that (i) their intrinsic Large
values may never be realized by the market Cap
or (ii) such stock may turn out Tax-Managed
not to have been undervalued. Small
Cap
o Growth Growth company stocks may provide minimal Tax-Managed
Stocks dividends that can cushion Large
stock prices in a market decline. The value Cap
of growth company Tax-Managed
stocks may Tax-Managed rise and fall Small Cap
dramatically based, in part,
Small on investors' perceptions of the
Cap company rather than on
fundamental analysis of the stocks.
o Market Market-oriented investments are generally Tax-Managed
Oriented subject to the risks associated Large
Investments with growth and value stocks. Cap
Tax-Managed
Small
Cap
o Securities Investments in small capitalization Tax-Managed
of Small companies may involve greater risks because Small
Capitaliza- these companies generally have a limited Cap
tion track record. Smaller capitalization
Companies companies often have narrower markets and
more limited managerial
and financial resources than larger,
more established companies.
As a result, the performance of small
capitalization companies may be more
volatile which could increase the
volatility of a Fund's portfolio.
Risk Description Relevant
Associated With Fund
Fixed Prices of fixed-income securities rise Tax Exempt
Income and fall in response to interest Bond
Securities rate changes. Generally, when interest Tax Free
rates rise, prices of fixed-income securities Money
fall. The longer the duration of the Market
security, the more sensitive the security
is to this risk. A 1% increase in interest
rates would reduce the value of a $100 note
by approximately one dollar if it had a one
year duration, but would reduce its
value by approximately fifteen dollars
if it had a 15 year duration. There is also a
risk that one or more of the securities will
be downgraded in credit rating or go into
default. Lower-rated bonds generally
have higher credit risks.
Municipal Municipal obligations are affected by Tax Exempt
Obligations economic, business or political Bond
Developments. These securities may be Tax Free
Tax Free subject to provisions of Money
Litigation, bankruptcy and other laws Market
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.
Credit and Adverse changes in a guarantor's credit Tax Exempt Bond
Liquidity quality if contemporaneous Tax Free Money
Enhancements with adverse changes in the guaranteed Market
security could cause losses to
a Fund and may affect its net asset value.
Exposing By exposing its liquidity reserves to the Tax-Managed
Liquidity equity market, a Fund's Large
Reserves to performance tends to correlate more Cap
Equity Markets closely to the performance of the Tax-Managed
market as a whole. Although this Small
increases a Fund's performance if Cap
equity markets rise, it reduces a Fund's
performance if equity
markets decline.
Securities If a borrower of a Fund's securities Tax-Managed
Lending fails financially, the Fund's Large
recovery of the loaned securities may be Cap
delayed or the Fund may Tax-Managed
lose its rights to the collateral. Small
Cap
Tax Exempt
Bond
Risk Associated With Description Relevant
Year 2000 Fund
o Year 2000 and Fund The Funds' operations depend on the All
operations smooth functioning of Funds
their service providers' computer systems.
The Funds and their shareholders could be
adversely affected if those
computer systems do not properly process
and calculate date-related information
on or after January 1, 2000.
Many computer software systems in use
today cannot distinguish between the year
2000 and the year 1900. Although year
2000-related computer problems could have a
negative effect on the Funds and their
shareholders, the Funds' service providers
have advised the Funds that they are working
to avoid such problems. Because it is the
obligation of those service providers to
ensure the proper functioning of their
computer systems, the Funds do not expect
to incur any material expense in connection
with year 2000 preparations.
o Year 2000 and Fund The Funds and their shareholders All
portfolio could be adversely Funds
investments Affected if the computer systems of
the issuers in which the
Funds invest or those of the
service providers they depend
upon, do not properly process and calculate
date-related information on or after
January 1, 2000. If such an event
Occurred, the value of those issuer's
securities could be reduced.
An investment in any of the Funds is not a bank deposit and is not insured
or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. The Tax Free Money Market Fund seeks to preserve the value of
an investment in that Fund at $1.00 per share, however it is possible to lose
money by investing in that Fund.
MANAGEMENT OF THE FUNDS
The Funds' investment adviser is FRIMCo, 909 A Street, Tacoma, Washington
98402. FRIMCo pioneered the "multi-style, multi-manager" investment method in
mutual funds and manages over $14 billion in more than 30 mutual fund
portfolios. FRIMCo was established in 1982 to serve as the investment management
arm of Russell.
Russell, which acts as consultant to the Funds, was founded in 1936 and has
been providing comprehensive asset management consulting services for over 30
years to institutional investors, principally large corporate employee benefit
plans. Russell provides the Funds and FRIMCo with the asset management
consulting services that it provides to its other consulting clients. The Funds
do not compensate Russell for these services. Russell and its affiliates have
offices around the world--in Tacoma, New York, Toronto, London, Zurich, Paris,
Sydney, Auckland, Singapore and Tokyo.
Russell is a subsidiary of The Northwestern Mutual Life Insurance Company.
Founded in 1857, Northwestern Mutual is a mutual life insurance corporation
headquartered in Milwaukee, Wisconsin. It leads the US in both individual life
insurance sold annually and individual life insurance in force.
FRIMCo recommends money managers to the Funds, allocates Fund assets among
them, oversees them, and evaluates their results. FRIMCo also oversees the
management of the Funds' liquidity reserves. The Funds' money managers select
the individual portfolio securities for the assets assigned to them.
FRIMCo's officers and employees who oversee the money managers are:
o Randall P. Lert, who has been Chief Investment Officer of FRIMCo since
June 1989.
o 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 listed in this section, has primary
responsibility for management of the Fixed Income I, Diversified Bond,
Short Term Bond, Fixed Income III, Tax Exempt Bond and Multistrategy
Bond Funds.
o Randal C. Burge, who has been a Portfolio Manager of FRIMCo since June
1995. From 1990 to 1995, Mr. Burge was a Client Executive for Frank
Russell Australia. Mr. Burge, jointly with another portfolio manager
listed in this section, has primary responsibility for management of
the Fixed Income I, Fixed Income III, Diversified Bond, Short Term
Bond, Tax Exempt Bond, Multistrategy Bond and Emerging Markets Funds.
o Jean E. Carter, who has been a Portfolio Manager of FRIMCo since April
1994. Ms. Carter, jointly with another portfolio manager listed in
this section, has primary responsibility for management of the
International and International Securities Funds.
o 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 listed in this section, has
primary responsibility for management of the International and
International Securities Funds.
o James M. Imhof, Manager of FRIMCo's Portfolio Trading, manages the
Funds' liquidity portfolios on a day to day basis and has been
responsible for ongoing analysis and monitoring of the money managers
since 1989.
o 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 listed in this section, has primary
responsibility for management of the Tax-Managed Equity Aggressive
Strategy, Equity Aggressive Strategy, Balanced Strategy, Moderate
Strategy, Conservative Strategy, Emerging Markets and Real Estate
Securities Funds.
o C. Nola Kulig, who has been a Portfolio Manager of FRIMCo since
January 1996. From 1994 to 1995, Ms. Kulig was a member of the Alpha
Strategy Group. From 1988 to 1994, Ms. Kulig was Senior Research
Analyst with Russell. Ms. Kulig, jointly with another portfolio
manager listed in this section, has primary responsibility for
management of the Equity I, Equity II, Equity III, Equity Q,
Tax-Managed Small Cap, Diversified Equity, Quantitative Equity,
Special Growth and Equity Income Funds.
o 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 listed in this section, has primary
responsibility for management of the Equity I, Equity II, Equity III,
Equity Q, Tax-Managed Large Cap, Tax-Managed Small Cap, Diversified
Equity, Quantitative Equity, Special Growth, and Equity Income Funds.
o Brian C. Tipple, who has been a Portfolio Manager of FRIMCo since July
1999. From 1991 to 1999, Mr. Tipple was a Client Executive with Frank
Russell Trust Company. From 1986 to 1989, he was an Investment Officer
with Frank Russell Trust Company. Mr. Tipple, jointly with another
portfolio manager listed in this section, has primary responsibility
for the Tax-Managed Large Cap Fund.
The aggregate annual rate of advisory and administrative fees payable to
FRIMCo monthly on a pro rata basis are the following percentages of each Fund's
average daily net assets: Tax-Managed Large Cap Fund, 0.75%; Tax-Managed Small
Cap, 1.03%; Tax Exempt Bond Fund, 0.35%; and Tax Free Money Market Fund, 0.25%.
Of these aggregate amounts 0.05% is attributable to administrative services.
FRIMCo has contractually agreed to waive, at least until October 31, 2000, a
portion of its 1.03% combined advisory and administrative fees for the
Tax-Managed Small Cap Fund, up to the full amount of those fees for Fund-level
expenses that exceed 1.25% of the average daily net assets of that Fund on an
annual basis. Additionally, FRIMCo has agreed to reimburse the Tax-Managed Small
Cap Fund, at least until October 31, 2000, for all remaining Fund-level expenses
that exceed 1.25% of the average daily net assets of the Tax-Managed Small Cap
Fund on an annual basis. FRIMCo has contractually agreed to waive 0.10% of its
0.25% combined advisory and administrative fees for the Tax Free Money Market
Fund until October 31, 2000. Prior to December 1, 1998, FRIMCo provided advisory
and administrative services to the Funds pursuant to a single Management
Agreement for which each Fund paid a single fee. Since then, FRIMCo's advisory
and administrative services are provided under a separate advisory agreement and
an administrative agreement. Each Fund may also pay, in addition to the
aggregate fees set forth above, a fee which compensates FRIMCo for managing
collateral which the Funds have received in securities lending and certain other
portfolio transactions which are not treated as net assets of that Fund
("additional assets") in determining the Fund's net asset value per share. The
additional fee payable to FRIMCo will equal an amount of up to 0.07% of each
Fund's additional assets on an annualized basis.
THE MONEY MANAGERS
Each Fund allocates its assets among the money managers listed under "Money
Manager Information" at the end of this Prospectus. FRIMCo, as the Funds'
advisor, may change the allocation of a Fund's assets among money managers at
any time. The Funds received an exemptive order from the Securities and Exchange
Commission (SEC) that permits a Fund to engage or terminate a money manager at
any time, subject to the approval by the Fund's Board of Trustees (Board),
without a shareholder vote. A Fund notifies its shareholders within 60 days of
when a money manager begins providing services. The Funds select money managers
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 any Fund's selection or termination of a money manager.
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. Additionally, each manager must operate within more specific
constraints developed from time to time by FRIMCo. FRIMCo develops such
constraints for each manager based on FRIMCo's assessment of the manager's
expertise and investment style. By assigning more specific constraints to each
money manager, FRIMCo intends to capitalize on the strengths of each money
manager and to combine their investment activities in a complementary fashion.
Although the money managers' activities are subject to general oversight by the
Board and the Funds' officers, neither the Board, the officers, FRIMCo, nor
Russell evaluate the investment merits of the money managers' individual
security selections.
J.P. Morgan Investment Management, Inc. ("Morgan") manages the Tax-Managed
Large Cap Fund. Robin Chance is the individual responsible for the management of
the Fund. Ms. Chance, Vice President and member of the Structured Equity Group,
has responsibility for tax aware structured equity strategies. Ms. Chance joined
Morgan in 1987. Ms. Chance is a CFA and a graduate of the of the University of
Pennsylvania's Management and Technology Program, also earning an MBA from New
York University's Stern School of Business.
Geewax, Terker & Company manages the Tax-Managed Small Cap Fund. John
Julius Geewax is the portfolio manager responsible for the management of the
Fund. Mr. Geewax is a graudate of the University of Pennsylvania and has earned
a J.D. from the University of Pennsylvania as well as an MBA and a PhD from the
Wharton School of the University of Pennsylvania. Mr. Geewax co-founded the firm
in 1982. He is currently a general partner and portfolio manager responsible for
research and development and trading oversight for all of the firm's investment
services.
<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 (if any), according to the following schedule:
Declared Payable Funds
Daily....................2nd to last business Tax Free Money
day of the month Market Fund
Monthly..................Early in the following Tax Exempt Bond
month Fund
Annually.................Mid-December Tax-Managed Large
Cap Fund
Tax-Managed Small
Cap Fund
The Tax Free Money Market Fund determines net investment income immediately
prior to the determination of its 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 a 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 the Fund pays them by January 31. Capital gains
realized during November and December will be distributed to you generally
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 Funds'
Transfer Agent, at Operations Department, P.O. Box 1591, Tacoma, WA 98401.
TAXES
In general, distributions from a Fund are taxable to you as either ordinary
income or capital gains. This is true whether you reinvest your distributions in
additional shares of the Fund or receive them in cash. Any capital gains
distributed by a Fund are taxable to you as long-term capital gains no matter
how long you have owned your shares. Every January, you will receive a statement
that shows the tax status of distributions you received for the previous year.
Distributions declared in December but paid in January are taxable as if they
were paid in December. Distributions taxed as capital gains may be taxable at
different rates depending on how long a Fund holds its assets.
When you sell or exchange your shares of a Fund, you may have a capital gain
or loss. The tax rate on any gain from the sale or exchange of your shares
depends on how long you have held your shares.
The Fund managers make no representation as to the amount or variability of
each Funds capital gain distributions which may vary as a function of several
variables including, but not limited to, prevailing dividend yield levels,
general market conditions, shareholders redemption patterns and Fund cash
equitization activity.
Fund distributions and gains from the sale or exchange of your shares will
generally be subject to state and local income tax. Non-US investors may be
subject to US withholding and estate tax. You should consult your tax
professional about federal, state, local or foreign tax consequences in holding
shares of a Fund.
Any foreign taxes paid by a Fund on its investments may be passed through to
its shareholders as foreign tax credits.
If you are a corporate investor, a portion of the dividends from net
investment income paid by the Tax-Managed Large Cap Fund and the Tax-Managed
Small Cap Fund will generally qualify, in part, for the corporate
dividends-received deduction. However, the portion of the dividends so qualified
depends on the aggregate qualifying dividend income received by each Fund from
domestic (US) sources. Certain holding period and debt financing restrictions
may apply to corporate investors seeking to claim the deduction. You should
consult your tax professional with respect to the applicability of these rules.
Although the Tax-Managed Large Cap and the Tax-Managed Small Cap Funds are
managed to minimize the amount of capital gains realized during a particular
year, the realization of capital gains is not entirely within either 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 the Tax-Managed Large Cap Fund and and
Tax-Managed Small Cap Fund may vary considerably from year to year.
The Tax Exempt Bond and Tax Free Money Market 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, including the alternative minimum tax, to
the extent that 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. The
Funds may invest a portion of their assets in private activity bonds, the income
from which is a preference item in determining your alternative minimum tax.
By law, a Fund must withhold 31% of your distributions and proceeds if you do
not provide your correct taxpayer identification number, or certify that such
number is correct, or if the IRS instructs the Fund to do so.
The tax discussion set forth above is included for general information only.
Prospective investors should consult their own tax advisers concerning the
federal, state, local or foreign tax consequences of an investment in a Fund.
Additional information on these and other tax matters relating to the Funds
and their shareholders is included in the section entitled "Taxes" in the SAI.
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 Tax-Managed Large Cap, Tax-Managed Small Cap and Tax Exempt
Bond Funds, a business day is one on which the New York Stock Exchange (NYSE) is
open for trading. A business day for the Tax Free Money Market Fund includes any
day on which the NYSE is open for trading and the Boston Federal Reserve Bank is
open. Neither the NYSE nor the Boston Federal Reserve Bank is open on national
holidays. Each Fund determines net asset value as of the close of the NYSE
(currently 4:00 p.m. Eastern Time).
Valuation of Portfolio Securities
Securities held by the Funds are typically priced using market quotations or
pricing services when the prices are believed to be reliable--that is, when the
prices reflect the fair market value of the 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.
The Tax Free Money Market Fund's 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 maturity of
any discount or premium is assumed. Money market instruments maturing within 60
days of the valuation date held by the Tax-Managed Large Cap, Tax-Managed Small
Cap and Tax Exempt Bond 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.
DISTRIBUTION AND SHAREHOLDER
SERVICING ARRANGEMENTS
Certain Funds offer multiple classes of shares. The Tax Exempt Bond Fund
offers Class C Shares, Class E Shares and Class S Shares. The Tax-Managed Small
Cap Fund and Tax-Managed Large Cap Fund offer Class C Shares and Class S Shares.
The Tax Free Money Market Fund offers Class S Shares only.
Class C Shares participate in the Funds' Rule 12b-1 distribution plan and
in the Funds' shareholder servicing plan. Under the distribution plan, the
Funds' Class C shares pay distribution fees of 0.75% annually for the sale and
distribution of Class C shares. Under the shareholder servicing plan, the Funds'
Class C shares pay shareholder servicing fees of 0.25% annually for services
provided to Class C shareholders. Because both of these fees are paid out of the
Funds' Class C share assets on an ongoing basis, over time these fees will
increase the cost of a Class C share investment in the Funds, and the
distribution fee may cost an investor more than paying other types of sales
charges.
Class E Shares participate in the Funds' shareholder servicing plan. Under
the shareholder servicing plan, the Funds' Class E shares pay daily fees equal
to 0.25% on an annualized basis for services provided to Class E shareholders.
The shareholder servicing fees are paid out of the Funds' Class E share assets
on an ongoing basis, and over time will increase the cost of your investment in
the Tax Exempt Bond Fund.
Class S Shares do not participate in the Funds' distribution plan or the
Funds' shareholders services plan.
HOW TO PURCHASE SHARES
Funds are generally available only through a select network of qualified
Financial Intermediaries. If you are not currently working with one of these
Financial Intermediaries, please call Russell Investor Services at (800)
RUSSEL4, (800-787-7354) for assistance in contacting an investment professional
near you.
There is a $5,000 required minimum investment in each of the Funds described
in this Prospectus except the Tax Free Money Market Fund. The Funds are designed
to be used as part of an allocated investment portfolio in combination with
Funds described in FRIC's Russell Funds Prospectus or Institutional Funds
Prospectus. Investment in the Funds described in this Prospectus will be applied
toward any applicable required minimum initial investment with respect to other
Funds.
Financial Intermediaries may charge their customers a fee for providing
investment-related services. Financial Intermediaries that maintains omnibus
accounts with the Funds may receive administrative fees from the Funds or their
transfer agent. Financial Intermediaries may receive shareholder servicing
compensation with respect to Class C and Class E shares of the Funds, and may
receive distribution compensation with respect to Class C shares.
Paying for Shares
You may purchase shares of the Funds through a Financial Intermediary on any
business day the Funds are open. Purchase orders are processed at the next net
asset value per share calculated after the Funds' receive your order in proper
form (defined in the "Written Instructions" section), and accept the order.
All purchases must be made in US dollars. Checks and other negotiable bank
drafts must be drawn on US banks and made payable to "Frank Russell Investment
Company." The Funds reserve the right to reject any purchase order for any
reason including, but not limited to, receiving a check which does not clear the
bank or a payment which does not arrive in proper form by settlement date. You
will be responsible for any resulting loss to the Funds. An overdraft charge may
also be applied. Cash, third party checks and checks drawn on credit card
accounts generally will not be accepted. However, exceptions may be made by
prior special arrangement with certain Financial Intermediaries.
Offering Dates and Times
Orders must be received by the Funds prior to the following designated times:
Close of the NYSE (currently 4:00 pm Eastern Time)
Tax-Managed Large Cap,
Tax-Managed Small Cap
and Tax Exempt Bond Funds
11:45 a.m. Eastern Time Tax Free Money Market Fund
Purchases can be made on any day when Fund shares are offered. Because
Financial Intermedaries' processing time may vary, please ask your Financial
Intermediary representative when your account will be credited.
Order and Payment Procedures
Generally, you must place purchase orders for Fund shares through a Financial
Intermediary. You may pay for your purchase by mail or electronic funds
transfer. Initial purchases require a completed and signed Application for each
new account regardless of the investment method. Specific payment arrangements
should be made with your Financial Intermediary.
By Mail
For new accounts, please mail the completed Application to your Financial
Intermediary. Payment for orders may be made by check or other negotiable bank
draft and sent to the Funds' Transfer Agent. Certified checks are not necessary,
but checks are accepted subject to collection at full face value in US funds.
Third party checks will not be accepted. Checks should be made payable to "Frank
Russell Investment Company."
By Federal Funds Wire
You can pay for orders by wiring federal funds to the Funds' Custodian, State
Street Bank and Trust Company. All wires must include your account registration
and account number for identification. Inability to properly identify a wire
transfer may prevent or delay timely settlement of your purchase.
By Automated Clearing House ("ACH")
You can make initial or subsequent investments through ACH to the Funds'
Custodian, State Street Bank and Trust Company.
Automated Investment Program
You can make regular investments (minimum $50) in the Funds in an established
account on a monthly, quarterly, semiannual or annual basis by automatic
electronic funds transfer from a bank account. You must make a separate transfer
for each Fund in which you purchase shares. You may change the amount or stop
the automatic purchase at any time. Contact your Financial Intermediary for
further information on this program and an enrollment form.
Three Day Settlement Program
The Funds will accept orders from Financial Intermediaries to purchase shares
of the Funds for settlement on the third business day following the receipt of
the order. These orders are paid for by a federal funds wire if the Financial
Intermediary has enrolled in the program and agreed in writing to indemnify the
Funds against any losses resulting from non-receipt of payment.
EXCHANGE PRIVILEGE
By Mail or Telephone
Through your Financial Intermediary, you may exchange shares of any Fund you
own for shares of any other Fund on the basis of the 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 FRIC 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 your Financial Intermediary.
Exchanges may be made by mail or by telephone if the registration of the two
accounts is identical. Contact your Financial Intermediary for assistance in
exchanging shares and, because Financial Intermediaries' processing time may
vary, to find out when your account will be credited or debited. To request an
exchange in writing, please follow the procedures in the "Written Instructions"
section before mailing to your Financial Intermediary.
An exchange involves the redemption of shares, which is treated as a sale for
income tax purposes. Thus, capital gain or loss may be realized. Please consult
your tax adviser for more information. 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) at the next net asset value per share
calculated after the Funds received the exchange request in good order.
In-Kind Exchange of Securities
FRIMCo, in its capacity as the Funds' investment advisor, may, at its
discretion, permit you to acquire Fund shares in exchange for securities you
currently own. Any securities exchanged must: meet the investment objective,
policies and limitations of the applicable 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 for 15 days following the purchase by exchange or until the transfer
has settled, whichever comes first. If you are a taxable investor, you will
generally realize a gain or loss for federal income tax purposes on the
exchange. If you are contemplating an in-kind exchange you should consult your
tax adviser.
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 way the Fund values its assets. Any interest
earned on the securities following their delivery to the Funds and prior to the
exchange will be considered in valuing the securities. All interest, dividends,
subscription or other rights attached to the securities becomes the property of
the Fund, along with the securities. Please contact your Financial Intermediary
for further information.
HOW TO REDEEM SHARES
Shares of the Funds may be redeemed through your Financial Intermediary on
any business day the Funds are open at the next net asset value per share
calculated after the Funds' Transfer Agent receives an order in proper form
(defined in the "Written Instructions" section). Payment will ordinarily be made
within seven days after receipt of your request in proper form. Shares recently
purchased by check may not be available for redemption for 15 days following the
purchase or until the check clears, whichever occurs first, to assure payment
has been collected.
Redemption Dates and Times
Redemption requests must be placed through a Financial Intermediary and
received by the Funds prior to the following designated times. Because Financial
Intermediaries' processing times may vary, please ask your Financial
Intermediary representative when your account will be debited. Requests can be
made by mail or telephone on any day when Fund shares are offered, or through
the Systematic Withdrawal Program.
Close of the NYSE (currently 4:00 pm Eastern Time)
Tax-Managed Large Cap,
Tax-Managed Small Cap
and Tax Exempt Bond Funds
11:45 a.m. Eastern Time Tax Free Money Market Fund
By Mail or Telephone
You may redeem your shares by calling or writing to your Financial
Intermediary. Written requests to sell shares are in proper form when the
instructions are signed by all registered owners, with a signature guarantee if
necessary.
Systematic Withdrawal Program
The Tax Exempt Bond and Tax Free Money Market Funds offer a systematic
withdrawal program which allows you to redeem your shares and receive regular
payments from your account on a monthly, quarterly, semiannual or annual basis.
If you would like to establish a systematic withdrawal program, please complete
the proper section of the account application and indicate how you would like to
receive your payments. You will generally receive your payment by the end of the
month in which a payment is scheduled. When you redeem your shares under a
systematic withdrawal program, it is a taxable transaction.
This program is not offered in connection with the Tax-Managed Large Cap Fund
or the Tax-Managed Small Cap Fund in view of their portfolio management
strategies.
You may choose to have the payments mailed to you or directed to your bank
account by ACH transfer. You may discontinue the systematic withdrawal program,
or change the amount and timing of withdrawal payments by contacting your
Financial Intermediary.
Accounts in Street Name
Many brokers, employee benefit plans and bank trusts combine their client's
Fund holdings in a single omnibus account with the Funds held in the brokers',
plans', or bank trusts' own name or "street name." Therefore, if you hold Fund
shares through a brokerage account, employee benefit plan or bank trust fund,
the Funds may have records only of the omnibus account. In this case, your
broker, employee benefit plan or bank is responsible for keeping track of your
account information. This means that you may not be able to request transactions
in your Fund shares directly through the Funds, but can do so only through your
broker, plan administrator or bank. Ask your Financial Intermediary for
information on whether your Fund shares are held in an omnibus account.
PAYMENT OF REDEMPTION PROCEEDS
By Check
When you redeem your shares, a check for the redemption proceeds will be sent
to the shareholder(s) of record at the address of record within seven days after
the Funds receive a redemption request in proper form.
By Wire
If you have established the electronic redemption option, your redemption
proceeds can be wired to your predesignated bank account on the next bank
business day after the Funds receive your redemption request. The Funds may
charge a fee to cover the cost of sending a wire transfer for redemptions less
than $1,000, and your bank may charge an additional fee to receive the wire.
Wire transfers can be sent to US commercial banks that are members of the
Federal Reserve System.
WRITTEN INSTRUCTIONS
Proper Form: Written instructions must be in proper form. They
must include:
A description of the request
The name of the Fund(s)
The class of shares, if applicable
The account number(s)
The amount of money or number of shares being purchased,
exchanged, transferred or redeemed
The name(s) on the account(s)
The signature(s) of all registered account owners
For exchanges, the name of the Fund you are exchanging into
Your daytime telephone number
Signature Requirements Based on Account Type
Account Type Requirements for Written Requests
Individual, Joint Written instructions must be signed by
Tenants, Tenants each shareholder, exactly
in Common as the names appear in the account
registration.
UGMA or UTMA (custodial Written instructions must be signed by
accounts for minors) the custodian in his/her
capacity as it appears in the account
registration.
Corporation, Association Written instructions must be signed by
authorized person(s), stating his/her
capacity as indicated by the corporate
resolution to act on the
account. A copy of the corporate
resolution,
certified within the past 90 days,
authorizing the signer to act.
Estate, Trust, Pension, Written instructions must be signed by
Profit all trustees. If the name of
Sharing Plan the trustee(s) does not appear in the account
registration, please provide a copy of the
trust document certified within the last
60 days.
Joint tenancy Written instructions must by signed by
shareholders whose the surviving tenant(s).
co-tenants are deceased A certified copy of
the death certificate must accompany the
request.
Signature Guarantee
The Funds reserve the right to require a signature guarantee under certain
circumstances. A signature guarantee verifies the authenticity of your
signature. You should be able to obtain a signature guarantee from a bank,
broker, credit union, savings association, clearing agency, or securities
exchange or association, but not a notary public. Call your financial
institution to see if it has the ability to guarantee a signature.
ACCOUNT POLICIES
Third Party Transactions
If you purchase Fund shares as part of a program of services offered by a
Financial Intermediary, you may be required to pay additional fees. You should
contact your Financial Intermediary for information concerning what additional
fees, if any, may be charged.
Redemption In-Kind
A Fund may pay for any portion of the redemption amount in excess of $250,000
by a distribution in-kind of securities from the Fund's portfolio, instead of in
cash. If you receive an in-kind distribution of portfolio securities, and choose
to sell them, you will incur brokerage charges.
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand a Fund's
financial performance for the past 5 years (or, if a Fund or Class has not been
in operation for 5 years, since the beginning of operations for that Fund or
Class). Certain information reflects financial results for a single Fund share
throughout each year or period ended December 31 and for the six months ended
June 30, 1999. The total returns in the table represent how much your investment
in the Fund would have increased (or decreased) during each period, assuming
reinvestment of all dividends and distributions. This information, except the
six months ended June 30, 1999 data, has been audited by PricewaterhouseCoopers
LLP, whose report, along with the Funds' financial statements, are included in
the Funds' annual report, which is available upon request. The Fund's Semi-
Annual Report for the period ended June 30, 1999 is also available upon request.
The information in the tables represents the Financial Highlights for each
Fund's Class S Shares for the periods shown. No Class C or Class E Shares of the
Tax Exempt Bond Fund, Class C or Class S Shares of the Tax-Managed Small Cap
Fund or Class C Shares of the Tax-Managed Large Cap Fund were issued during the
periods shown.
<TABLE>
<CAPTION>
Tax-Managed Large Cap Fund--Class S Shares
Years
Ended December 31
-------------------
Six
Months
Ended
June
30, 1999* 1998 1997 1996+
----- ----- ----- -----
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Year......... $18.26 $13.90 $10.61 $10.00
----- ----- ----- -----
Income from Investment Operations:
Net investment income (d)............... .09 .10 .08 .03
----- ----- ----- -----
Net realized and unrealized gain (loss)
on investments......................... 2.28 4.35 3.28 .61
----- ----- ----- -----
Total Income From Investment
Operations......................... 2.37 4.45 3.36 .64
----- ----- ----- -----
Less Distributions:
Net investment income................... -- (.08) (.07) (.03)
Net realized gain on investments........ -- (.01) -- --
----- ----- ----- -----
Total Distributions.................. -- (.09) (.07) (.03)
----- ----- ----- -----
Net Asset Value, End of Year............... $20.63 $18.26 $13.90 $10.61
----- ----- ----- -----
Total Return (%)(a)(c)..................... 12.98 32.08 31.73 6.10
Ratios (%)/Supplemental Data:
Operating expenses, net, to average
net assets (b)(c)..................... .77 .99 1.00 1.00
Operating expenses, gross, to average
net assets (b)(c)..................... .77 99 1.08 2.83
Net investment income to average
net assets (b)(c)..................... .90 .61 .92 1.62
Portfolio turnover (b).................. 44.53 50.59 39.23 8.86
Net assets, end of year ($000 omitted).. 455,090 305,45 109,735 19,931
+ For the period October 7, 1996 (commencement of operations) to
December 31, 1996.
* Unaudited.
(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.
(d) For the period ended December 31, 1998, average month-end shares
outstanding were used for this calculation.
</TABLE>
<TABLE>
<CAPTION>
Tax Exempt Bond Fund--Class S Shares
Years Ended December 31
------------------------------
Six Months
Ended June
30, 1999* 1998 1997 1996 1995 1994
---------- ----- ----- ----- ----- ----
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year... $21.39 $21.19 $21.02 $21.2 $20.48 $21.45
----- ----- ----- ----- ----- -----
Income from Investment Operations:
Net investment income (a)......... .41 .81 .84 .85 .81 .86
Net realized and unrealized gain
(loss) on investments............ (.60) .19 .18 (.21) .77 (.97)
----- ----- ----- ----- ----- -----
Total From Investment
Operations..................... (.19) 1.00 1.02 .64 1.58 (.11)
----- ----- ----- ----- ----- -----
Less Distributions:
Net investment income............ (.34) (.80) (.85) (.86) (.82) (.86)
----- ----- ----- ----- ----- -----
Total Distributions........... (.34) (.80) (.85) (.86) (.82) (.86)
----- ----- ----- ----- ----- -----
Net Asset Value, End of Year........ $20.86 $21.39 $21.19 $21.02 $21.24 $20.48
----- ----- ----- ----- ----- -----
Total Return (%).................... (.93) 4.82 4.92 3.07 7.81 (0.54)
Ratios (%)/Supplemental Data:
Operating expenses, to average
net assets..................... .53 .72 .71 .75 .74 .72
Net investment income to average
net assets..................... 3.92 3.80 3.99 4.02 3.91 4.14
Portfolio turnover (%)............ 133.64 74.42 40.79 74.34 73.91 71.71
Net assets, end of year
($000 omitted)................. 146,674 128,959 83,076 66,344 63,838 48,975
* Unaudited.
(a) For the period ended December 31, 1998, average month-end shares
outstanding were used for this calculation.
</TABLE>
<TABLE>
<CAPTION>
Tax Free Money Market Fund--Class S Shares
Years Ended December 31
---------------------------------
Six Months
Ended June
30, 1999* 1998 1997 1996 1995 1994
---------- ----- ----- ----- ----- ----
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year... $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
----- ----- ----- ----- ----- -----
Income from Investment Operations:
Net investment income............. .0152 .0331 .0355 .0329 .0370 .0279
----- ----- ----- ----- ----- ----
Less Distributions:
Net investment income............. (.0152) (.0331) (.0355) (.0329) (.0370) (.0279)
----- ----- ----- ----- ----- -----
Net Asset Value, End of Year......... $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
----- ----- ----- ----- ----- -----
Total Return (%)..................... 1.53 3.36 3.61 3.35 3.76 2.83
Ratios (%)/Supplemental Data:
Operating expenses, net, to
average daily net assets......... .29 .34 .28 .42 .48 .40
Operating expenses, gross, to
average daily net assets......... .39 .44 .38 .42 .48 .40
Net investment income to
average daily net assets.......... 3.06 3.29 3.55 3.28 3.69 2.84
Net assets, end of year ($000
omitted)........................ 181,637 194,663 130,725 102,207 78,000 100,819
* Unaudited.
</TABLE>
MONEY MANAGER INFORMATION
The money managers have no affiliations with the Funds or the Funds' service
providers other than their management of Fund assets. 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 Funds in FRIC, or to other clients of Frank
Russell Company, including its wholly owned subsidiary, Frank Russell Trust
Company.
Tax-Managed Large Cap Fund
J.P. Morgan Investment Management Inc., 522 Fifth Ave., 6th Floor,
New York, NY 10036.
Tax-Managed Small Cap Fund
Geewax, Terker & Company, 99 Starr Street, Phoenixville, PA 19460.
Tax Exempt Bond Fund
MFS Institutional Advisors, Inc., 500 Boylston Street, Boston, MA 02116.
Standish, Ayer & Wood, Inc., One Financial Center, Boston, MA 02111.
Tax Free Money Market Fund
Weiss, Peck & Greer, L.L.C., One New York Plaza, 30th Floor, New York, NY
10004.
IN CONSIDERING INVESTMENT IN THE FUNDS, DO NOT RELY ON ANY INFORMATION UNLESS
IT IS CONTAINED IN THIS PROSPECTUS OR IN THE FUNDS' STATEMENT OF ADDITIONAL
INFORMATION. THE FUNDS HAVE NOT AUTHORIZED ANYONE TO ADD ANY INFORMATION OR TO
MAKE ANY ADDITIONAL STATEMENTS ABOUT THE FUNDS. THE FUNDS MAY NOT BE AVAILABLE
IN SOME JURISDICTIONS OR TO SOME PERSONS. THE FACT THAT YOU HAVE RECEIVED THIS
PROSPECTUS SHOULD NOT, IN ITSELF, BE TREATED AS AN OFFER TO SELL FUND SHARES TO
YOU. CHANGES IN THE AFFAIRS OF THE FUNDS OR IN THE FUNDS' MONEY MANAGERS MAY
OCCUR AFTER THE DATE ON THE COVER PAGE OF THIS PROSPECTUS. THIS PROSPECTUS WILL
BE AMENDED OR SUPPLEMENTED TO REFLECT ANY MATERIAL CHANGES TO THE INFORMATION IT
CONTAINS.
For more information about the Funds, the following documents are available
without charge:
Annual/Semiannual Reports: Additional information about the Funds' investments
is available in the Funds' annual and semiannual reports to shareholders. In
each Fund's annual report, you will find a discussion of the market conditions
and investment strategies that significantly affected the Fund's performance
during its last fiscal year.
Statement of Additional Information (SAI): The SAI provides more detailed
information about the Funds.
The annual report for each Fund and the SAI are incorporated into this
Prospectus by reference. You may obtain free copies of the reports and the SAI,
and may request other information, by contacting your Financial Intermediary or
the Funds at:
Frank Russell Investment Company
909 A Street
Tacoma, WA 98402
Telephone: 1-800-787-7354
Fax: 253-591-3495 Distributor: Russell
Internet: Fund Distributors, Inc.
http://www.russell.com
SEC File No. 811-3153
36-08-060(11/99)
You can review and copy information about the Funds (including the SAI) at the
Securities and Exchange Commission's Public Reference Room in Washington, D.C.
You can obtain information on the operation of the Public Reference Room by
calling the Commission at 1-800-SEC-0330. You can obtain copies of this
information upon paying a duplicating fee by writing to the Public Reference
Section of the Commission, Washington, D.C. 20549-6009. Reports and other
information about the Funds are also available on the Commission's Internet
website at http://www.sec.gov.
FRANK RUSSELL INVESTMENT COMPANY
Tax-Managed Large Cap Fund - Classes C and S
Tax-Managed Small Cap Fund - Classes C and S
Tax Exempt Bond Fund - Classes C, E, S
Tax Free Money Market Fund - Class S
- -------------------------------------------------------------------------------
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and is not soliciting an offer to buy these securities
in any state where the offer or sale is not permitted.
FRANK RUSSELL INVESTMENT COMPANY
LifePoints(R) Tax-Managed Funds
Prospectus
Class C and S Shares:
Tax-Managed Equity Aggressive Strategy Fund
Tax-Managed Aggressive Strategy Fund
Tax-Managed Moderate Strategy Fund
Tax-Managed Conservative Strategy Fund
December 1, 1999
909 A STREET, TACOMA, WA 98402 800-787-7354 253-627-7001
As with all mutual funds, the Securities and Exchange Commission has neither
determined that the information in this Prospectus is accurate or complete, nor
approved or disapproved of these securities. It is a criminal offense to state
otherwise.
<PAGE>
TABLE OF CONTENTS
Risk/Return Summary
Investment Objective..........................................
Principal Investment Strategies...............................
Principal Risks...............................................
Performance...................................................
Fees and Expenses.............................................
Summary Comparison of the Funds...............................
The Purpose of the Funds--Multi-Style, Multi-Manager..........
Diversification...............................................
Management of the Underlying Funds and the LifePoints.......
Tax-Managed Funds.............................................
The Money Managers for the Underlying Funds...................
Investment Objectives, Investment Strategies and Risks of the
Underlying Funds..............................................
Principal Risks...............................................
Dividends and Distributions...................................
Taxes.........................................................
How Net Asset Value Is Determined.............................
Distribution and Shareholder Servicing Arrangements...........
How to Purchase Shares........................................
Exchange Privilege............................................
How to Redeem Shares..........................................
Payment of Redemption Proceeds................................
Written Instructions..........................................
Account Policies..............................................
Money Manager Information.....................................
<PAGE>
Investment Objective
Tax-Managed seeks to achieve high, long-term capital
Equity appreciation on an after-tax basis
Aggressive while recognizing the possibility of high
Strategy fluctuations in year-to-year market values.
Fund
Tax-Managed seeks to achieve high, long-term capital
Aggressive appreciation with low current income on an
Strategy after-tax basis, while recognizing the
Fund possibility of substantial fluctuations in year-to-year
market values.
Tax-Managed seeks to achieve moderate long-term capital
Moderate appreciation with high current income on an
Strategy after-tax basis, while recognizing the
Fund possibility of moderate fluctuations in
year-to-year market values.
Tax-Managed seeks to achieve moderate total rate of return through
Conservative low capital appreciation and reinvestment Fund of a high
Strategy Fund level of current income on an after-tax basis.
Principal Investment Strategies
Each of the Frank Russell Investment Company ("FRIC") Funds described in this
Prospectus ("LifePoints(R) Tax-Managed Funds") is a "fund of funds," and
diversifies its assets by investing, at present, in the Class S Shares of
several other FRIC Funds ("Underlying Funds"). Each LifePoints Tax-Managed Fund
seeks to achieve a specific investment objective by investing in different
combinations of the Underlying Funds using a tax-efficient strategy.
The LifePoints Tax-Managed Funds seek to achieve their investment objectives
while minimizing shareholder tax consequences arising from their portfolio
management activities. In their attention to tax consequences of portfolio
management, the LifePoints Tax-Managed Funds differ from most other
fund-of-funds, which are managed to maximize pre-tax return without regard to
whether their portfolio management activities result in taxable distributions to
shareholders. The LifePoints Tax-Managed Funds are designed for long-term
investors who seek to minimize the impact of taxes on their investment returns.
The Funds are not designed for short-term investors or for tax-deferred
investment vehicles such as IRAs and 40l(k) plans.
Each LifePoints Tax-Managed Fund intends to minimize its taxable
distributions to shareholders in three ways:
First, each LifePoints Tax-Managed Fund strives to realize its returns as
capital gains, and not as investment income, under US tax laws. To do so, the
Fund typically buys shares of Underlying Funds with the intention of holding
them long enough to qualify for capital gain tax treatment.
Second, each LifePoints Tax-Managed Fund attempts to minimize its realization
of capital gains and to offset any such realization with capital losses. To
do so, when the Funds sells shares of an appreciated Underlying Fund, it
seeks to minimize the resulting capital gains by first selling the shares for
which it paid the highest price. Further the Fund attempts to offset those
capital gains with matching capital losses by simultaneously selling shares
of depreciated Underlying Funds.
Third, each LifePoints Tax-Managed Fund allocates a portion of its assets to
Underlying Funds that employ tax-efficient strategies.
If large shareholder redemptions occur unexpectedly, a LifePoints Tax-Managed
Fund could be required to sell shares of appreciated Underlying Funds resulting
in realization of net capital gains. This could temporarily reduce the
LifePoints Tax-Managed Fund's tax efficiency. Also, as each LifePoints
Tax-Managed Fund matures, it may hold shares of Underlying Funds that have
appreciated so significantly that it would be difficult for the Fund to sell
them without realizing net capital gains.
When LifePoints Tax-Managed Fund's shares are redeemed, the Fund may realize
capital gains or income, impacting all shareholders. The LifePoints Tax-Managed
Funds believe that multiple purchases and redemptions of Fund shares by
individual shareholders could adversely affect their strategy of tax-efficiency
and could reduce their ability to contain costs. The LifePoints Tax-Managed
Funds further believe that short-term investments in the Funds are inconsistent
with their long-term strategy. For this reason, each LifePoints Tax-Managed Fund
will apply its general right to refuse any purchases by rejecting purchase
orders from investors whose patterns of purchases and redemptions in the Fund is
inconsistent with the Fund's strategy.
Each LifePoints Tax-Managed Fund allocates its assets by investing in shares
of a diversified group of Underlying Funds. The Underlying Funds in which each
LifePoints Tax-Managed Fund invests are shown in the table below. The LifePoints
Tax-Managed Funds intend their strategy of investing in combinations of
Underlying Funds to result in investment diversification that an investor could
otherwise achieve only by holding numerous individual investments.
<TABLE>
<CAPTION>
Tax-Managed
Equity Tax-Managed Tax-Managed Tax-Managed
Aggresive Aggressive Moderate Conservative
Strategy Strategy Strategy Strategy
Fund Fund Fund Fund
Underlying Fund
<S> <C> <C> <C> <C>
Tax-Managed Small Cap Fund..........20% 12% 9% 6%
Tax-Managed Large Cap Fund
(formerly Equity T Fund)............53% 35% 29% 18%
Diversified Equity Fund.............4% 3% 2% 1%
Quantitative Equity Fund............4% 3% 2% 1%
International Securities Fund.......16% 19% 15% 9%
Emerging Markets Fund...............3% 3% 3% 2%
Tax Free Money Market Fund..........-- 10% 10% 10%
Tax Exempt Bond Fund................-- 15% 30% 53%
</TABLE>
Each LifePoints Tax-Managed Fund intends to be fully invested at all times.
Although the Funds, like all other mutual funds, maintain liquidity reserves
(i.e. cash awaiting investment or held to meet redemption requests), the Funds
expose these reserves to the performance of appropriate equity markets by
investing in stock futures contracts. This causes the Funds to perform as though
their cash reserves were actually invested in those markets. Additionally, the
Funds invest their liquidity reserves in one or more FRIC money market funds.
A LifePoints Tax-Managed Fund can change the allocation of its assets among
Underlying Funds at any time, if the LifePoints Tax-Managed Funds' investment
adviser, Frank Russell Investment Management Company (FRIMCo) believes that
doing so would better enable the LifePoints Tax-Managed Fund to pursue its
investment objective. From time to time, each LifePoints Tax-Managed Fund
adjusts its investments within set limits based on FRIMCo's outlook for the
economy, financial markets generally and relative market valuation of the asset
classes represented by each Underlying Fund. Additionally, each LifePoints
Tax-Managed Fund may deviate from set limits when, in FRIMCo's opinion, it is
necessary to do so to pursue the LifePoints Tax-Managed Fund's investment
objective. However, the LifePoints Tax-Managed Funds expect that amounts they
allocate to each Underlying Fund will generally vary only within 10% of the
ranges specified in the table above.
LOGO
Tax-Managed Equity Aggressive Strategy Fund
[PIE CHART APPEARS HERE]
Quantitative Equity Fund 10%
Tax Managed Small Cap Fund 15%
Tax Managed Large Cap Fund 50%
International Securities Fund 20%
Emerging Markets Fund 5%
LOGO
Tax-Managed Aggressive Fund
[PIE CHART APPEARS HERE]
Diversified Equity Fund 3%
Quantitative Equity Fund 3%
Tax-Managed Small Cap
Fund 12%
Tax-Managed Large Cap
Fund 35%
International Securities Fund 19%
Emerging Markets Fund 3%
Tax Free Money Market Fund 10%
Tax Exempt Bond Fund 15%
LOGO
Balanced Strategy Fund
[PIE CHART APPEARS HERE]
Emerging Markets Fund 3%
Real Estate Securities Fund 5%
Special Growth Fund 5%
Diversified Bond Fund 25%
International Securities Fund 14%
Diversified Equity Fund 16%
Multistrategy Bond Fund 16%
Quantiative Equity Fund 16%
LOGO
[PIE CHART APPEARS HERE]
Tax-Managed Moderate Strategy Fund
Quanitative Equity Fund 2%
Tax-Managed Small Cap Fund 9%
Tax-Managed Large Cap Fund 29%
International Securities 15%
Emerging Market Fund 3%
Tax-Free Money Market Fund 10%
Tax-Exempt Bond Fund 30%
Diversified Equity Fund 2%
LOGO
[PIE CHART APPEARS HERE]
Tax-Managed Conservative Fund
Quantitative Equity Fund 1%
Tax Managed Small Cap Fund 6%
Tax Managed Large Cap Fund 18%
International Securities Fund 9%
Emerging Markets Fund 2%
Tax Free Money Market 10%
Tax-Exempt Bond Fund 53%
Diversified Equity Fund 1%
Diversification
Each LifePoints Tax-Managed Fund is a "nondiversified" investment company for
purposes of the Investment Company Act of 1940 because it invests in the
securities of a limited number of issuers (i.e., the Underlying Funds). Each of
the Underlying Funds in which the LifePoints Tax-Managed Funds invest is a
diversified investment company.
Principal Risks
You should consider the following factors before investing in the LifePoints
Tax-Managed Funds:
o An investment in the LifePoints Tax-Managed Funds, like any investment,
has risks. The value of each LifePoints Tax-Managed Fund fluctuates, and
you could lose money.
o Since the assets of each LifePoints Tax-Managed Fund is invested primarily
in shares of the Underlying Funds, the investment performance of each
LifePoints Tax-Managed Fund is directly related to the investment
performance of the Underlying Funds in which it invests.
o The policy of each LifePoints Tax-Managed Fund is to allocate its assets
among the Underlying Funds within certain ranges. Therefore, the
LifePoints Tax-Managed Funds may have less flexibility to invest than a
mutual fund without such constraints.
o A LifePoints Tax-Managed Fund is exposed to the same risks as the
Underlying Funds in direct proportion to the allocation of its assets among
the Underlying Funds. These risks include the risks associated with a
multi-manager approach to investing, as well as those associated with
investing in equity securities, fixed income securities, and international
securities. In addition, each LifePoints Tax-Managed Fund and each
Underlying Fund could be adversely affected if the computer systems of its
service providers or of the issuers in which they invest fail to operate
properly on or after January 1, 2000. For further detail on the risks
summarized here, please refer to the section "Risks of the Underlying
Funds".
o An investment in any of the LifePoints Tax-Managed Funds is not a bank
deposit and is not insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency.
o The officers, Trustees, and FRIMCo 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 Tax-Managed Funds and to the Underlying Funds.
Performance
Because each LifePoints Tax-Managed Fund was new when this prospectus was
printed, no performance history is included. Performance history will be
available for each LifePoints Tax-Managed Fund after it has been in operation
for one calendar year.
<PAGE>
Fee and Expenses
These tables describe the fees and expenses that you may pay if you buy and
hold shares of the LifePoints Tax-Managed Funds.
Shareholder Fees
(fees paid directly from your investment)
Maximum
Maximum Sales Maximum
Sales Charge Maximum Account
Charge (Load) Deferred Redemption Exchange Maintenance
(Load) Imposed Sales Fees Fees Fees
Imposed on Charge
on Reinvested (Load)
Purchases Dividends
Each Fund None None None None None None
(Class C)
Each Fund None None None None None None
(Class S)
<TABLE>
<CAPTION>
Annual Operating Expenses
(expenses that are deducted from Fund assets)
(% of net assets)
Other
Expenses
(including Total Total
Administrative Gross Expense Net
Advisory Distribution Fees and Annual Waivers Annual
Fees (12b-1) Shareholder Fund and Fund
Fees* Servicing Operating Reimbursements# Operating
Fees)** Expenses+ Expenses
<S> <C> <C> <C> <C> <C> <C>
Class C Shares
Tax-Managed Equity
Aggressive Strategy
Fund................... 0.20% 0.75% 0.67% 1.62% (0.62)% 1.00%
Tax-Managed
Aggressive
Strategy Fund.......... 0.20% 0.75% 0.75% 1.70% (0.70)% 1.00%
Tax-Managed
Moderate Strategy
Fund................... 0.20% 0.75% 0.54% 1.49% (0.49)% 1.00%
Tax-Managed
Conservative
Strategy Fund.......... 0.20% 0.75% 1.78% 2.73% (1.73)% 1.00%
Class S Shares
Tax-Managed Equity
Aggressive Strategy
Fund................... 0.20% 0.00% 0.42% 0.62% (0.62)% 0.00%
Tax-Managed
Aggressive Strategy
Fund................... 0.20% 0.00% 0.50% 0.70% (0.70)% 0.00%
Tax-Managed
Moderate Strategy
Fund................... 0.20% 0.00% 0.29% 0.49% (0.49)% 0.00%
Tax-Managed
Conservative
Strategy Fund.......... 0.20% 0.00% 1.53% 1.73% (1.73)% 0.00%
</TABLE>
* Pursuant to the rules of the National Association of Securities Dealers,
Inc. ("NASD"), the aggregate initial sales charges, deferred sales charges
and asset-based sales charges on shares of the LifePoints Tax-Managed Funds
may not exceed 6.25% of total gross sales, subject to certain exclusions.
This 6.25% limitation is imposed on the Class C Shares of the LifePoints
Tax-Managed Funds rather than on a per shareholder basis. Therefore,
long-term shareholders of the Class C Shares may pay more than the economic
equivalent of the maximum front-end sales charges permitted by the NASD.
** The Fund expenses shown in this table do not include the pro-rata expenses
of the Underlying Funds, which are shown in the next two tables. For
purposes of this table, "Other Expenses" for Class C include a shareholder
services fee of up to 0.25% of average daily net assets. Annual operating
expenses for each Class of Shares are estimated, based on average net
assets expected to be invested for the Fund's first twelve months of
operations. During the course of this period, expenses may be more or less
than the amount shown. FRIMCo's advisory and administrative services are
provided separately under an advisory agreement and administrative
agreement which provide for the fees reflected in the table.
+ If you purchase any class of Shares of a LifePoints Tax-Managed Fund
through a Financial Intermediary, such as a bank or an investment adviser,
you may also pay additional fees to the intermediary for services provided
by the intermediary. You should contact your financial intermediary for
information concerning what additional fees, if any, will be charged.
# FRIMCo has contractually agreed to waive, at least through November 30,
2000, its 0.20% advisory fee. The LifePoints Tax-Managed Funds' custodian
has agreed to waive a portion of its fees for the first three months of the
Funds' operations. Certain LifePoints Tax-Managed Funds' operating expenses
will be paid by the Underlying Funds and/or FRIMCo, as more fully described
below.
No LifePoints Tax-Managed Fund will bear any operating expenses. Those
operating expenses include those arising from accounting, administrative,
custody, auditing, legal and transfer agent services. They do not include
expenses attributable to advisory fees (which are currently waived by FRIMCo),
any Rule 12b-1 distribution fee, any shareholder service fees, or any
nonrecurring extraordinary expenses, which will be borne by the LifePoints
Tax-Managed Funds or their appropriate classes of shares.
A LifePoints Tax-Managed Fund's operating expenses are borne either by the
Underlying Funds in which the LifePoints Tax-Managed Fund invests or by FRIMCo.
This arrangement is governed by Special Servicing Agreements among each of the
affected Funds and FRIMCo. Those agreements are entered into on a yearly basis
and must be re-approved annually by FRIC's Board of Trustees.
Shareholders in a LifePoints Tax-Managed Fund bear indirectly the
proportionate expenses of the Underlying Funds in which the LifePoints
Tax-Managed Fund invests. The following table provides the expense ratios for
each of the Underlying Funds in which the LifePoints Tax-Managed Funds may
invest (based on information as of December 31, 1998). As explained at the
beginning of this Prospectus, each LifePoints Tax-Managed Fund intends to invest
in some, but not all, of the Underlying Funds.
Total
Underlying Fund (Class S Shares) Operating
Expense
Ratios
Diversified Equity Fund.............................. .95%
Quantitative Equity Fund............................. .94%
International Securities Fund........................ 1.30%
Emerging Markets Fund................................ 1.81%
Tax-Managed Large Cap Fund (formerly Equity T Fund) .94%
Tax-Managed Small Cap Fund*.......................... 1.28%
Tax Exempt Bond Fund................................. .56%
Tax Free Money Market Fund........................... .28%
* Estimated based on average net assets expected to be invested during the
first twelve months of operations.
Based on these expense ratios, the LifePoints Tax-Managed Funds expect their
total direct and indirect operating expense ratios of each class of shares of
each LifePoints Tax-Managed Fund (calculated as a percentage of average net
assets) to be as follows:
Class Class
C S
Tax-Managed Equity Aggressive Strategy.......... 2.11% 1.11%
Tax-Managed Aggressive Strategy................. 1.95% 0.95%
Tax-Managed Moderate Strategy................... 1.87% 0.87%
Tax-Managed Conservative Strategy............... 1.74% 0.74%
Each LifePoints Tax-Managed Fund's total expense ratio is based on its
estimated total operating expense ratio plus a weighted average of the expense
ratios of the Underlying Funds in which it plans to invest. These total expense
ratios may be higher or lower depending on the allocation of a LifePoints
Tax-Managed Fund's assets among the Underlying Funds, the actual expenses of the
Underlying Funds and the actual expenses of the LifePoints Tax-Managed Funds.
Example
This example is intended to help you compare the cost of investing in each
LifePoints Tax-Managed Fund with the cost of investing in other mutual funds.
The example assumes that you invest $10,000 in a LifePoints Tax-Managed
Fund for the time periods indicated and then redeemed all of your shares at the
end of the period. This example also assumes your investment has a 5% return
each year, and that operating expenses, which include the indirect expenses of
the Underlying Funds, remain the same.
Although your actual costs may be higher or lower, under these assumptions
your costs would be:
Class C: 1 Year 3 Years
Tax-Managed Equity Aggressive Strategy Fund... $211 $664
Tax-Managed Aggressive Strategy Fund.......... $195 $616
Tax-Managed Moderate Strategy Fund............ $187 $590
Tax-Managed Conservative Strategy Fund........ $174 $549
Class S: 1 Year 3 Years
Tax-Managed Equity Aggressive Strategy Fund... $111 $349
Tax-Managed Aggressive Strategy Fund.......... $95 $300
Tax-Managed Moderate Strategy Fund............ $87 $275
Tax-Managed Conservative Strategy Fund........ $74 $234
<PAGE>
SUMMARY COMPARISON OF THE FUNDS
The investment objectives of the LifePoints Tax-Managed Funds are summarized
below in a chart that illustrates the degree to which each LifePoints
Tax-Managed Fund seeks to obtain capital appreciation, income, and stability of
principal:
Capital Possibility
LifePoints Tax-Managed Fund Appreciation Income of
Fluctuation
Tax-Managed Equity Aggressive
Strategy Fund........................... High Low High
Tax-Managed Aggressive Strategy Fund.... High Low High
Tax-Managed Moderate Strategy Fund...... Moderate High Moderate
Tax-Managed Conservative Strategy Fund.. Low High Low
THE PURPOSE OF THE FUNDS--MULTI-STYLE, MULTI-MANAGER
DIVERSIFICATION
The LifePoints Tax-Managed Funds are offered through certain bank trust
departments, registered investment advisers, broker-dealers and other financial
services organizations that have been selected by the LifePoints Tax-Managed
Funds' adviser or distributor (Financial Intermediaries). The LifePoints
Tax-Managed Funds offer investors the opportunity to invest in a diversified
mutual fund investment allocation program and are designed to provide a means
for investors 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.
Three functions form the core of Russell's consulting services:
o Objective Setting: Defining appropriate investment objectives and desired
investment returns, based on a client's unique situation and risk
tolerance.
o 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.
o 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.
The LifePoints Tax-Managed Funds believe investors should seek to hold fully
diversified portfolios that reflect both their own individual investment time
horizons and their ability to accept risk. The LifePoints Tax-Managed Funds
believe that for many, this can be accomplished through strategically purchasing
shares in one or more of the Underlying Funds which have been structured to
provide access to specific asset classes employing a multi-style, multi-manager
approach.
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. For this reason, no single manager
has consistently outperformed the market over extended periods. Although
performance cycles tend to repeat themselves, they do not do so predictably.
The LifePoints Tax-Managed Funds believe, however, that it is possible to
select managers who have shown a consistent ability to achieve superior results
within subsets or styles of specific asset classes and investment styles by
employing a unique combination of qualitative and quantitative measurements. A
number of the Underlying Funds in which the LifePoints Tax-Managed Funds invest
combine 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 the
risk of 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.
The LifePoints Tax-Managed Funds have a greater potential than most mutual
funds for diversification among investment styles and money managers since the
LifePoints Tax-Managed Funds invest in shares of several Underlying Funds. The
LifePoints Tax-Managed Funds were created to provide a mutual fund investor with
a simple but effective means of structuring a diversified mutual fund investment
program suited to meet the investor's individual needs. FRIMCo has long stressed
the value of diversification in an investment program, and has offered its
advisory expertise in assisting investors on how to design their individual
investment program.
The LifePoints Tax-Managed Funds conduct their business through a number of
service providers, who act on behalf of the Funds. FRIMCo, the Funds'
administrator and investment adviser, performs the Funds' day to day corporate
management and oversees the Funds' money managers. Each of the Funds' money
managers makes all investment decisions for the portion of the Fund assigned to
it by FRIMCo. The Underlying Funds' custodian, State Street Bank, maintains
custody of all of the Underlying Funds' assets. FRIMCo, in its capacity as the
Funds' transfer agent, is responsible for maintaining the Funds' shareholder
records and carrying out shareholder transactions. When a Fund acts in one of
these areas, it does so through the service provider responsible for that area.
MANAGEMENT OF THE UNDERLYING FUNDS
AND THE LIFEPOINTS TAX-MANAGED FUNDS
The investment adviser of the LifePoints Tax-Managed Funds and each of the
Underlying Funds is FRIMCo, 909 A Street, Tacoma, Washington 98402. FRIMCo
pioneered the "multi-style, multi-manager" investment method in mutual funds and
manages over $14 billion in more than 30 mutual fund portfolios. FRIMCo was
established in 1982 to serve as the investment management arm of Russell.
Russell, which acts as consultant to the LifePoints Tax-Managed Funds and
each of the Underlying Funds, was founded in 1936 and has been providing
comprehensive asset management consulting services for over 30 years to
institutional investors, principally large corporate employee benefit plans.
Russell provides the LifePoints Tax-Managed Funds, the Underlying Funds, and
FRIMCo with the asset management consulting services that it provides to its
other consulting clients. Neither the LifePoints Tax-Managed Funds nor the
Underlying Funds compensate Russell for these services. Russell and its
affiliates have offices around the world--in Tacoma, New York, Toronto, London,
Zurich, Paris, Sydney, Auckland, Singapore and Tokyo.
Russell is a subsidiary of The Northwestern Mutual Life Insurance Company.
Founded in 1857, Northwestern Mutual is a mutual life insurance corporation
headquartered in Milwaukee, Wisconsin. It leads the US in both individual life
insurance sold annually and individual life insurance in force.
FRIMCo recommends money managers to the Underlying Funds, allocates
Underlying Fund assets among them, oversees them, and evaluates their results.
FRIMCo also oversees the management of the Underlying Funds' liquidity reserves.
The Underlying Funds' money managers select the individual portfolio securities
for the assets in the Underlying Funds assigned to them.
James A. Jornlin is responsible for the day to day decisions regarding the
investment and reinvestment of the LifePoints Tax-Managed Funds within their
target asset allocation strategy percentages. Mr. Jornlin has managed the
LifePoints Tax-Managed Funds since their inception. He also oversees certain
Underlying Funds as described below. Mr. Jornlin has been a Senior Investment
Officer of FRIMCo since April 1995. From 1991 to March 1995, Mr. Jornlin was a
Senior Research Analyst with Russell.
FRIMCo's officers and employees who oversee the money managers of the
Underlying Funds are:
o Randall P. Lert, who has been Chief Investment Officer of FRIMCo since June
1989.
o 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 listed in this section, has primary responsibility for management
of the Fixed Income I, Diversified Bond, Short Term Bond, Fixed Income III,
Tax Exempt Bond and Multistrategy Bond Funds.
o Randal C. Burge, who has been a Portfolio Manager of FRIMCo since June
1995. From 1990 to 1995, Mr. Burge was a Client Executive for Frank Russell
Australia. Mr. Burge, jointly with another portfolio manager listed in this
section, has primary responsibility for management of the Fixed Income I,
Fixed Income III, Diversified Bond, Short Term Bond, Tax Exempt Bond,
Multistrategy Bond and Emerging Markets Funds.
o Jean E. Carter, who has been a Portfolio Manager of FRIMCo since April
1994. Ms. Carter, jointly with another portfolio manager listed in this
section, has primary responsibility for management of the International,
and International Securities Funds.
o 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 listed in this section, has primary responsibility for management
of the International and International Securities Funds.
o James M. Imhof, Manager of FRIMCo's Portfolio Trading, manages the Funds'
liquidity portfolios on a day to day basis and has been responsible for
ongoing analysis and monitoring of the money managers since 1989.
o James A. Jornlin, who has been a Senior Investment Officer of FRIMCo since
April 1995. From 1991 to March 1995, Mr. Jornlin was a Senior Research
Analyst with Russell. Mr. Jornlin, jointly with another portfolio manager
listed in this section, has primary responsibility for management of the
Tax-Managed Equity Aggressive Strategy, Equity Aggressive Strategy,
Aggressive Strategy, Balanced Strategy, Moderate Strategy, Conservative
Strategy, Emerging Markets and Real Estate Securities Funds.
o C. Nola Kulig, who has been a Portfolio Manager of FRIMCo since January
1996. From 1994 to 1995, Ms. Kulig was a member of the Alpha Strategy
Group. From 1988 to 1994, Ms. Kulig was Senior Research Analyst with
Russell. Ms. Kulig, jointly with another portfolio manager listed in this
section, has primary responsibility for management of the Equity I, Equity
II, Equity III, Equity Q, Tax-Managed Small Cap, Diversified Equity,
Quantitative Equity, Special Growth and Equity Income Funds.
o 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 listed in this section, has primary responsibility for
management of the Equity I, Equity II, Equity III, Equity Q, Tax-Managed
Large Cap, Tax-Managed Small Cap, Diversified Equity, Quantitative Equity,
Special Growth and Equity Income Funds.
o Brian C. Tipple, who has been a Portfolio Manager of FRIMCo since July
1999. From 1991 to 1999, Mr. Tipple was a Client Executive with Frank
Russell Trust Company. From 1986 to 1989, he was an Investment Officer with
Frank Russell Trust Company. Mr. Tipple has primary responsibility for the
Tax-Managed Large Cap Fund.
For its investment advisory and administrative services, FRIMCo receives an
aggregate fee from each LifePoints Tax-Managed Fund at the annual rate of 0.25%
of the average daily net assets of each LifePoints Tax-Managed Fund, payable to
FRIMCo monthly on a pro rata basis. Of this aggregate amount, 20% is
attributable to advisory services and 0.05% is attributable to administrative
services. FRIMCo has contractually agreed to waive its .20% advisory fee to
which it is entitled from each LifePoints Tax-Managed Fund.
In addition to the advisory fee payable by the LifePoints Tax-Managed Funds,
the LifePoints Tax-Managed Funds will bear indirectly a proportionate share of
operating expenses that include the advisory fees paid by the Underlying Funds
in which they invest. While a shareholder of a LifePoints Tax-Managed Fund will
also bear a proportionate part of advisory fees paid by an Underlying Fund, each
of the advisory fees paid is based upon the services received by the respective
LifePoints Tax-Managed Fund. From the advisory fee that it receives from each
Underlying Fund, FRIMCo pays the Underlying Fund's money managers for their
investment selection services. FRIMCo retains any remainder as compensation for
the services described above and to pay expenses. The annual rate of the
advisory fees, payable to FRIMCo monthly on a pro rata basis, are the following
percentages of the average daily net assets of each Underlying Fund: Diversified
Equity Fund 0.73%, Quantitative Equity Fund 0.73%, International Securities Fund
0.90%, Emerging Markets Fund 1.15%, Tax-Managed Large Cap Fund .70%, Tax-Managed
Small Cap Fund .98%, Tax Exempt Bond Fund .30%, and Tax Free Money Market Fund
.20%. The fees of the Underlying Funds may be higher than the fees charged by
some mutual funds with similar objectives which use only a single money manager.
THE MONEY MANAGERS FOR THE UNDERLYING FUNDS
Each Underlying Fund allocates its assets among the money managers listed
under "Money Manager Information" at the end of this Prospectus. FRIMCo, as the
Underlying Funds' advisor, may change the allocation of an Underlying Fund's
assets among money managers at any time. The Underlying Funds received an
exemptive order from the Securities and Exchange Commission (SEC) that permits
an Underlying Fund to engage or terminate a money manager at any time, subject
to approval by the Underlying Fund's Board of Trustees (Board), without a
shareholder vote. An Underlying Fund notifies its shareholders within 60 days of
when a money manager begins providing services. The Underlying Funds select
money managers 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 any Underlying Fund's selection or
termination of a money manager.
Each money manager has complete discretion to purchase and sell portfolio
securities for its segment of an Underlying Fund. At the same time, however,
each money manager must operate within the Underlying Fund's investment
objectives, restrictions and policies. Additionally, each manager must operate
within more specific constraints developed from time to time by FRIMCo. FRIMCo
develops such constraints for each manager based on FRIMCo's assessment of the
manager's expertise and investment style. By assigning more specific constraints
to each money manager, FRIMCo intends to capitalize on the strengths of each
money manager and to combine their investment activities in a complementary
fashion. Although the money managers' activities are subject to general
oversight by the Board and the Underlying Funds' officers, neither the Board,
the officers, FRIMCo, nor Russell evaluate the investment merits of the money
managers' individual security selections.
J.P. Morgan Investment Management, Inc. ("Morgan") manages the Tax-Managed
Large Cap Fund. Robin Chance is the individual responsible for the management of
the Fund. Ms. Chance, Vice President and member of the Structured Equity Group,
has responsibility for tax aware structured equity strategies. Ms. Chance joined
Morgan in 1987. Ms. Chance is a CFA and a graduate of the of the University of
Pennsylvania's Management and Technology Program, also earning an MBA from New
York University's Stern School of Business.
Geewax, Terker & Company manages the Tax-Managed Small Cap Fund. John
Julius Geewax is the portfolio manager responsible for the management of the
Fund. Mr. Geewax is a graduate of the University of Pennsylvania and has earned
a J.D. from the University of Pennsylvania as well as an MBA and a PhD from the
Wharton School of the University of Pennsylvania. Mr. Geewax co-founded the firm
in 1982. He is currently a general partner and portfolio manager responsible for
research and development and trading oversight for all of the firm's investment
services.
INVESTMENT OBJECTIVES, INVESTMENT STRATEGIES
AND RISKS OF THE UNDERLYING FUNDS
The objective and principal strategies and risks of each Underlying Fund are
described in this section. 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 Tax-Managed Funds
invest in the Underlying Funds, investors of the LifePoints Tax-Managed Funds
will be affected by the Underlying Funds' investment strategies in direct
proportion to the amount of assets each LifePoints Tax-Managed Fund allocates to
the Underlying Fund pursuing such policies. To request a copy of a Prospectus
for an Underlying Fund, contact FRIC at 800/787-7354 (in Washington,
253/627-7001).
DIVERSIFIED EQUITY FUND
Investment To provide income and capital growth by investing
Objective principally in equity securities.
Principal The Diversified Equity Fund invests primarily in
Investment common stocks of medium and large capitalization
Strategies companies. These companies are predominately
US-based, although the Fund may invest a limited portion
of its assets in non-US firms from time to time.
The Fund employs a "multi-style, multi manager" approach whereby
portions of the Fund are allocated to different money managers who
employ distinct investment styles. The Fund uses three principal
investment styles, intended to complement one another.
o Growth Style emphasizes investments in equity securities of
companies with above-average earnings growth prospects. These
companies are generally found in the technology, health care,
consumer, and service sectors.
o Value Style emphasizes investments in equity securities of
companies that appear to be undervalued relative to their
corporate worth, based on earnings, book or asset value,
revenues, or cash flow. These companies are generally found
among industrial, financial, and utilities sectors.
o Market-Oriented Style emphasizes investments in companies that
appear to be undervalued relative to their growth prospects.
This style may encompass elements of both the growth and value
styles. These companies may be found in any industry sector.
Additionally, the Fund is diversified by equity substyle. For
example, within the Growth Style, the Fund expects to employ both
an Earnings Momentum substyle (concentrating on companies with
more volatile and accelerating growth rates) and Consistent Growth
substyle (concentrating on companies with stable earnings growth
over an economic cycle).
When determining how to allocate its assets among money managers,
the Fund considers a variety of factors. These factors include a
money manager's investment style and substyle and its performance
record as well as the characteristics of the money manager's
typical portfolio investments. These characteristics include
capitalization size, growth and profitability measures, valuation
ratios, economic sector weightings, and earnings and price
volatility statistics. The Fund also considers the manner in which
money managers' historical and expected investment returns
correlate with one another.
The Fund intends to be fully invested at all times. Although the
Fund, like any mutual fund, maintains liquidity reserves (i.e.,
cash awaiting investment or held to meet redemption requests), the
Fund exposes these reserves to the performance of appropriate
equity markets by investing in stock index futures contracts. This
causes the Fund to perform as though its cash reserves were
actually invested in those markets. Additionally, the Fund invests
its liquidity reserves in one or more Frank Russell Investment
Company (FRIC) money market funds.
The Fund may lend up to one-third of its portfolio securities to
earn income. These loans may be terminated at any time. The Fund
will receive either cash or US government debt obligations as
collateral.
QUANTITATIVE EQUITY FUND
Investment To provide a total return greater than the total return of
Objective 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.
Principal The Quantitative Equity Fund invests primarily in common
Investment stocks of medium and large capitalization companies, which are
Strategies predominately US-based.
The Fund generally pursues a market-oriented style of security
selection based on quantitative investment models. This style
emphasizes investments in companies that appear to be undervalued
relative to their growth prospects.
The Fund employs a multi-manager approach whereby portions of the
Fund are allocated to different money managers who employ distinct
investment styles. The Fund intends these styles to complement one
another. When determining how to allocate its assets among money
managers, the Fund considers a variety of factors. These factors
include a money manager's investment style and performance record
as well as the characteristics of the money manager's typical
portfolio investments. These characteristics include
capitalization size, growth and profitability measures, valuation
ratios, economic sector weightings, and earnings and price
volatility statistics. The Fund also considers the manner in which
money managers' historical and expected investment returns
correlate with one another.
Each of the Fund's money managers use quantitative models to rank
securities based upon their expected ability to outperform the
total return of the Russell 1000 Index. Once a money manager has
ranked the securities, it then selects the securities most likely
to outperform and constructs, for its segment of the Fund, a
portfolio that has risks similar to the Russell 1000 Index. Each
money manager performs this process independently from each other
money manager.
The Russell 1000 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 Fund's money managers typically use a variety of quantitative
models, ranking securities within each model and on a composite
basis using proprietary weighting formulas. Examples of those
quantitative models are dividend discount models, price/cash flow
models, price/earnings models, earnings surprise and earnings
estimate revisions models, and price momentum models.
Although the Fund, like any mutual fund, maintains liquidity
reserves (i.e., cash awaiting investment or held to meet
redemption requests), the Fund exposes these reserves to the
performance of appropriate equity markets by investing in stock
index futures contracts. This causes the Fund to perform as though
its cash reserves were actually invested in those markets.
Additionally, the Fund invests its liquidity reserves in one or
more FRIC money market funds.
The Fund may lend up to one-third of its portfolio securities to
earn income. These loans may be terminated at any time. The Fund
will receive either cash or US government debt obligations as
collateral.
INTERNATIONAL SECURITIES FUND
Investment To provide favorable total return and additional
Objective diversification for US investors.
Principal The International Securities Fund invests primarily in
Investment equity securities issued by companies domiciled outside the United
Strategies States and in depository receipts, which represent ownership of
securities of non-US companies.
The Fund's investments span most of the developed nations of the
world (particularly Europe and the Far East) to maintain a high
degree of diversification among countries and currencies. Because
international equity investment performance has a reasonably low
correlation to US equity performance, this Fund may be appropriate
for investors who want to reduce their investment portfolio's
overall volatility by combining an investment in this Fund with
investments in US equities.
The Fund may seek to protect its investments against adverse
currency exchange rate changes by purchasing forward currency
contracts. These contracts enable the Fund to "lock in" the US
dollar price of a security that it plans to buy or sell. The Fund
may not accurately predict currency movements.
The Fund employs a "multi-style, multi manager" approach whereby
portions of the Fund are allocated to different money managers who
employ distinct investment styles. The Fund uses three principal
investment styles, intended to complement one another:
o Growth Style emphasizes investments in equity securities of
companies with above-average earnings growth prospects.
These companies are generally found in the technology,
health care, consumer, and service sectors.
o Value Style emphasizes investments in equity securities of
companies that appear to be undervalued relative to their
corporate worth, based on earnings, book or asset value,
revenues, or cash flow. These companies are generally found
among industrial, financial, and utilities sectors.
o Market-Oriented Style emphasizes investments in companies
that appear to be undervalued relative to their growth
prospects. This style may encompass elements of both the
growth and value styles. These companies may be found in any
industry sector. A variation of this style maintains
investments that replicate country and sector weightings of
a broad international market index.
When determining how to allocate its assets among money managers,
the Fund considers a variety of factors. These factors include a
money manager's investment style and performance record as well as
the characteristics of the money manager's typical portfolio
investments. These characteristics include capitalization size,
growth and profitability measures, valuation ratios, economic
sector weightings, and earnings and price volatility statistics.
The Fund also considers the manner in which money managers'
historical and expected investment returns correlate with one
another.
The Fund intends to be fully invested at all times. Although the
Fund, like any mutual fund, maintains liquidity reserves (i.e.,
cash awaiting investment or held to meet redemption requests), the
Fund exposes these reserves to the performance of appropriate
equity markets by investing in stock index futures contracts. This
causes the Fund to perform as though its cash reserves were
actually invested in those markets. Additionally, the Fund invests
its liquidity reserves in one or more FRIC money market funds.
Up to 15% of the Fund's net assets may be "illiquid" securities
(i.e., securities that do not have a readily available market or
that are subject to resale restrictions). Additionally, the Fund
may lend up to one-third of its portfolio securities to earn
income. These loans may be terminated at any time. The Fund will
receive either cash or US government debt obligations as
collateral.
EMERGING MARKETS FUND
Investment To provide maximum total return, primarily through capital
Objective appreciation and by assuming a higher level of volatility than
is ordinarily expected from developed market international
portfolios, by investing primarily in equity
securities.
Principal The Emerging Markets Fund will primarily invest in equity
Investment securities of companies that are located in countries with emerg-
Strategies ing markets or that derive a majority of their revenues from
operations in such countries.
These companies are referred to as "Emerging Market Companies."
For purposes of the Fund's operations, an "emerging market"
country is a country having an economy and market that the World
Bank or the United Nations 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 seeks to maintain a broadly diversified exposure to
emerging market countries and ordinarily will invest in the
securities of issuers in at least three different emerging market
countries.
The Fund invests in common stocks of Emerging Market Companies and
in depository receipts, which represent ownership of securities of
non-US companies. The Fund may also invest in rights, warrants and
convertible fixed-income securities. The Fund's securities are
denominated primarily in foreign currencies and may be held
outside the United States.
Some emerging markets countries do not permit foreigners to
participate directly in their securities markets or otherwise
present difficulties for efficient foreign investment. Therefore,
when it believes it is appropriate to do so, the Fund may invest
in pooled investment vehicles, such as other investment companies,
which enjoy broader or more efficient access to shares of Emerging
Market Companies in certain countries.
The Fund employs a multi-manager approach whereby portions of the
Fund are allocated to different money managers who employ distinct
investment styles. The Fund intends these styles to complement one
another. When determining how to allocate its assets among money
managers, the Fund considers a variety of factors. These factors
include a money manager's investment style and performance record
as well as the characteristics of the money manager's typical
portfolio investments (e.g., capitalization size, growth and
profitability measures, valuation ratios, economic sector
weightings, and earnings and price volatility statistics). The
Fund also considers the manner in which money managers' historical
and expected investment returns correlate with one another.
The Fund may enter into repurchase agreements. Under those
agreements a bank or broker dealer sells securities to the Fund,
and agrees to repurchase the securities at the Fund's cost plus
interest, ordinarily on the next business day.
The Fund may agree to purchase securities for a fixed price at a
future date beyond customary settlement time. This kind of
agreement is known as a "forward commitment" or as a "when-issued"
transaction.
Up to 15% of the Fund's net assets may be "illiquid" securities
(i.e., securities that do not have a readily available market or
that are subject to resale restrictions). Additionally, the Fund
may lend up to one-third of its portfolio securities to earn
income. These loans may be terminated at any time. A Fund will
receive either cash or US government debt obligations as
collateral.
Because international equity investment performance has a
reasonably low correlation to US equity performance, this Fund may
be appropriate for investors who want to reduce their investment
portfolio's overall volatility by combining an investment in this
Fund with investments in US equities.
TAX-MANAGED LARGE CAP FUND (formerly Equity T Fund)
Investment To provide capital growth on an after-tax basis by
Objective investing principally in equity securities.
Principal The Tax-Managed Large Cap Fund invests primarily in equity
Investment securities of large capitalization US companies, although the Fund
Strategies may invest a limited amount in non-US firms from time to time.
The Fund generally pursues a market-oriented style of security
selection based on quantitative investment models. This style
emphasizes investments in large capitalization companies that, on a
long-term basis, appear to be undervalued relative to their growth
prospects, and may include both growth and value securities. Under
normal market conditions, the Tax-Managed Large Cap Fund will
invest at least 65 percent of the value of its total assets in
securities that are included in the S&P 500(R) market index.
The Fund seeks to realize capital growth while minimizing
shareholder tax consequences arising from the Fund's portfolio
management activities. In its attention to tax consequences of its
investment decisions, the Fund differs from most equity mutual
funds, which are managed to maximize pre-tax total return without
regard whether their portfolio management activities result in
taxable distributions to shareholders.
The Fund is designed for long-term investors who seek to minimize
the impact of taxes on their investment returns. The Fund is not
designed for short-term investors or for tax-deferred investment
vehicles such as IRAs and 401(k) plans.
The Fund intends to minimize its taxable distributions to
shareholders in two ways:
o First, the Fund strives to realize its returns as capital
gains, and not as investment income, under US tax laws. To
do so, the Fund typically buys stocks with the intention of
holding them long enough to qualify for capital gain tax
treatment.
o Second, the Fund attempts to minimize its realization of
capital gains and to offset any such realization with
capital losses. To do so, when the Fund sells shares of an
appreciated portfolio security, it seeks to minimize the
resulting capital gains by first selling the shares for
which the Fund paid the highest price. Further the Fund
attempts to offset those capital gains with matching capital
losses by simultaneously selling shares of depreciated
portfolio securities.
If large shareholder redemptions occur unexpectedly, the Fund could
be required to sell portfolio securities resulting in its
realization of net capital gains. This could temporarily reduce the
Fund's tax efficiency. Also, as the Fund matures, it may hold
individual securities that have appreciated so significantly that
it would be difficult for the Fund to sell them without realizing
net capital gains.
The Fund selects and holds portfolio securities based on its
assessment of their potential for long term total returns. The Fund
uses a dividend discount model to gauge securities' anticipated
returns relative to their industry peers. This model forecasts the
expected future dividends of individual securities, and calculates
the expected return at the current share price. The Fund identifies
securities that exhibit superior total return prospects. From among
those securities, using a quantitative after-tax model, the Fund
chooses stocks from a variety of economic sectors and industries,
generally in the proportions that those sectors and industries are
represented in the S&P 500 Index.
When Shares are redeemed, the Fund may realize capital gains or
income, impacting all shareholders. The Fund believes that multiple
purchases and redemptions of Fund shares by individual shareholders
could adversely affect the Fund's strategy of tax-efficiency and
could reduce its ability to contain costs. The Fund further
believes that short-term investments in the Fund are inconsistent
with its long-term strategy. For this reason, the Fund will apply
its general right to refuse any purchases by rejecting purchase
orders from investors whose patterns of purchases and redemptions
in the Fund is inconsistent with the Fund's strategy.
The Fund intends to be fully invested at all times. Although the
Fund, like any mutual fund, maintains liquidity reserves (i.e.,
cash awaiting investment or held to meet redemption requests), the
Fund exposes these reserves to the performance of appropriate
equity markets by investing in stock index futures contracts. This
causes the Fund to perform as though its cash reserves were
actually invested in those markets. The Fund may also invest
its liquidity reserves in one or more Frank Russell Investment
Company (FRIC) money market funds.
Additionally, the Fund may lend up to one-third of its portfolio
securities to earn additional income. These loans may be terminated
at any time. The Fund will receive either cash or US government
debt obligations as collateral.
TAX-MANAGED SMALL CAP FUND
Investment To provide capital growth on an after-tax basis by
Objective investing principally in equity securities of small capitalization
companies.
Principal The Tax-Managed Small Cap Fund invests primarily in equity
Investment securities of US companies, although the Fund invest a limited
Strategies amount in non-US firms from time to time.
The Fund generally pursues a market-oriented style of security
selection based on quantitative investment models. This style
emphasizes investments in small capitalization companies that, on a
long-term basis, appear to be undervalued relative to their growth
prospects, and may include both growth and value securities. Under
normal market conditions, the Tax-Managed Small Cap Fund will
invest at least 65 percent of the value of its total assets in
securities that are not included in the S&P 500 market index.
The Fund seeks to realize capital growth while minimizing
shareholder tax consequences arising from the Fund's portfolio
management activities. In its attention to tax consequences of its
investment decisions, the Fund differs from most equity mutual
funds, which are managed to maximize pre-tax total return without
regard whether their portfolio management activities result in
taxable distributions to shareholders.
The Fund is designed for long-term investors who seek to minimize
the impact of taxes on their investment returns. The Fund is not
designed for short-term investors or for tax-deferred investment
vehicles such as IRAs and 401(k) plans.
The Fund intends to minimize its taxable distributions to
shareholders in two ways:
o First, the Fund strives to realize its returns as capital
gains, and not as investment income, under US tax laws. To
do so, the Fund typically buys stocks with the intention of
holding them long enough to qualify for capital gain tax
treatment.
o Second, the Fund attempts to minimize its realization of
capital gains and to offset any such realization with
capital losses. To do so, when the Fund sells shares of an
appreciated portfolio security, it seeks to minimize the
resulting capital gains by first selling the shares for
which the Fund paid the highest price. Further the Fund
attempts to offset those capital gains with matching capital
losses by simultaneously selling shares of depreciated
portfolio securities.
If large shareholder redemptions occur unexpectedly, the Fund could
be required to sell portfolio securities resulting in its
realization of net capital gains. This could temporarily reduce the
Fund's tax efficiency. Also, as the Fund matures, it may hold
individual securities that have appreciated so significantly that
it would be difficult for the Fund to sell them without realizing
net capital gains.
The Fund selects and holds portfolio securities based on its
assessment of their potential for long term total returns.
When the Fund's shares are redeemed, the Fund may realize capital
gains or income, impacting all shareholders. The Fund believes that
multiple purchases and redemptions of Fund shares by individual
shareholders could adversely affect the Fund's strategy of
tax-efficiency and could reduce its ability to contain costs. The
Fund further believes that short-term investments in the Fund are
inconsistent with its long-term strategy. For this reason, the Fund
will apply its general right to refuse any purchases by rejecting
purchase orders from investors whose patterns of purchases and
redemptions in the Fund is inconsistent with the Fund's strategy.
The Fund intends to be fully invested at all times. Although the
Fund, like any mutual fund, maintains liquidity reserves (i.e.,
cash awaiting investment or held to meet redemption requests), the
Fund exposes these reserves to the performance of appropriate
equity markets by investing in stock index futures contracts. This
causes the Fund to perform generally as though its cash reserves
were actually invested in those markets. The Fund may also
invest its liquidity reserves in one or more Frank Russell
Investment Company (FRIC) money market funds.
Additionally, the Fund may lend up to one-third of its portfolio
securities to earn additional income. These loans may be terminated
at any time. The Fund will receive either cash or US government
debt obligations as collateral.
TAX EXEMPT BOND FUND
Investment To provide a high level of federal tax-exempt current
Objective income by investing primarily in a diversified portfolio of
investment grade municipal securities.
Principal The Tax Exempt Bond Fund concentrates its investments
Investment in investment-grade municipal debt obligations
Strategies providing tax-exempt interest income. Specifically, these
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 to obtain
funds to support special government needs or special projects.
The average weighted duration of the Fund's portfolio typically
ranges within ten percent of the average weighted duration of the
Lehman Brothers 1-10 Year Municipal Bond Index, but may vary up to
25% from the Index's duration. The Fund has no restrictions on
individual security duration.
The Fund employs multiple money managers, each with its own
expertise in the municipal bond market. When determining how to
allocate its assets among money managers, the Fund considers a
variety of factors. These factors include a money manager's
investment style and performance record as well as the
characteristics of the money manager's typical portfolio
investments. These characteristics include portfolio biases,
magnitude of sector shifts, and duration movements. The Fund also
considers the manner in which money managers' historical and
expected investment returns correlate with one another.
The Fund may lend up to one-third of its portfolio securities to
earn additional income. These loans may be terminated at any time.
The Fund will receive either cash or US government debt obligations
as collateral.
TAX FREE MONEY MARKET FUND
Investment To provide the maximum current income exempt from
Objective 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.
Principal The Tax Free Money Market Fund invests in a portfolio of
Investment high quality short-term debt securities maturing in 397 days or
Strategies less. The dollar-weighted average maturity of the Fund's portfolio
will be 90 days or less.
The Fund invests almost exclusively in investment-grade municipal
debt obligations providing tax-exempt interest income.
Specifically, these 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 to
obtain funds to support special government needs or special
projects.
Some of the securities in which the Fund invests are supported by
credit and liquidity enhancements from third parties. These
enhancements are generally letters of credit from foreign or
domestic banks.
PRINCIPAL RISKS
The following table describes principal types of risks the LifePoints
Tax-Managed Funds are subject to, based on the investments made by the
Underlying Funds, and lists next to each description the Underlying and
LifePoints Tax-Managed Funds most likely to be affected by the risk. Other
Underlying and LifePoints Tax-Managed Funds that are not listed may be subject
to one or more of the risks, based on the allocation of assets among the
Underlying Funds, but will not do so in a way that is expected to principally
affect the performance of the LifePoints or Underlying Fund as a whole. Please
refer to the LifePoints Tax-Managed Funds' Statement of Additional Information
for a discussion of risks associated with types of securities held by the Funds
and investment practices employed.
Risk Associated Description Relevant Fund
With:
Multi-manager The investment styles employed All LifePoints
approach by a Fund's money managers may not Tax-Managed
be complementary. The interplay of
the various (Underlying Funds:
strategies employed by a Fund's Diversified Equity,
multiple money managers may result in Quantitative Equity,
the Fund's holding a concentration of International
certain types of securities. This Securities, Emerging
concentration may be beneficial Markets, Tax-Exempt
detrimental to the Fund's performance Bond)
depending upon the performance of those
securities and the overall economic
environment. The multiple manager approach
could result in a high level of portfolio
turnover, resulting in higher Fund
brokerage expenses and increased tax
liability from the Fund's
realization of capital gains.
Tax-sensitive A Fund's tax-managed equity All LifePoints
management investment strategy may Tax-Managed Funds
not provide as high a return
before consideration of federal (Underlying Funds:
income tax consequences as other Tax-Managed Large
funds. A tax-sensitive Cap;
investment strategy involves Tax-Managed Small
active management and a Fund can Cap)
realize capital gains.
In response to market, economic,
political or other conditions, a
Fund may temporarily use a
different investment strategy for
defensive purposes. If it does
so, different factors could affect
the Fund's performance, and
the Fund may not achieve its investment
objective.
Risk Associated Description Relevant Fund
With:
Equity The value of equity securities All LifePoints
securities will rise and fall Tax-Managed
in response to the activities of Funds
the company
that issued the stock, general (Underlying Funds:
market Diversified
conditions, and/or economic Equity
conditions. Quantitative
Equity
International
Securities
Emerging Markets
Tax-Managed Large
Cap
Tax-Managed Small
Cap)
o Value Stocks Investments in value stocks are All LifePoints
subject to risks Tax-Managed
that (i) their intrinsic values Funds
may never be
realized by the market or (ii) (Underlying Funds:
such stock may Diversified
turn out not to have been Equity
undervalued. Quantitative
Equity
International
Securities
Tax-Managed Large
Cap
Tax-Managed Small
Cap)
o Growth Stocks Growth company stocks may All LifePoints
provide minimal Tax-Managed
dividends that can cushion stock Funds
prices in a market
decline. The value of growth (Underlying
company stocks may Funds:
rise and fall dramatically Diversified
based, in part, on Equity
investors' perceptions of the International
company rather than Securities
on fundamental analysis of the Tax-Managed Large
stocks. Cap
Tax-Managed Small
Cap)
o Market-Oriented Market-oriented investments are All LifePoints
Investments generally subject Tax-Managed
to the risks associated with Funds
growth and value
stocks. (Underlying
Funds:
Diversified
Equity
Quantitative
Equity
International
Securities
Tax-Managed Large
Cap
Tax-Managed Small
Cap)
o Securities Investments in smaller companies All LifePoints
may involve greater risks because Tax-Managed Funds
these companies have greater risks (Underlying Fund:
because these companies generally Tax-Managed Small
have a limited track record. Cap)
Smaller companies often have narrower
markets and more limited
managerial and financial
resources than larger,
more established companies. As a
result, their performance can be
more volatile, which could
increase the volatility of a
Fund's portfolio.
Risk Associated Description Relevant Fund
With:
Fixed-income Prices of fixed-income Tax-Managed
securities securities rise and fall in Aggressive
response to interest rate Strategy
changes. Generally, when Tax-Managed
interest rates rise, prices of Moderate
fixed-income securities Strategy
fall. The longer the duration of Tax-Managed
the security, the Conservative
more sensitive the security is Strategy
to this risk. A 1% increase
in interest rates would (Underlying
reduce the value of Funds:
a $100 note by approximately one Tax Exempt Bond,
dollar if it had a Tax Free Money
one year duration, but would Market)
reduce its value by
approximately fifteen dollars if
it had a 15 year duration.
There is also a risk that one or
more of the securities will
be downgraded in credit rating
or go into default.
Lower-rated bonds generally have
higher credit risks.
International A Fund's return and net asset All LifePoints
securities value may be Tax-Managed Funds
significantly affected by (Underlying Funds:
political or economic conditions International Securities,
and regulatory requirements in a Emerging Markets)
particular country. Foreign
markets, economies and political
systems may be less stable than
US markets, and changes in exchange
rates of foreign currencies
can affect the value of a Fund's
foreign assets. Foreign laws
and accounting standards typically
are not as strict as they are
in the US and there may be less
public information available
about foreign companies. A Fund's
foreign debt securities are
typically obligations of sovereign
governments. These securities
are particularly subject to a risk
of default from political
instability.
o Emerging Investments in emerging or (Underlying Fund:
Market developing markets Emerging Markets)
Countries involve exposure to economic
structures that are generally less
diverse and mature, and to
political systems which have less
stability than those of more
developed countries. Emerging
market securities are subject to
currency transfer restrictions
and may experience delays and
disruptions in securities settlement
procedures.
Municipal Municipal obligations are Tax-Managed
Obligations affected by economic, Aggressive
business or political Strategy
developments. These securities Tax-Managed
may be subject to provisions of Moderate
litigation, Strategy
bankruptcy and other laws Tax-Managed
affecting the rights and Conservative
remedies of creditors, or may Strategy
become subject to
future laws extending the time
for payment of (Underlying
principal and/or interest, or Funds:
limiting the rights of Tax Exempt Bond
municipalities to levy taxes. Tax Free Money
Market)
Risk Associated Description Relevant Fund
With:
Credit and Adverse changes in a guarantor's Tax-Managed
Liquidity credit quality Aggressive
Enhancements if contemporaneous with adverse Strategy
changes in Tax-Managed
guaranteed security, could cause Moderate
losses to a fund Strategy
and may affect it's net asset Tax-Managed
value. Conservative
Strategy
(Underlying Fund:
Tax Free Money
Market)
Exposing By exposing its liquidity All LifePoints
Liquidity reserves to the equity Tax-Managed
Reserves to market, a Fund's performance Funds
Equity tends to correlate
Markets more closely to the performance (Underlying
of the market as Funds:
a whole. Although this increases Diversified
a Fund's Equity
performance if equity markets Quantitative
rise, it reduces a Equity
Fund's performance if equity International
markets decline. Securities
Emerging Markets
Tax-Managed Large
Cap
Tax-Managed Small
Cap)
Securities If a borrower of a Fund's All LifePoints
Lending securities fails Tax-Managed
financially, the Fund's recovery Funds
of the loaned
securities may be delayed or the (Underlying
Fund may lose its Funds:
rights to the collateral. Diversity Equity
Quantitative Equity
International
Securities
Emerging Markets
Tax-Managed Large Cap
Tax-Managed Small Cap
Tax Exempt Bond)
Risk Associated Description Relevant Fund
With:
Year 2000
o Year 2000 The Funds' operations depend on All LifePoints
and the smooth Tax-Managed
Fund functioning of their service Funds
operations providers' computer
systems. The Funds and their (Underlying
shareholders could Funds:
be adversely affected if those All Funds)
computer systems
do not properly process and calculate
date-related information
on or after January 1, 2000. Many
computer software systems in
use today cannot distinguish between
the year 2000 and the year
1900. Although year 2000-related
computer problems could have a
negative effect on the Funds and
their shareholders, the Funds'
service providers have advised the
Funds that they are working
to avoid such problems. Because it is
the obligation of those service providers
to ensure the proper functioning of their
computer systems, the Funds do not
expect to incur any material
expense in connection with year 2000
preparations.
o Year 2000 The Funds and their shareholders All LifePoints and
could be Tax-Managed Funds
adversely affected if the Funds
investments computer systems of the
issuers in which the Funds (Underlying
invest or those of the Funds:
service providers they depend All Funds)
upon, do not
properly process and calculate date
-related information on or
after January 1, 2000. If such an event
occurred, the value of those issuer's
securities could be reduced.
o Year 2000 A Fund that invests All LifePoints
and Fund significantly in non-US Tax-Managed Funds
portfolio issuers may be exposed to a
higher degree of risk investments in
from Year 2000 issues than other (Underlying Funds:
non-U.S. Funds. It is International
issuers generally believed that non- Securities,
US securities governments and Emerging Markets)
issuers are less prepared for
Year 2000 related contingencies than
the US government and US-based issuers,
which could result in a more
significant diminution in value of
non-US issuer's securities on or after
January 1, 2000.
DIVIDENDS AND DISTRIBUTIONS
Income Dividends
Each LifePoints Tax-Managed 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, if any, for each LifePoints Tax-Managed Fund on a quarterly
basis, with payment being made in April, July, October and December.
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 LifePoints Tax-Managed Fund
may declare a 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 LifePoints Tax-Managed
Fund and received by you on December 31 of the prior year, provided that the
LifePoints Tax-Managed Fund pays them by January 31. Capital gains realized
during November and December will be distributed to you generally during
February of the following year.
In addition, the LifePoints Tax-Managed 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 Tax-Managed Funds may generate capital gains through rebalancing the
portfolios to meet the LifePoints Tax-Managed Funds' allocation percentages.
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 LifePoints Tax-Managed 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 LifePoints Tax-Managed 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 LifePoints Tax-Managed Funds' Transfer Agent, at Operations
Department, P.O. Box 1591, Tacoma, WA 98401.
TAXES
In general, distributions from a LifePoints Tax-Managed Fund are taxable to
you as either ordinary income or capital gains. This is true whether you
reinvest your distributions in additional shares of the LifePoints Tax-Managed
Fund or receive them in cash. Any capital gains distributed by a LifePoints
Tax-Managed Fund are taxable to you as long-term capital gains no matter how
long you have owned your shares. Every January, you will receive a statement
that shows the tax status of distributions you received for the previous year.
Distributions declared in December but paid in January are taxable as if they
were paid in December. Distributions taxed as capital gains may be taxable at
different rates depending on how long a LifePoints Tax-Managed Fund holds its
assets.
When you sell or exchange your shares of a LifePoints Tax-Managed Fund, you
may have a capital gain or loss. The tax rate on any gain from the sale or
exchange of your shares depends on how long you have held your shares.
LifePoints Tax-Managed Fund distributions and gains from the sale or exchange
of your shares will generally be subject to state and local income tax. Non-US
investors may be subject to US withholding and estate tax. You should consult
your tax professional about federal, state, local or foreign tax consequences in
holding shares of a LifePoints Tax-Managed Fund.
Any foreign taxes paid by an Underlying Fund on its investments may be passed
through to its shareholders as foreign tax credits.
By law, a LifePoints Tax-Managed Fund must withhold 31% of your distributions
and proceeds if you do not provide your correct taxpayer identification number,
or certify that such number is correct, or if the IRS instructs the LifePoints
Tax-Managed Fund to do so.
The tax discussion set forth above is included for general information only.
Prospective investors should consult their own tax advisers concerning the
federal, state, local or foreign tax consequences of an investment in a
LifePoints Tax-Managed Fund.
Additional information on these and other tax matters relating to the
LifePoints Tax-Managed Funds and their shareholders is included in the section
entitled "Taxes" in the SAI.
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
LifePoints Tax-Managed Fund on each business day on which shares are offered or
redemption orders are tendered. For all LifePoints Tax-Managed Funds, a business
day is one on which the New York Stock Exchange (NYSE) is open for trading. The
NYSE is not open on national holidays. All Underlying Funds and LifePoints
Tax-Managed Funds determine net asset value as of the close of the NYSE
(currently 4:00 p.m. Eastern Time). The determination is made by appraising each
LifePoints Tax-Managed 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
Securities held by the Underlying Funds are typically priced using market
quotations or pricing services when the prices are believed to be reliable--that
is, when the prices reflect the fair market value of the securities. The
Underlying 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. If you hold shares in a LifePoints
Tax-Managed Fund that invests in an Underlying Fund, such as the International
Securities Fund, and that holds portfolio securities listed primarily on foreign
exchanges, the net asset value of that both the Underlying and LifePoints
Tax-Managed Fund's shares may change on a day when you will not be able to
purchase or redeem LifePoints Tax-Managed Fund shares. This is because the value
of those portfolio securities may change on weekends or other days when the
LifePoints Tax-Managed Fund does not price its shares.
DISTRIBUTION AND SHAREHOLDER
SERVICING ARRANGEMENTS
The LifePoints Tax-Managed Funds offer multiple classes of shares: Class C
Shares and Class S Shares.
Class C Shares participate in the LifePoints Tax-Managed Funds' Rule 12b-1
distribution plan and in the LifePoints Tax-Managed Funds' shareholder servicing
plan. Under distribution plan, Class C Shares pay distribution fees of 0.75%
annually for the sale and distribution of Class C Shares. Under the shareholder
servicing plan, the Class C Shares pay shareholder servicing fees of 0.25%
annually for services provided to Class C shareholders. Because both of these
fees are paid out of the Class C Share assets on an ongoing basis, over time
these fees will increase the cost of a Class C Share investment in the
LifePoints Tax-Managed Funds, and the distribution fee may cost an investor more
than paying other types of sales charges.
Class S Shares participate in neither the Fund's distribution plan nor the
Funds' shareholder servicing plan.
HOW TO PURCHASE SHARES
LifePoints Tax-Managed Funds are generally available only through a select
network of qualified Financial Intermediaries. If you are not currently working
with one of these Financial Intermediaries, please call Russell Investor
Services at (800) RUSSEL4 (800-787-7354) for assistance in contacting an
investment professional near you.
An initial minimum investment in Class C or Class S Shares of a LifePoints
Tax-Managed Fund must be at least $10,000, and any subsequent investments must
be at least $50. FRIMCo, on behalf of each LifePoints Tax-Managed Fund, reserves
the right to change, as to any LifePoints Tax-Managed Fund or any class thereof,
the categories of investors eligible to purchase shares of that LifePoints
Tax-Managed Fund or class or the required minimum investment amounts.
Financial Intermediaries may charge their customers a fee for providing
investment-related services. Financial Intermediaries that maintain omnibus
accounts with the Funds may receive administrative fees from the Funds or their
transfer agent. Financial Intermediaries may receive distribution and
shareholder servicing compensation with respect to Class C and Class S shares.
Paying for Shares
You may purchase shares of the LifePoints Tax-Managed Funds through a
Financial Intermediary on any business day the Funds are open. Purchase orders
are processed at the next net asset value per share calculated after the
LifePoints Tax-Managed Funds' receive your order in proper form (defined in the
"Written Instructions" section), and accept the order.
All purchases must be made in US dollars. Checks and other negotiable bank
drafts must be drawn on US banks and made payable to "Frank Russell Investment
Company." The LifePoints Tax-Managed Funds reserve the right to reject any
purchase order for any reason including, but not limited to, receiving a check
which does not clear the bank or a payment which does not arrive in proper form
by settlement date. You will be responsible for any resulting loss to the Funds.
An overdraft charge may also be applied. Cash, third party checks and checks
drawn on credit card accounts generally will not be accepted. However,
exceptions may be made by prior special arrangement with certain Financial
Intermediaries.
Offering Dates and Times
Orders must be received by the LifePoints Tax-Managed Funds prior to the
close of the NYSE (currently 4:00 p.m. Eastern Time). Purchases can be made on
any day when LifePoints Tax-Managed Fund shares are offered. Because Financial
Intermediaries' processing time may vary, please ask your Financial Intermediary
representative when your account will be credited.
Order and Payment Procedures
Generally, you must place purchase orders for LifePoints Tax-Managed Fund
shares through a Financial Intermediary. You may pay for your purchase by mail
or electronic funds transfer. Initial purchases require a completed and signed
Application for each new account regardless of the investment method. Specific
payment arrangements should be made with your Financial Intermediary.
By Mail
For new accounts, please mail the completed Application to your Financial
Intermediary. Payment for orders may be made by check or other negotiable bank
draft and sent to the LifePoints Tax-Managed Funds' Transfer Agent. Certified
checks are not necessary, but checks are accepted subject to collection at full
face value in US funds. Third party checks will not be accepted. Checks should
be made payable to "Frank Russell Investment Company."
By Federal Funds Wire
You can pay for orders by wiring federal funds to the LifePoints Tax-Managed
Funds' Custodian, State Street Bank and Trust Company. All wires must include
your account registration and account number for identification. Inability to
properly identify a wire transfer may prevent or delay timely settlement
of your purchase.
By Automated Clearing House ("ACH")
You can make initial or subsequent investments through ACH to the Funds'
Custodian, State Street Bank and Trust Company.
Automated Investment Program
You can make regular investments (minimum $50) in LifePoints Tax-Managed
Funds in an established account on a monthly, quarterly, semiannual or annual
basis by automatic electronic funds transfer from a bank account. You must make
a separate transfer for each LifePoints Tax-Managed Fund in which you purchase
shares. You may change the amount or stop the automatic purchase at any time.
Contact your Financial Intermediary for further information on this program and
an enrollment form.
Three Day Settlement Program
The LifePoints Tax-Managed Funds will accept orders through Financial
Intermediaries to purchase shares of the LifePoints Tax-Managed Funds for
settlement on the third business day following the receipt of the order. These
orders are paid for by a federal funds wire if the Financial Intermediary has
enrolled in the program and agreed in writing to indemnify the LifePoints
Tax-Managed Funds against any losses resulting from non-receipt of payment.
EXCHANGE PRIVILEGE
By Mail or Telephone
Through your Financial Intermediary, you may exchange Class C or Class S
Shares of any LifePoints Tax-Managed Fund you own for shares of any other
LifePoints Tax-Managed Fund offered by this Prospectus on the basis of the
current net asset value per share at the time of the exchange. Shares of a
LifePoints Tax-Managed Fund offered by this Prospectus may only be exchanged for
shares of a Fund offered by FRIC 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 your
Financial Intermediary.
Exchanges may be made by mail or by telephone if the registration of the two
accounts is identical. Contact your Financial Intermediary for assistance in
exchanging shares and, because Financial Intermediaries' processing time may
vary, to find out when your account will be credited or debited. To request an
exchange in writing, please follow the procedures in the "Written Instructions"
section before mailing to your Financial Intermediary.
An exchange involves the redemption of shares, which is treated as a sale for
income tax purposes. Thus, capital gain or loss may be realized. Please consult
your tax adviser for more information. The LifePoints Tax-Managed 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) at the next net
asset value per share calculated after the Funds received the exchange request
in good order.
In-Kind Exchange of Securities
FRIMCo, in its capacity as the LifePoints Tax-Managed Funds' investment
advisor, may, at its discretion, permit you to acquire LifePoints Tax-Managed
Fund shares in exchange for securities you currently own. Any securities
exchanged must: meet the investment objective, policies and limitations of the
applicable LifePoints Tax-Managed 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 for 15 days following the purchase by exchange or until the transfer
has settled, whichever comes first. If you are a taxable investor, you will
generally realize a gain or loss for federal income tax purposes on the
exchange. If you are contemplating an in-kind exchange you should consult your
tax adviser.
The basis of the exchange will depend upon the relative net asset value of
the LifePoints Tax-Managed Fund shares purchased and securities exchanged.
Securities accepted by a LifePoints Tax-Managed Fund will be valued in the same
way the LifePoints Tax-Managed Fund values its assets. Any interest earned on
the securities following their delivery to the LifePoints Tax-Managed Funds and
prior to the exchange will be considered in valuing the securities. All
interest, dividends, subscription or other rights attached to the securities
becomes the property of the LifePoints Tax-Managed Fund, along with the
securities. Please contact your Financial Intermediary for further information.
HOW TO REDEEM SHARES
Shares of the LifePoints Tax-Managed Funds may be redeemed through your
Financial Intermediary on any business day the LifePoints Tax-Managed Funds are
open at the next net asset value per share calculated after the Funds' Transfer
Agent receives an order in proper form (defined in the "Written Instructions"
section). Payment will ordinarily be made within seven days after receipt of
your request in proper form. Shares recently purchased by check may not be
available for redemption for 15 days following the purchase or until the check
clears, whichever occurs first, to assure payment has been collected.
Redemption Dates and Times
Redemption requests must be placed through a Financial Intermediary and
received by the LifePoints Tax-Managed Funds prior to the close of the NYSE
(currently 4:00 p.m. Eastern Time). Because Financial Intermediaries' processing
times may vary, please ask your Financial Intermediary representative when your
account will be debited. Requests can be made by mail or telephone on any day
when LifePoints Tax-Managed Fund shares are offered, or through the Systematic
Withdrawal Program.
By Mail or Telephone
You may redeem your shares by calling or writing to your Financial
Intermediary. Written requests to sell shares are in proper form when the
instructions are signed by all registered owners, with a signature guarantee if
necessary.
Systematic Withdrawal Program
The LifePoints Tax-Managed Funds offer a systematic withdrawal program which
allows you to redeem your shares and receive regular payments from your account
on an annual basis on December 10th of each year or, if December 10th is not a
business day, on the prior business day. If you would like to establish a
systematic withdrawal program, please complete the proper section of the account
application and indicate how you would like to receive your payments. When you
redeem your shares under a systematic withdrawal program, it is a taxable
transaction.
You may choose to have the payments mailed to you or directed to your bank
account by ACH transfer. You may discontinue the systematic withdrawal program,
or change the amount and timing of withdrawal payments by contacting your
Financial Intermediary.
Accounts in Street Name
Many brokers, employee benefit plans and bank trusts combine their client's
holdings in a single omnibus account held in the brokers', plans', or bank
trusts' own name or "street name." Therefore, if you hold LifePoints Tax-Managed
Fund shares through a brokerage account, employee benefit plan or bank trust
fund, the LifePoints Tax-Managed Funds may have records only of the omnibus
account. In this case, your broker, employee benefit plan or bank is responsible
for keeping track of your account information. This means that you may not be
able to request transactions in your LifePoints Tax-Managed Fund shares directly
through the Funds, but can do so only through your broker, plan administrator or
bank. Ask your Financial Intermediary for information on whether your LifePoints
Tax-Managed Fund shares are held in an omnibus account.
PAYMENT OF REDEMPTION PROCEEDS
By Check
When you redeem your shares, a check for the redemption proceeds will be sent
to the shareholder(s) of record at the address of record within seven days after
the LifePoints Tax-Managed Funds receive a redemption request in proper form.
By Wire
If you have established the electronic redemption option, your redemption
proceeds can be wired to your predesignated bank account on the next bank
business day after the LifePoints Tax-Managed Funds receive your redemption
request. The LifePoints Tax-Managed Funds may charge a fee to cover the cost of
sending a wire transfer for redemptions less than $1,000, and your bank may
charge an additional fee to receive the wire. Wire transfers can be sent to US
commercial banks that are members of the Federal Reserve System.
WRITTEN INSTRUCTIONS
Proper Form: Written instructions must be in proper form. They
must include:
A description of the request
The name of the Fund(s)
The class of shares, if applicable
The account number(s)
The amount of money or number of shares being purchased,
exchanged, transferred or redeemed
The name(s) on the account(s)
The signature(s) of all registered account owners
For exchanges, the name of the Fund you are exchanging into
Your daytime telephone number
Signature Requirements Based on Account Type
Account Type Requirements for Written Requests
Individual, Joint Written instructions must be signed by each
Tenants, Tenants shareholder, exactly as the names appear in
in Common the account registration.
UGMA or UTMA Written instructions must be signed by the
(custodial custodian in his/her capacity as it appears
accounts for minors) in the account registration.
Corporation, Written instructions must be signed by
Association authorized person(s), stating his/her
capacity as indicated by the corporate resolution to act
on the account. A copy of the corporate resolution,
certified within the past 90 days, authorizing the signer
to act.
Estate, Trust, Written instructions must be signed by all
Pension, Profit trustees. If the name of the trustee(s)
Sharing Plan does not appear in the account registration, please
provide a copy of the trust document certified within the
last 60 days.
Joint tenancy Written instructions must by signed by the
shareholders whose surviving tenant(s). A certified copy of
co-tenants are the death certificate must accompany the
deceased request.
Signature Guarantee
The LifePoints Tax-Managed Funds reserve the right to require a signature
guarantee under certain circumstances. A signature guarantee verifies the
authenticity of your signature. You should be able to obtain a signature
guarantee from a bank, broker, credit union, savings association, clearing
agency, or securities exchange or association, but not a notary public. Call
your financial institution to see if it has the ability to guarantee a
signature.
ACCOUNT POLICIES
Third Party Transactions
If you purchase LifePoints Tax-Managed Fund shares as part of a program of
services offered by a Financial Intermediary, you may be required to pay
additional fees. You should contact your Financial Intermediary for information
concerning what additional fees, if any, may be charged.
Redemption In-Kind
A Fund may pay for any portion of the redemption amount in excess of $250,000
by a distribution in-kind of securities from the Fund's portfolio, instead of in
cash. If you receive an in-kind distribution of portfolio securities, and choose
to sell them, you will incur brokerage charges.
MONEY MANAGER INFORMATION
The money managers have no affiliations with the LifePoints Tax-Managed Funds
or the LifePoints Tax-Managed Funds' service providers other than their
management of Underlying Fund assets. 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 Funds in FRIC, or to other clients of FRIMCo or of Russell, including its
wholly owned subsidiary, Frank Russell Trust Company.
This section identifies the money managers for the Underlying Funds in which
the LifePoints Tax-Managed Funds invest.
Diversified Equity Fund
Alliance Capital Management L.P., US Bank Place, 601 2nd Ave. South, Suite
5000, Minneapolis, MN 55402-4322.
Barclays Global Fund Advisors N.A., 45 Fremont Street, San Francisco, CA
94105.
Equinox Capital Management, Inc., 590 Madison Avenue, 41st Floor, New York,
NY 10022.
Jacobs Levy Equity Management, 280 Corporate Center, 3 ADP Boulevard,
Roseland, NJ 07068.
Lincoln Capital Management Company, 200 South Wacker Drive, Suite 2100,
Chicago, IL 60606.
Marsico Capital Management, LLC, 1200 17th Street, Suite 1200, Denver, CO
80202.
Peachtree Asset Management, a division of SSBC Fund Management
LLC, One Peachtree Center, Suite 4500, 303 Peachtree Street N.E., Atlanta,
GA 30308.
Sanford C. Bernstein & Co., Inc., 767 Fifth Avenue, 21st Floor, New York, NY
10153.
Suffolk Capital Management, Inc., 1633 Broadway, 40th Floor, New York, NY
10107.
Trinity Investment Management Corporation, 75 Park Plaza,
Boston, MA 02116.
Quantitative Equity Fund
Barclays Global Fund Advisors, See: Diversified Equity Fund.
Franklin Portfolio Associates LLC, Two International Place, 22nd Floor,
Boston, MA 02110-4104.
J.P. Morgan Investment Management, Inc., 522 Fifth Ave., 6th
Floor, New York, NY 10036.
Jacobs Levy Equity Management, 280 Corporate Center, 3 ADP Boulevard,
Roseland, NJ 07068.
International Securities Fund
Delaware International Advisers Limited, 80 Cheapside, 3rd
Floor, London EC2V6EE England.
Fidelity Management Trust Company, 82 Devonshire Street,
Boston, MA, 02109.
J.P. Morgan Investment Management, Inc., See: Quantitative
Equity Fund.
Mastholm Asset Management, LLC, 10500 N.E. 8th Street, Suite
660, Bellevue, WA 98004.
Montgomery Asset Management, LLC, 101 California Street, San
Francisco, CA 94111
Oechsle International Advisors, LLC, One International Place, 23rd Floor,
Boston, MA 02110.
Sanford C. Bernstein & Co., Inc., See: Diversified Equity Fund.
The Boston Company Asset Management, Inc., One Boston Place, 14th Floor,
Boston, MA 02108-4402.
Emerging Markets Fund
Foreign & Colonial Emerging Markets Limited, Exchange House, Primrose Street,
London, England EC2A 2NY.
Genesis Asset Managers, Ltd., 21 Knights Bridge, London, SW1X
7LY England.
J.P. Morgan Investment Management Inc., See: Quantitative
Equity Fund.
Montgomery Asset Management LLC, See: International Securities
Fund.
Nicholas-Applegate Capital Management, 600 W. Broadway 32nd Fl.
San Diego, CA 92101.
Sanford C. Burstein & Co. Inc., See: Diversified Equity.
Schrodes Capital Management International Limited, 31 Greshmon Street,
London, UK EC2V 7QA.
Tax-Managed Large Cap Fund
(Formerly Equity T Fund)
J.P. Morgan Investment Management, Inc., See: Emerging Markets
Fund.
Tax-Managed Small Cap Fund
Geewax, Terker & Company, 99 Starr Street, Phoenixville, PA 19460.
Tax Exempt Bond Fund
MFS Institutional Advisors, Inc., 500 Boylston Street, Boston, MA 02116.
Standish, Ayer & Wood, Inc., One Financial Center, Boston, MA
02111.
Tax Free Money Market Fund
Weiss, Peck & Greer, L.L.C., One New York Plaza, 30th Floor, New York, NY
10004.
IN CONSIDERING INVESTMENT IN THE LIFEPOINTS TAX-MANAGED FUNDS, DO NOT RELY ON
ANY INFORMATION UNLESS IT IS CONTAINED IN THIS PROSPECTUS OR IN THE LIFEPOINTS
TAX-MANAGED FUNDS' STATEMENT OF ADDITIONAL INFORMATION. THE LIFEPOINTS
TAX-MANAGED FUNDS HAVE NOT AUTHORIZED ANYONE TO ADD ANY INFORMATION OR TO MAKE
ANY ADDITIONAL STATEMENTS ABOUT THE LIFEPOINTS TAX-MANAGED FUNDS. THE LIFEPOINTS
TAX-MANAGED FUNDS MAY NOT BE AVAILABLE IN SOME JURISDICTIONS OR TO SOME PERSONS.
THE FACT THAT YOU HAVE RECEIVED THIS PROSPECTUS SHOULD NOT, IN ITSELF, BE
TREATED AS AN OFFER TO SELL LIFEPOINTS TAX-MANAGED FUND SHARES TO YOU. CHANGES
IN THE AFFAIRS OF THE LIFEPOINTS TAX-MANAGED FUNDS OR IN THE UNDERLYING FUNDS'
MONEY MANAGERS MAY OCCUR AFTER THE DATE ON THE COVER PAGE OF THIS PROSPECTUS.
THIS PROSPECTUS WILL BE AMENDED OR SUPPLEMENTED TO REFLECT ANY MATERIAL CHANGES
TO THE INFORMATION IT CONTAINS.
For more information about the
LifePoints Tax-Managed Funds, the
following documents are available
without charge:
Annual/Semiannual Reports: Additional information about the LifePoints
Tax-Managed Funds' investments will be available in the LifePoints Tax-Managed
Funds' annual and semiannual reports to shareholders, once the LifePoints
Tax-Managed Funds have completed their first annual or semi-annual period. In
each LifePoints Tax-Managed Fund's annual report, you will find a discussion of
the Funds' holdings and of market conditions and investment strategies that
significantly affected the LifePoints Tax-Managed Fund's performance during its
last fiscal year.
Statement of Additional Information (SAI): The SAI provides more detailed
information about the LifePoints Tax-Managed Funds.
You may obtain free copies of the annual report for each LifePoints Tax-Managed
Fund and the SAI once the LifePoints Tax-Managed Funds have completed their
first annual or semi-annual period or may request other information, by
contacting your Financial Intermediary or the LifePoints Tax-Managed Funds at:
Frank Russell Investment Company
909 A Street
Tacoma, WA 98402
Telephone: 1-800-787-7354
Fax: 253-591-3495
Internet: http://www.russell.com
You can review and copy information Distributor:
about the LifePoints Tax-Managed Funds Russell Fund
(including the SAI) at the Securities Distributors,
and Exchange Commission's Public Inc.
Reference Room in Washington, D.C. You SEC File No. 811-3153
can obtain information on the operation
of the Public Reference Room by calling 36-08-058 (11/99)
the Commission at 1-800-SEC-0330. You
can obtain copies of this information
upon paying a duplicating fee by
writing to the Public Reference Section
of the Commission, Washington, D.C.
20549-6009. Reports and other
information about the LifePoints
Tax-Managed Funds are also available on
the Commission's Internet website at
http://www.sec.gov.
FRANK RUSSELL INVESTMENT COMPANY
Class C and S Shares:
Tax-Managed Equity Aggressive Strategy Fund
Tax-Managed Aggressive Strategy Fund
Tax-Managed Moderate Strategy Fund
Tax-Managed Conservative Strategy Fund
FRANK RUSSELL INVESTMENT COMPANY
LifePoints Funds
Prospectus
Class C, D, E and S Shares:
Equity Aggressive Strategy Fund*
Aggressive Strategy Fund
Balanced Strategy Fund
Moderate Strategy Fund
Conservative Strategy Fund
December 1, 1999
909 A STREET, TACOMA, WA 98402 o 800-787-7354 o 253-627-7001
As with all mutual funds, the Securities and Exchange Commission has neither
determined that the information in this Prospectus is accurate or complete, nor
approved or disapproved of these securities. It is a criminal offense to state
otherwise.
* Prior to May 1, 1999, this Fund was known as the Equity Balanced
Strategy Fund.
<PAGE>
TABLE OF CONTENTS
Risk/Return Summary
Investment Objective..........................................
Principal Investment Strategies...............................
Principal Risks...............................................
Performance...................................................
Fees and Expenses.............................................
Summary Comparison of the Funds..................................
The Purpose of the Funds--Multi-Style, Multi-Manager
Diversification..................................................
Management of the Underlying Funds and the LifePoints Funds......
The Money Managers for the Underlying Funds......................
Investment Objectives, Investment Strategies and Risks of the
Underlying Funds.................................................
Dividends and Distributions......................................
Taxes............................................................
How Net Asset Value Is Determined................................
Distribution and Shareholder Servicing Arrangements..............
How to Purchase Shares...........................................
Exchange Privilege...............................................
How to Redeem Shares.............................................
Payment of Redemption Proceeds...................................
Written Instructions.............................................
Account Policies.................................................
Financial Highlights.............................................
Money Manager Information........................................
<PAGE>
RISK/RETURN SUMMARY
INVESTMENT OBJECTIVE
Equity seeks to achieve high, long-term capital
Aggressive appreciation, while recognizing the possibility
Strategy Fund* of high fluctuations in year-to-year market
values.
Aggressive seeks to achieve high, long-term capital
Strategy appreciation with low current income, while
Fund recognizing the possibility of substantial
fluctuations in year-to-year market values.
Balanced seeks to achieve a moderate level of current
Strategy income and, over time, above-average capital
Fund appreciation with moderate risk.
Moderate seeks to achieve moderate long-term capital
Strategy appreciation with high current income, while
Fund recognizing the possibility of moderate
fluctuations in year-to-year market values.
Conservative seeks to achieve moderate total rate of return
Strategy Fund through low capital appreciation and reinvestment
of a high level of current income.
* Prior to May 1, 1999, this Fund was known as the Equity Balanced Strategy
Fund.
PRINCIPAL INVESTMENT STRATEGIES
Each of the five Frank Russell Investment Company (FRIC) Funds described in
this Prospectus (LifePoints Fund) is a "fund of funds," and diversifies its
assets by investing, at present, in the Class S Shares of several other FRIC
Funds (Underlying Funds). Each LifePoints Fund seeks to achieve a specific
investment objective by investing in different combinations of the Underlying
Funds.
Each LifePoints Fund allocates its assets by investing in shares of a
diversified group of Underlying Funds. The Underlying Funds in which each
LifePoints Fund invests are shown in the table below. The LifePoints Funds
intend their strategy of investing in combinations of Underlying Funds to result
in investment diversification that an investor could otherwise achieve only by
holding numerous individual investments.
<TABLE>
<CAPTION>
Equity
Aggresive 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%
Multistrategy Bond Fund............. -- % 18% 16% -- % -- %
Real Estate Securities Fund......... 5% 5% 5% 5% 5%
Emerging Markets Fund............... 5% 5% 3% 2% 1%
Short Term Bond Fund................ -- % -- % -- % 33% 60%
</TABLE>
A LifePoints Fund can change the allocation of its assets among Underlying
Funds at any time, if the LifePoints Funds' investment adviser, Frank Russell
Investment Management Company (FRIMCo) believes that doing so would better
enable the LifePoints Fund to pursue its investment objective. From time to
time, each LifePoints Fund adjusts its investments within set limits based on
FRIMCo's outlook for the economy, financial markets generally and relative
market valuation of the asset classes represented by each Underlying Fund.
Additionally, each LifePoints Fund may deviate from set limits when, in FRIMCo's
opinion, it is necessary to do so to pursue the LifePoints Fund's investment
objective. However, The LifePoints Funds expect that amounts they allocate to
each Underlying Fund will generally vary only within 10% of the ranges specified
in the table above.
LOGO
Equity Aggressive Strategy Fund
LOGO
Aggressive Strategy Fund
[PIE CHART APPEARS HERE]
Real Estate Securities Fund 5%
Emerging Markets Fund 5%
Special Growth Fund 11%
Multistrategy Bond Fund 18%
International Securities Fund 19%
Diversified Equity Fund 21%
Quantitative Equity Fund 21%
LOGO
Balanced Strategy Fund
[PIE CHART APPEARS HERE]
Emerging Markets Fund 3%
Real Estate Securities Fund 5%
Special Growth Fund 5%
Diversified Bond Fund 25%
International Securities Fund 14%
Diversified Equity Fund 16%
Multistrategy Bond Fund 16%
Quantitative Equity Fund 16%
LOGO
Moderate Strategy Fund
[PIE CHART APPEARS HERE]
Special Growth Fund 2%
Emerging Markets Fund 2%
Real Estate Securities Fund 5%
International Securities Fund 9%
Diversified Equity Fund 11%
Quantitative Equity Fund 11%
Diversified Bond Fund 27%
Short Term Bond Fund 33%
LOGO
Conservative Strategy Fund
[PIE CHART APPEARS HERE]
Emerging Markets Fund 1%
Diversified Equity Fund 5%
International Securities
Fund 5%
Real Estate Securities Fund 5%
Quantitative Equity Fund 6%
Diversified Bond Fund 18%
Short Term Bond Fund 60%
Diversification
Each LifePoints Fund is a "nondiversified" investment company for purposes of
the Investment Company Act of 1940 because it invests in the securities of a
limited number of issuers (i.e., the Underlying Funds). Each of the Underlying
Funds in which the LifePoints Funds invest is a diversified investment company.
PRINCIPAL RISKS
You should consider the following factors before investing in the LifePoints
Funds:
o An investment in the LifePoints Funds, like any investment, has risks. The
value of each LifePoints Fund fluctuates, and you could lose money.
o Since the assets of each LifePoints Fund is invested primarily in shares of
the Underlying Funds, the investment performance of each LifePoints Fund is
directly related to the investment performance of the Underlying Funds in
which it invests.
o The policy of each LifePoints Fund is to allocate its assets among the
Underlying Funds within certain ranges. Therefore, the LifePoints Funds may
have less flexibility to invest than a mutual fund without such
constraints.
o A LifePoints Fund is exposed to the same risks as the Underlying Funds in
direct proportion to the allocation of its assets among the Underlying
Funds. These risks include the risks associated with a multi-manager
approach to investing, as well as those associated with investing in equity
securities, fixed income securities, and international securities. In
addition, each Lifepoints Fund and each Underlying Fund could be adversely
affected if the computer systems of its service providers or of the issuers
in which they invest fail to operate properly on or after January 1, 2000.
For further detail on the risks summarized here, please refer to the
section "Risks of the Underlying Funds".
o An investment in any of the LifePoints Funds is not a bank deposit and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or
any other government agency.
o The officers, Trustees, and FRIMCo 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.
PERFORMANCE
The following bar charts illustrate the risks of investing in the LifePoints
Funds by showing how the performance of each LifePoints Fund's Class E Shares
varies over the life of the LifePoints Fund. The return for the other classes of
shares offered by this Prospectus will differ from the Class E returns shown in
the bar chart, depending upon the fees and expenses of that class. The chart
does not reflect any account maintenance fee. Any such charge will reduce your
return.
No returns are shown for the Class C or Class S Shares of any LifePoints Fund
because those Shares were not issued during the periods shown. If the Rule 12b-1
distribution fees for the Class C Shares had been reflected in the returns shown
for Class E Shares, the returns would have been lower. If the shareholder
services fees, which are not imposed for Class S, had not been reflected, the
returns would have been higher.
Past performance is no indication of future results.
[INSERT BAR CHART]
During the period shown in the bar chart, each LifePoints Fund had the
following highest and lowest quarterly return:
Best Worst
Quarter Quarter
Equity Aggressive Strategy.................. 17.7% (14.0)%
(4Q/98) (3Q/98)
Aggressive Strategy......................... 14.3% (11.6)%
(4Q/98) (3Q/98)
Balanced Strategy........................... 10.5% (7.2)%
(4Q/98) (3Q/98)
Moderate Strategy........................... 6.8% (3.8)%
(4Q/98) (3Q/98)
Conservative Strategy....................... 3.6% (0.8)%
(4Q/98) (3Q/98)
The following table further illustrates the risks of investing in the
LifePoints Funds by showing how each LifePoints Fund's average annual returns
for one year and since the beginning of operations of such LifePoints Fund
compare with the returns of certain indexes that measure broad market
performance.
Average annual total returns*
for the periods ended December 31, 1998
Since
1 Year Inception**
Equity Aggressive Strategy Fund
Class D......................................... -- 1.17%
Class E......................................... 13.75% 8.69
Salomon Smith Barney 3-Month Treasury Bill Index 5.05 4.99
Equity Aggressive Strategy Composite Index#..... 17.71 13.07
Since
1 Year Inception**
Aggressive Strategy Fund
Class D......................................... -- 0.96
Class E......................................... 11.69 8.79
Salomon Smith Barney 3-Month Treasury Bill Index 5.05 4.99
.
Aggressive Strategy Composite Index#............ 14.68 10.80
Balanced Strategy Fund
Class D......................................... -- 3.23
Class E......................................... 11.66 9.80
Salomon Smith Barney 3-Month Treasury Bill Index 5.05 4.99
.
Balanced Strategy Composite Index#.............. 13.72 11.23
Moderate Strategy Fund
Class D......................................... -- 3.57
Class E......................................... 10.19 8.04
Salomon Smith Barney 3-Month Treasury Bill Index 5.05 4.99
.
Moderate Strategy Composite Index#.............. 11.30 9.78
Conservative Strategy Fund
Class D......................................... -- 3.77
Class E......................................... 7.70 7.95
Salomon Smith Barney 3-Month Treasury Bill Index 5.05 4.97
.
Revised Conservative Strategy Composite Index#. 8.72 8.09
* No returns are shown for Class C or Class S Shares of any LifePoints Fund
because those shares were not issued during the period shown. Had the Rule
12b-1 distribution fees and shareholder servicing fees for Class C Shares
been reflected in the returns shown for Class E Shares, the returns shown
would have been lower.
** Equity Aggressive Strategy Fund commenced operations by issuing class E
Shares on September 30, 1997. The other LifePoints Funds commenced
operations by issuing their Class E Shares on the following dates:
Aggressive Strategy Fund and Balanced Strategy Fund - September 16, 1997;
Moderate Strategy Fund - October 2, 1997; and Conservative Strategy Fund -
November 7, 1997. Each LifePoints Fund commenced operations of its Class D
Shares on March 24, 1998. Performance shown for Class D Shares prior to
that date is the performance of the Class E Shares, and does not reflect
deduction of the Rule 12b-1 distribution fees that apply to Class D Shares.
Had it done so, the returns shown would have been lower.
<TABLE>
<CAPTION>
<S> <C> <C>
# The Equity Aggressive Strategy The Moderate Strategy
Composite Index is comprised of Composite Index is comprised of
the following indices: the following indices:
60% Russell 1000(R) Index 33% Merrill Lynch 1-2.99 Year Treasury Index
20% Salomon Smith Barney BMI 27% Lehman Brothers
Ex-US Aggregate Bond Index
10% Russell 2500TM Index 22% Russell 1000(R) Index
5% IFC Investable composite Index 9% Salomon Smith Barney BMI Index
5% NAREIT Equity REIT Index 5% NAREIT Equity REIT Index
2% Russell 2500TM Index
2% IFC Investable Composite Index
The Aggressive Strategy
Composite Index is comprised of the
following indices:
42% Russell 1000(R) Index The Conservative Strategy Composite Index
19% Salomon Smith Barney BMI is comprised of the
18% Lehman Brothers Aggregate following indices:
Bond Index 60% Merrill Lynch 1-2.99 Year Treasury Index
11% Russell 2500TM Index 18% Lehman Brothers Aggregate Bond Index
5% IFC Investable Composite Index 11% Russell 1000(R)
5% NAREIT Equity REIT Index 5% Salomon Smith Barney BMI Ex-US
5% NAREIT Equity REIT Index
1% IFC Investable Composite Index
</TABLE>
The Balanced Strategy Composite Index is comprised
of the following indices:
41% Lehman Brothers Aggregate Bond Index
32% Russell 1000R Index
14% Salomon Smith Barney BMI Ex-US
5% Russell 2500TM Index
5% NAREIT Equity REIT Index
3% IFC Investable Composite Index
FEES AND EXPENSES
These tables describe the fees and expenses that you may pay if you buy and
hold shares of the LifePoints Funds.
<TABLE>
<CAPTION>
Shareholder Fees
(fee paid directly from your investment)
Maximum
Maximum Sales Maximum
Sales Charge Maximum Account
Charge (Load) Deferred Redemption Exchange Maintenance
(Load) Imposed Sales Fees Fees
Imposed on Charge
on Reinvested (Load)
Purchases Dividends
<S> <C> <C> <C> <C> <C> <C>
Each Fund None None None None None None
(Class C)
Each Fund None None None None None None
(Class D)
Each Fund None None None None None None
(Class E)
Each Fund None None None None None None
(Class S)
</TABLE>
<TABLE>
<CAPTION>
Annual Operating Expenses
(expenses that were deducted from Fund assets)
(% of net assets)
Other
Expenses#
(including Total Total
Administrative Gross Expense Net
Advisory Distribution Fees and Annual Waivers Annual
Fee (12b-1) Shareholder Fund and Fund
Fees* Servicing Operating Reimbursements# Operating
Fees)** Expenses**+ Expenses
<S> <C> <C> <C> <C> <C> <C>
Class C Shares
Equity Aggressive
Strategy Fund....... 0.20% 0.75% 0.42% 1.37% (0.37)% 1.00%
Aggressive Strategy
Fund................ 0.20% 0.75% 0.46% 1.41% (0.41)% 1.00%
Balanced Strategy
Fund................ 0.20% 0.75% 0.41% 1.36% (0.36)% 1.00%
Moderate Strategy
Fund................ 0.20% 0.75% 0.74% 1.69% (0.69)% 1.00%
Conservative
Strategy Fund...... 0.20% 0.75% 2.30% 3.25% (2.25)% 1.00%
Class D Shares
Equity Aggressive
Strategy Fund...... 0.20% 0.25% 0.42% 0.87% (0.37)% 0.50%
Aggressive Strategy
Fund............... 0.20% 0.25% 0.46% 0.91% (0.41)% 0.50%
Balanced Strategy
Fund............... 0.20% 0.25% 0.41% 0.86% (0.36)% 0.50%
Moderate Strategy
Fund............... 0.20% 0.25% 0.74% 1.19% (0.69)% 0.50%
Conservative
Strategy Fund...... 0.20% 0.25% 2.30% 2.75% (2.25)% 0.50%
Class E Shares
Equity Aggressive
Strategy Fund...... 0.20% 0.00% 0.42% 0.62% (0.37)% 0.25%
Aggressive Strategy
Fund............... 0.20% 0.00% 0.46% 0.66% (0.41)% 0.25%
Balanced Strategy
Fund............... 0.20% 0.00% 0.41% 0.61% (0.36)% 0.25%
Moderate Strategy
Fund............... 0.20% 0.00% 0.74% 0.94% (0.69)% 0.25%
Conservative
Strategy Fund...... 0.20% 0.00% 2.30% 2.50% (2.25)% 0.25%
Class S Shares
Equity Aggressive
Strategy Fund....... 0.20% 0.00% 0.17% 0.37% (0.37%) 0.00%
Aggressive Strategy
Fund................ 0.20% 0.00% 0.21% 0.41% (0.41%) 0.00%
Balanced Strategy
Fund................ 0.20% 0.00% 0.16% 0.36% (0.36%) 0.00%
Moderate Strategy
Fund................ 0.20% 0.00% 0.49% 0.69% (0.69%) 0.00%
Conservative
Strategy Fund....... 0.20% 0.00% 2.05% 2.25% (2.25%) 0.00%
</TABLE>
* Pursuant to the rules of the National Association of Securities Dealers,
Inc. ("NASD"), the aggregate initial sales charges, deferred sales charges
and asset-based sales charges on shares of the Funds may not exceed 6.25%
of total gross sales, subject to certain exclusions. This 6.25% limitation
is imposed on the Class C and Class D Shares of the Funds rather than on a
per shareholder basis. Therefore, long-term shareholders of the Class C or
Class D Shares may pay more than the economic equivalent of the maximum
front-end sales charges permitted by the NASD.
** The Fund expenses shown in this table do not include the pro-rata expenses
of the Underlying Funds, which are shown in the next two tables. For
purposes of this table, Other Expenses for Classes C, D and E includes a
shareholder services fee of up to 0.25% of average daily net assets. Annual
operating expenses for Class C and Class S Shares are based on average net
assets expected to be invested during the year ending December 31, 1999.
During the course of this period, expenses may be more or less than the
amount shown. Other Expenses have been restated to reflect changes to the
Funds' Transfer and Dividend Disbursing Agency Agreement, which became
effective June 8, 1998. Prior to December 1, 1998, FRIMCo provided advisory
and administrative services to the Funds pursuant to a single Management
Agreement for which each Fund paid a single fee. Since then, FRIMCo's
advisory and administrative services have been provided under a separate
advisory agreement and administrative agreement which provide for the fees
reflected in the table.
# FRIMCo has contractually agreed to waive, at least through November 30,
2000, its aggregate 0.25% combined advisory and administrative fees.
Certain LifePoints Funds operating expenses will be paid by the Underlying
Funds and/or FRIMCo, as more fully described below.
+ If you purchase any class of Shares of a LifePoints Fund through a
Financial Intermediary, such as a bank or an investment adviser, may also
pay additional fees to the intermediary for services provided by the
intermediary. You should contact your financial intermediary for
information concerning what additional fees, if any, will be charged.
No Lifepoints Fund will bear any operating expenses. Those operating expenses
include those arising from accounting, custody, auditing, legal and transfer
agent services. They do not include expenses attributable to advisory and
administrative fees (which are currently waived by FRIMCo), any Rule 12b-1
distribution fee, any shareholder service fees, or any nonrecurring
extraordinary expenses, which will be borne by the LifePoints Funds or their
appropriate classes of shares.
A LifePoints Fund's operating expenses are borne either by the Underlying
Funds in which the LifePoints Fund invests or by FRIMCo. This arrangement is
governed by Special Servicing Agreements among each of the affected Funds and
FRIMCo. Those agreements are entered into on a yearly basis and must be
re-approved annually by FRIC's Board of Trustees.
Shareholders in a LifePoints Fund 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, 1998). As
explained at the beginning of this Prospectus, each LifePoints Fund intends to
invest in some, but not all, of the Underlying Funds.
Total
Underlying Fund Class S Operating
Expense
Ratios
Diversified Equity Fund.............................. .95%
Special Growth Fund.................................. 1.20%
Quantitative Equity Fund............................. .94%
International Securities Fund........................ 1.30%
Diversified Bond Fund................................ .59%
Short Term Bond Fund................................. .67%
Multistrategy Bond Fund.............................. .80%
Real Estate Securities Fund.......................... 1.10%
Emerging Markets Fund................................ 1.81%
<PAGE>
The total direct and indirect operating expense ratios of each class of
shares of each LifePoints Fund (calculated as a percentage of average net
assets) are as follows:
Class C Class D Class E Class S
Equity Aggressive Strategy......... 2.10% 1.60% 1.35% 1.10%
Aggressive Strategy................ 2.07% 1.57% 1.32% 1.07%
Balanced Strategy.................. 1.96% 1.46% 1.21% 0.96%
Moderate Strategy.................. 1.82% 1.32% 1.07% 0.82%
Conservative Strategy.............. 1.75% 1.25% 1.00% 0.75%
Each LifePoints Fund's total expense ratio is based on its total operating
expense ratio plus a weighted average of the expense ratios of the underlying
FRIC Funds in which it was invested as of December 31, 1998. These total expense
ratios may be higher or lower depending on the allocation of a LifePoints Fund's
assets among the underlying FRIC Funds and the actual expenses of the underlying
LifePoints Funds.
Example
This example is intended to help you compare the cost of investing in each
LifePoints Fund with the cost of investing in other mutual funds.
The example assumes that you invest $10,000 in the LifePoints Fund for the
time periods indicated, and then redeem all your shars at the end of these
periods. The example also assumes that your investment has a 5% return each
year, and that operating expenses, which include the indirect expenses of the
Underlying Funds, remain the same. The figures shown would be the same whether
you sold your shares at the end of a period or kept them.
Although your actual costs may be higher or lower, under these assumptions
your costs would be:
Class C: 1 3 5 10
Year Years Years Years
Equity Aggressive Strategy Fund.......... $210 $663 $1,161 $2,641
Aggressive Strategy Fund................. 207 652 1,144 2,603
Balanced Strategy Fund................... 196 618 1,083 2,466
Moderate Strategy Fund................... 182 574 1,006 2,289
Conservative Strategy Fund............... 175 552 968 2,202
Class D: 1 3 5 10
Year Years Years Years
Equity Aggressive Strategy Fund.......... $160 $504 $883 $2,010
Aggressive Strategy Fund................. 157 495 868 1,975
Balanced Strategy Fund................... 146 460 806 1,835
Moderate Strategy Fund................... 132 417 730 1,661
Conservative Strategy Fund............... 125 394 691 1,574
Class E: 1 3 5 10
Year Years Years Years
Equity Aggressive Strategy Fund.......... $135 $426 $746 $1,697
Aggressive Strategy Fund................. 132 417 730 1,661
Balanced Strategy Fund................... 121 381 668 1,521
Moderate Strategy Fund................... 107 337 591 1,346
Conservative Strategy Fund............... 100 315 553 1,259
Class S: 1 3 5 10
Year Years Years Years
Equity Aggressive Strategy Fund.......... $110 $348 $609 $1,387
Aggressive Strategy Fund................. 107 336 589 1,340
Balanced Strategy Fund................... 96 302 530 1,206
Moderate Strategy Fund................... 82 259 453 1,032
Conservative Strategy Fund............... 75 237 415 944
SUMMARY COMPARISON OF THE FUNDS
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>
Capital Possibility
LifePoints Appreciation of
Fund Income Fluctuation
<S> <C> <C> <C>
Equity Aggressive 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>
THE PURPOSE OF THE FUNDS--MULTI-STYLE, MULTI-MANAGER DIVERSIFICATION
The LifePoints Funds are offered through certain bank trust departments,
registered investment advisers, broker-dealers and other financial services
organizations that have been selected by the LifePoints Funds' adviser or
distributor (Financial Intermediaries). The LifePoints Funds offer investors the
opportunity to invest in a diversified mutual fund investment allocation program
and are designed to provide a means for investors 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.
Three functions form the core of Russell's consulting services:
o Objective Setting: Defining appropriate investment objectives and desired
investment returns, based on a client's unique situation and risk
tolerance.
o 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.
o 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.
The LifePoints Funds believe investors should seek to hold fully diversified
portfolios that reflect both their own individual investment time horizons and
their ability to accept risk. The LifePoints Funds believe that for many, this
can be accomplished through strategically purchasing shares in one or more of
the Underlying Funds which have been structured to provide access to specific
asset classes employing a multi-style, multi-manager approach.
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. For this reason, no single manager
has consistently outperformed the market over extended periods. Although
performance cycles tend to repeat themselves, they do not do so predictably.
The LifePoints Funds believe, however, that it is possible to select managers
who have shown a consistent ability to achieve superior results within subsets
or styles of specific asset classes and investment styles by employing a unique
combination of qualitative and quantitative measurements. The Underlying Funds
in which the LifePoints Funds invest combine 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 the risk of 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.
The LifePoints Funds have a greater potential than most mutual funds for
diversification among investment styles and money managers since the LifePoints
Funds invest in shares of several Underlying Funds. The LifePoints Funds were
created to provide a mutual fund investor with a simple but effective means of
structuring a diversified mutual fund investment program suited to meet the
investor's individual needs. FRIMCo has long stressed the value of
diversification in an investment program, and has offered its advisory expertise
in assisting investors on how to design their individual investment program.
The Funds conduct their business through a number of service providers, who
act on behalf of the Funds. FRIMCo, the Funds' administrator and investment
adviser, performs the Funds' day to day corporate management and oversees the
Funds' money managers. Each of the Funds' money managers makes all investment
decisions for the portion of the Fund assigned to it by FRIMCo. The Funds'
custodian, State Street Bank, maintains custody of all of the Funds' assets.
FRIMCo, in its capacity as the Funds' transfer agent, is responsible for
maintaining the Funds' shareholder records and carrying out shareholder
transactions. When a Fund acts in one of these areas, it does so through the
service provider responsible for that area.
MANAGEMENT OF THE UNDERLYING FUNDS
AND THE LIFEPOINTS FUNDS
The LifePoints Funds' investment adviser is FRIMCo, 909 A Street, Tacoma,
Washington 98402. FRIMCo pioneered the "multi-style, multi-manager" investment
method in mutual funds and manages over $14 billion in more than 30 mutual fund
portfolios. FRIMCo was established in 1982 to serve as the investment management
arm of Russell.
Russell, which acts as consultant to the LifePoints Funds, was founded in
1936 and has been providing comprehensive asset management consulting services
for over 30 years to institutional investors, principally large corporate
employee benefit plans. Russell provides the LifePoints Funds and FRIMCo with
the asset management consulting services that it provides to its other
consulting clients. The LifePoints Funds do not compensate Russell for these
services. Russell and its affiliates have offices around the world--in Tacoma,
New York, Toronto, London, Zurich, Paris, Sydney, Auckland and Tokyo.
Russell is a subsidiary of The Northwestern Mutual Life Insurance Company.
Founded in 1857, Northwestern Mutual is a mutual life insurance corporation
headquartered in Milwaukee, Wisconsin. It leads the US in both individual life
insurance sold annually and individual life insurance in force.
FRIMCo recommends money managers to the Underlying Funds, allocates
Underlying Fund assets among them, oversees them, and evaluates their results.
FRIMCo also oversees the management of the Underlying Funds' liquidity reserves.
The Underlying Funds' money managers select the individual portfolio securities
for the assets in the Underlying Funds assigned to them.
James A. Jornlin is responsible for the day to day decisions regarding the
investment and reinvestment of the LifePoints Funds within their target
allocation strategy percentages. Mr. Jornlin also oversees certain other
funds as described below. Mr. Jornlin has been a Senior Investment Officer
of FRIMCo since April 1995. From 1991 to March 1995, Mr. Jornlin was a
Senior Research Analyst with Russell.
FRIMCo's officers and employees who oversee the money managers of the
Underlying Funds are:
o Randall P. Lert, who has been Chief Investment Officer of FRIMCo since June
1989.
o 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 listed in this section, has primary responsibility for management
of the Fixed Income I, Diversified Bond, Short Term Bond, Fixed Income III,
Tax Exempt Bond and Multistrategy Bond Funds.
o Randal C. Burge, who has been a Portfolio Manager of FRIMCo since June
1995. From 1990 to 1995, Mr. Burge was a Client Executive for Frank Russell
Australia. Mr. Burge, jointly with another portfolio manager listed in this
section, has primary responsibility for management of the Fixed Income I,
Fixed Income III, Diversified Bond, Short Term Bond, Tax Exempt Bond,
Multistrategy Bond and Emerging Markets Funds.
o Jean E. Carter, who has been a Portfolio Manager of FRIMCo since April
1994. Ms. Carter, jointly with another portfolio manager listed in this
section, has primary responsibility for management of the International,
and International Securities Funds.
o 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 listed in this section, has primary responsibility for management
of the International and International Securities Funds.
o James M. Imhof, Manager of FRIMCo's Portfolio Trading, manages the Funds'
liquidity portfolios on a day to day basis and has been responsible for
ongoing analysis and monitoring of the money managers since 1989.
o 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 listed in this section, has primary responsibility for management
of the Tax-Managed Equity Aggressive Strategy, Equity Aggressive Strategy,
Aggressive Strategy, Balanced Strategy, Moderate Strategy, Conservative
Strategy, Emerging Markets and Real Estate Securities Funds.
o C. Nola Kulig, who has been a Portfolio Manager of FRIMCo since January
1996. From 1994 to 1995, Ms. Kulig was a member of the Alpha Strategy
Group. From 1988 to 1994, Ms. Kulig was Senior Research Analyst with
Russell. Ms. Kulig, jointly with another portfolio manager listed in this
section, has primary responsibility for management of the Equity I, Equity
II, Equity III, Equity Q, Tax-Managed Small Cap, Diversified Equity,
Quantitative Equity, Special Growth and Equity Income Funds.
o 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 listed in this section, has primary responsibility for
management of the Equity I, Equity II, Equity III, Equity Q, Tax-Managed
Large Cap, Tax-Managed Small Cap, Diversified Equity, Quantitative Equity,
Special Growth, and Equity Income Funds.
For its investment advisory and administrative services, FRIMCo receives an
aggregate fee from each LifePoints Fund at the annual rate of 0.25% of the
average daily net assets of each LifePoints Fund, payable to FRIMCo monthly on a
pro rata basis. FRIMCo has voluntarily agreed to waive the fee to which it is
entitled from each LifePoints Fund. Of this aggregate amount 0.05% is
attributable to administrative services. Prior to December 1, 1998, FRIMCo
provided advisory and administrative services to the LifePoints Funds pursuant
to a single Management Agreement for which each LifePoints Fund paid a single
fee. Since then, FRIMCo's advisory and administrative services are provided
under a separate advisory agreement and an administrative agreement.
In addition to the advisory fee payable by the LifePoints Funds, the
LifePoints Funds will bear indirectly a proportionate share of operating
expenses that include the advisory fees paid by the Underlying Funds in which
they invest. While a shareholder of a LifePoints Fund will also bear a
proportionate part of advisory fees paid by an Underlying Fund, each of the
advisory fees paid is based upon the services received by the respective
LifePoints Fund. From the advisory fee that it receives from each Underlying
Fund, FRIMCo pays the Underlying Fund's money managers for their investment
selection services. FRIMCo retains any remainder as compensation for the
services described above and to pay expenses. The annual rate of the advisory
fees, payable to FRIMCo monthly on a pro rata basis, are the following
percentages of the average daily net assets of each Underlying Fund: Diversified
Equity Fund 0.73%, Special Growth Fund 0.90%, Quantitative Equity Fund 0.73%,
International Securities Fund 0.90%, Diversified Bond Fund 0.40%, Short Term
Bond Fund 0.45%, Multistrategy Bond Fund 0.60%, Real Estate Securities Fund
0.80%, and Emerging Markets Fund 1.15%. The fees of the Underlying Funds, other
than the Diversified Bond, Short Term 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.
THE MONEY MANAGERS FOR THE UNDERLYING FUNDS
Each Underlying Fund allocates its assets among the money managers listed
under "Money Manager Information" at the end of this Prospectus. FRIMCo, as the
Underlying Funds' advisor, may change the allocation of an Underlying Fund's
assets among money managers at any time. The Underlying Funds received an
exemptive order from the Securities and Exchange Commission (SEC) that permits
an Underlying Fund to engage or terminate a money manager at any time, subject
to the approval by the Underlying Fund's Board of Trustees (Board), without a
shareholder vote. An Underlying Fund notifies its shareholders within 60 days of
when a money manager begins providing services. The Underlying Funds select
money managers 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 any Underlying Fund's selection or
termination of a money manager.
Each money manager has complete discretion to purchase and sell portfolio
securities for its segment of an Underlying Fund. At the same time, however,
each money manager must operate within the Underlying Fund's investment
objectives, restrictions and policies. Additionally, each manager must operate
within more specific constraints developed from time to time by FRIMCo. FRIMCo
develops such constraints for each manager based on FRIMCo's assessment of the
manager's expertise and investment style. By assigning more specific constraints
to each money manager, FRIMCo intends to capitalize on the strengths of each
money manager and to combine their investment activities in a complementary
fashion. Although the money managers' activities are subject to general
oversight by the Board and the Underlying Funds' officers, neither the Board,
the officers, FRIMCo, nor Russell evaluate the investment merits of the money
managers' individual security selections.
INVESTMENT OBJECTIVES, INVESTMENT STRATEGIES
AND RISKS OF THE UNDERLYING FUNDS
The objective and principal strategies and risks of each Underlying Fund are
described in this section. 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 strategies 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 FRIC
at 800/787-7354 (in Washington, 253/627-7001).
DIVERSIFIED EQUITY FUND
Investment To provide income and capital growth by investing
Objective principally in equity securities.
Principal The Diversified Equity Fund invests primarily in
Investment common stocks of medium and large capitalization
Strategies companies. These companies are predominately
US-based, although the Fund may invest a limited portion of its
assets in non-US firms from time to time.
The Fund employs a "multi-style, multi manager" approach whereby
portions of the Fund are allocated to different money managers who
employ distinct investment styles. The Fund uses three principal
investment styles, intended to complement one another.
o Growth Style emphasizes investments in equity securities of
companies with above-average earnings growth prospects. These
companies are generally found in the technology, health care,
consumer, and service sectors.
o Value Style emphasizes investments in equity securities of
companies that appear to be undervalued relative to their
corporate worth, based on earnings, book or asset value,
revenues, or cash flow. These companies are generally found
among industrial, financial, and utilities sectors.
o Market-Oriented Style emphasizes investments in companies that
appear to be undervalued relative to their growth prospects.
This style may encompass elements of both the growth and value
styles. These companies may be found in any industry sector.
Additionally, the Fund is diversified by equity substyle. For
example, within the Growth Style, the Fund expects to employ both
an Earnings Momentum substyle (concentrating on companies with
more volatile and accelerating growth rates) and Consistent Growth
substyle (concentrating on companies with stable earnings growth
over an economic cycle).
When determining how to allocate its assets among money managers,
the Fund considers a variety of factors. These factors include a
money manager's investment style and substyle and its performance
record as well as the characteristics of the money manager's
typical portfolio investments. These characteristics include
capitalization size, growth and profitability measures, valuation
ratios, economic sector weightings, and earnings and price
volatility statistics. The Fund also considers the manner in which
money managers' historical and expected investment returns
correlate with one another.
The Fund intends to be fully invested at all times. Although the
Fund, like any mutual fund, maintains liquidity reserves (i.e.,
cash awaiting investment or held to meet redemption requests), the
Fund exposes these reserves to the performance of appropriate
equity markets by investing in stock index futures contracts. This
causes the Fund to perform as though its cash reserves were
actually invested in those markets. Additionally the Fund invests
its liquidity reserves in one or more Frank Russell Investment
Company (FRIC) money market Funds.
The Fund may lend up to one-third of its portfolio securities to
earn income. These loans may be terminated at any time. The Fund
will receive either cash or US government debt obligations as
collateral.
SPECIAL GROWTH FUND
Investment To maximize total return primarily through capital
Objective appreciation and assuming a higher level of volatility than
Diversified Equity Fund.
Principal The Special Growth Fund invests primarily in common
Investment stocks of small and medium capitalization companies.
Strategies These companies are predominately US-based, although
the Fund may invest in non-US firms from time to
time.
The Fund's investments may include companies that have been
publicly traded for less than five years and smaller companies,
such as companies not listed in the Russell 2000(R) Index.
The Fund employs a "multi-style, multi manager" approach whereby
portions of the Fund are allocated to different money managers who
employ distinct investment styles. The Fund uses three principal
investment styles, intended to complement one another:
o Growth Style emphasizes investments in equity securities of
companies with above-average earnings growth prospects. These
companies are generally found in the technology, health care,
consumer, and service sectors.
o Value Style emphasizes investments in equity securities of
companies that appear to be undervalued relative to their
corporate worth, based on earnings, book or asset value,
revenues, or cash flow. These companies are generally found
among industrial, financial, and utilities sectors.
o Market-Oriented Style emphasizes investments in companies that
appear to be undervalued relative to their growth prospects.
This style may encompass elements of both the growth and value
styles. These companies may be found in any industry sector.
When determining how to allocate its assets among money managers,
the Fund considers a variety of factors. These factors include a
money manager's investment style and performance record as well as
the characteristics of the money manager's typical portfolio
investments. These characteristics include capitalization size,
growth and profitability measures, valuation ratios, economic
sector weightings, and earnings and price volatility statistics.
The Fund also considers the manner in which money managers'
historical and expected investment returns correlate with one
another.
The Fund intends to be fully invested at all times. Although the
Fund, like any mutual fund, maintains liquidity reserves (i.e.,
cash awaiting investment or held to meet redemption requests), the
Fund exposes these reserves to the performance of appropriate
equity markets by investing in stock index futures contracts. This
causes the Fund to perform as though its cash reserves were
actually invested in those markets. Additionally the Fund invests
its liquidity reserves in one or more FRIC money market Funds.
Up to 15% of a Fund's net assets may be "illiquid" securities
(i.e., securities that do not have a readily available market or
that are subject to resale restrictions). Additionally, the Fund
may lend up to one-third of its portfolio securities to earn
income. These loans may be terminated at any time. The Fund will
receive either cash or US government debt obligations as
collateral.
QUANTITATIVE EQUITY FUND
Investment To provide a total return greater than the total
Objective 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.
Principal The Quantitative Equity Fund invests primarily in
Investment common stocks of medium and large capitalization
Strategies companies, which are predominately US-based.
The Fund generally pursues a market-oriented style of security
selection based on quantitative investment models. This style
emphasizes investments in companies that appear to be undervalued
relative to their growth prospects.
The Fund employs a multi-manager approach whereby portions of the
Fund are allocated to different money managers who employ distinct
investment styles. The Fund intends these styles to complement one
another. When determining how to allocate its assets among money
managers, the Fund considers a variety of factors. These factors
include a money manager's investment style and performance record
as well as the characteristics of the money manager's typical
portfolio investments. These characteristics include
capitalization size, growth and profitability measures, valuation
ratios, economic sector weightings, and earnings and price
volatility statistics. The Fund also considers the manner in which
money managers' historical and expected investment returns
correlate with one another.
Each of the Fund's money managers use quantitative models to rank
securities based upon their expected ability to outperform the
total return of the Russell 1000 Index. Once a money manager has
ranked the securities, it then selects the securities most likely
to outperform and constructs, for its segment of the Fund, a
portfolio that has risks similar to the Russell 1000 Index. Each
money manager performs this process independently from each other
money manager.
The Russell 1000 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 Fund's money managers typically use a variety of quantitative
models, ranking securities within each model and on a composite
basis using proprietary weighting formulas. Examples of those
quantitative models are dividend discount models, price/cash flow
models, price/earnings models, earnings surprise and earnings
estimate revisions models, and price momentum models.
Although the Fund, like any mutual fund, maintains liquidity
reserves (i.e., cash awaiting investment or held to meet
redemption requests), the Fund exposes these reserves to the
performance of appropriate equity markets by investing in stock
index futures contracts. This causes the Fund to perform as though
its cash reserves were actually invested in those markets.
Additionally the Fund invests its liquidity reserves in one or
more FRIC money market Funds.
The Fund may lend up to one-third of its portfolio securities to
earn income. These loans may be terminated at any time. The Fund
will receive either cash or US government debt obligations as
collateral.
INTERNATIONAL SECURITIES FUND
Investment To provide favorable total return and additional
Objective diversification for US investors.
Principal The International Securities Fund invests primarily
Investment in equity securities issued by companies domiciled
Strategies outside the United States and in depository
receipts, which represent ownership of securities of
non-US companies.
The Fund's investments span most of the developed nations of the
world (particularly Europe and the Far East) to maintain a high
degree of diversification among countries and currencies. Because
international equity investment performance has a reasonably low
correlation to US equity performance, this Fund may be appropriate
for investors who want to reduce their investment portfolio's
overall volatility by combining an investment in this Fund with
investments in US equities.
The Fund may seek to protect its investments against adverse
currency exchange rate changes by purchasing forward currency
contracts. These contracts enable the Fund to "lock in" the US
dollar price of a security that it plans to buy or sell. The Fund
may not accurately predict currency movements.
The Fund employs a "multi-style, multi manager" approach whereby
portions of the Fund are allocated to different money managers who
employ distinct investment styles. The Fund uses three principal
investment styles, intended to complement one another:
o Growth Style emphasizes investments in equity securities of
companies with above-average earnings growth prospects. These
companies are generally found in the technology, health care,
consumer, and service sectors.
o Value Style emphasizes investments in equity securities of
companies that appear to be undervalued relative to their
corporate worth, based on earnings, book or asset value,
revenues, or cash flow. These companies are generally found
among industrial, financial, and utilities sectors.
o Market-Oriented Style emphasizes investments in
companies that appear to be undervalued relative
to their growth prospects. This style may
encompass elements of both the growth and value
styles. These companies may be found in any
industry sector. A variation of this style
maintains investments that replicate country and
sector weightings of a broad international market
index.
When determining how to allocate its assets among money managers,
the Fund considers a variety of factors. These factors include a
money manager's investment style and performance record as well as
the characteristics of the money manager's typical portfolio
investments. These characteristics include capitalization size,
growth and profitability measures, valuation ratios, economic
sector weightings, and earnings and price volatility statistics.
The Fund also considers the manner in which money managers'
historical and expected investment returns correlate with one
another.
The Fund intends to be fully invested at all times. Although the
Fund, like any mutual fund, maintains liquidity reserves (i.e.,
cash awaiting investment or held to meet redemption requests), the
Fund exposes these reserves to the performance of appropriate
equity markets by investing in stock index futures contracts. This
causes the Fund to perform as though its cash reserves were
actually invested in those markets. Additionally the Fund invests
its liquidity reserves in one or more FRIC money market Funds.
Up to 15% of the Fund's net assets may be "illiquid" securities
(i.e., securities that do not have a readily available market or
that are subject to resale restrictions). Additionally, the Fund
may lend up to one-third of its portfolio securities to earn
income. These loans may be terminated at any time. The Fund will
receive either cash or US government debt obligations as
collateral.
DIVERSIFIED BOND FUND
Investment To provide effective diversification against
Objective equities and a stable level of cash flow by
investing in fixed-income securities.
Principal The Diversified Bond Fund invests primarily in
Investment investment grade fixed-income securities. In
Strategies particular, the Fund holds debt securities issued or
guaranteed by the US government or, to a lesser extent by non-US
governments, or by their respective agencies and
instrumentalities. It also holds mortgage-backed securities,
including collateralized mortgage obligations. The Fund also
invests in corporate debt securities and dollar-denominated
obligations issued in the US by non-US banks and corporations
(Yankee Bonds). A majority of the Fund's holdings are US dollar
denominated. From time to time the Fund may invest in municipal
debt obligations.
The average weighted duration of the Fund's portfolio typically
ranges within 10% of the average weighted duration of the Lehman
Brothers Aggregate Bond Index, which was 4.5 years as of December
31, 1998, but may vary up to 25% from the Index's duration. The
Fund has no restrictions on individual security duration.
The Fund invests in securities of issuers in a variety of sectors
of the fixed-income market. In seeking investments that will
produce cash flow, the Fund's money managers also identify sectors
of the fixed-income market that they believe are undervalued and
concentrate the Fund's investments in those sectors. These sectors
will differ over time. To a lesser extent, the Fund may attempt to
anticipate shifts in interest rates and hold securities that the
Fund expects to perform well in relation to market indexes, as a
result of such shifts. Additionally, the Fund typically holds
proportionately fewer US Treasury obligations than are represented
in the Lehman Brothers Aggregate Bond Index.
The Fund employs multiple money managers, each with its own
expertise in the fixed-income markets. When determining how to
allocate its assets among money managers, the Fund considers a
variety of factors. These factors include a money manager's
investment style and performance record as well as the
characteristics of the money manager's typical portfolio
investments. These characteristics include portfolio biases,
magnitude of sector shifts, and duration movements. The Fund also
considers the manner in which money managers' historical and
expected investment returns correlate with one another.
The Fund may enter into interest rate futures contracts, options
on such futures contracts, and interest rate swaps (i.e.,
agreements to exchange the Fund's rights to receive certain
interest payments) as a substitute for holding physical securities
or to facilitate the implementation of its investment strategy,
but not for leverage purposes.
The Fund may lend up to one-third of its portfolio securities to
earn income. These loans may be terminated at any time. The Fund
will receive either cash or US government debt obligations as
collateral.
SHORT TERM BOND FUND
Investment The preservation of capital and the generation of
Objective current income consistent with preservation of
capital by investing primarily in fixed-income
securities with low-volatility characteristics.
Principal The Short Term Bond Fund invests primarily in
Investment fixed-income securities. In particular, the Fund
Strategies holds debt securities issued or guaranteed by the US
government or, to a lesser extent by non-US governments, or by
their respective agencies and instrumentalities. It also holds
mortgage-backed securities, including collateralized mortgage
obligations. The Fund also invests in corporate debt securities
and dollar-denominated obligations issued in the US by non-US
banks and corporations (Yankee Bonds). A majority of the Fund's
holdings are US dollar denominated. From time to time the Fund may
invest in municipal debt obligations.
The Fund may invest up to 10% of its assets in debt securities
that are rated below investment grade as determined by one or more
nationally recognized securities rating organizations or in
unrated securities judged by the Fund to be of comparable quality.
The average weighted duration of the Fund's portfolio typically
ranges within 15% of the average weighted duration of the Merrill
Lynch 1-2.99 Years Treasury Index, but may vary up to 50% from the
Index's duration. The Fund has no restrictions on individual
security duration.
The Fund invests in securities of issuers in a variety of sectors
of the fixed-income market. The Fund's money managers identify
sectors of the fixed-income market that they believe are
undervalued and concentrate the Fund's investments in those
sectors. These sectors will differ over time. To a lesser extent,
the Fund may attempt to anticipate shifts in interest rates and
hold securities that the Fund expects to perform well in relation
to market indexes, as a result of such shifts. Additionally, the
Fund typically holds proportionately fewer US Treasury obligations
than are represented in the Merrill Lynch 1-2.99 Years Treasury
Index.
The Fund employs multiple money managers, each with its own
expertise in the fixed-income markets. When determining how to
allocate its assets among money managers, the Fund considers a
variety of factors. These factors include a money manager's
investment style and performance record as well as the
characteristics of the money manager's typical portfolio
investments. These characteristics include portfolio biases,
magnitude of sector shifts, and duration movements. The Fund also
considers the manner in which money managers' historical and
expected investment returns correlate with one another.
The Fund may enter into interest rate futures contracts, options
on such futures contracts, and interest rate swaps (i.e.,
agreements to exchange the Fund's rights to receive certain
interest payments) as a substitute for holding physical securities
or to facilitate the implementation of its investment strategy,
but not for leverage purposes.
The Fund may lend up to one-third of its portfolio securities to
earn income. These loans may be terminated at any time. The Fund
will receive either cash or US government debt obligations as
collateral.
MULTISTRATEGY BOND FUND
Investment To provide maximum total return, primarily through
Objective capital appreciation and by assuming a higher level
of volatility than is ordinarily expected from broad
fixed-income market portfolios.
Principal The Multistrategy Bond Fund invests primarily in
Investment fixed-income securities. In particular, the Fund
Strategies holds debt securities issued or guaranteed by the US
government or, to a lesser extent by non-US governments, or by
their respective agencies and instrumentalities. It also holds
mortgage-backed securities, including collateralized mortgage
obligations. The Fund also invests in corporate debt securities
and dollar-denominated obligations issued in the US by non-US
banks and corporations (Yankee Bonds). A majority of the Fund's
holdings are US dollar denominated. From time to time the Fund may
invest in municipal debt obligations.
The Fund may invest up to 25% of its assets in debt securities
that are rated below investment grade as determined by one or more
nationally recognized securities rating organizations or in
unrated securities judged by a Fund money manager to be of
comparable quality.
The average weighted duration of the Fund's portfolio typically
ranges within 10% of the average weighted duration of the Lehman
Brothers Aggregate Bond Index, which was 4.5 years as of Deceember
31, 1998, but may vary up to 25% from the Index's duration. The
Fund has no restrictions on individual security duration.
The Fund invests in securities of issuers in a variety of sectors
of the fixed-income market. The Fund's money managers identify
sectors of the fixed-income market that they believe are
undervalued and concentrate the Fund's investments in those
sectors. These sectors will differ over time. To a lesser extent,
the Fund may attempt to anticipate shifts in interest rates and
hold securities that the Fund expects to perform well in relation
to market indexes, as a result of such shifts. Additionally, the
Fund typically holds proportionately fewer US Treasury obligations
than are represented in the Lehman Brothers Aggregate Bond Index.
The Fund employs multiple money managers, each with its own
expertise in the fixed-income markets. When determining how to
allocate its assets among money managers, the Fund considers a
variety of factors. These factors include a money manager's
investment style and performance record as well as the
characteristics of the money manager's typical portfolio
investments. These characteristics include portfolio biases,
magnitude of sector shifts, and duration movements. The Fund also
considers the manner in which money managers' historical and
expected investment returns correlate with one another.
The Fund may enter into interest rate futures contracts, options
on such futures contracts, and interest rate swaps (i.e.,
agreements to exchange the Fund's rights to receive certain
interest payments) as a substitute for holding physical securities
or to facilitate the implementation of its investment strategy but
not for leverage purposes.
The Fund may lend up to one-third of its portfolio securities to
earn income. These loans may be terminated at any time. The Fund
will receive either cash or US government debt obligations as
collateral.
REAL ESTATE SECURITIES FUND
Investment To generate a high level of total return through
Objective above average current income, while maintaining the
potential for capital appreciation.
Principal The Fund seeks to achieve its objective by
Investment concentrating its investments in equity securities
Strategies of issuers whose value is derived primarily from
development, management and market pricing of
underlying real estate properties.
The Fund invests primarily in securities of companies that own
and/or manage properties, known as real estate investment trusts
(REITs). REITs may be composed of anywhere from two to over 1,000
properties. The Fund may also invest in equity and debt securities
of other types of real estate-related companies. These companies
are predominately US-based, although the Fund may invest a limited
portion of its assets in non-US firms from time to time.
The Fund employs a "multi-style, multi manager" approach whereby
portions of the Fund are allocated to different money managers who
employ distinct investment styles. The Fund intends these
investment styles to complement one another.
When determining how to allocate its assets among money managers,
the Fund considers a variety of factors. These factors include a
money manager's investment style and performance record as well as
the characteristics of the money manager's typical portfolio
investments. These characteristics include capitalization size,
growth and profitability measures, valuation ratios, property type
and geographic weightings, and earnings and price volatility
statistics. The Fund also considers the manner in which money
managers' historical and expected investment returns correlate
with one another.
The Fund intends to be fully invested at all times. Although the
Fund, like any mutual fund, maintains liquidity reserves (i.e.,
cash awaiting investment or held to meet redemption requests), the
Fund may expose these reserves to the performance of appropriate
equity markets by investing in stock index futures contracts. This
causes the Fund to perform as though its cash reserves were
actually invested in those markets. Additionally, the Fund invests
its liquidity reserves in one or more FRIC money market Funds.
Up to 15% of the Fund's net assets may be "illiquid" securities
(i.e., securities that do not have a readily available market or
that are subject to resale restrictions). Additionally, the Fund
may lend up to one-third of its portfolio securities to earn
income. These loans may be terminated at any time. The Fund will
receive either cash of US government debt obligations as
collateral.
EMERGING MARKETS FUND
Investment To provide maximum total return, primarily through
Objective 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.
Principal The Emerging Markets Fund will primarily invest in
Investment equity securities of companies that are located in
Strategies countries with emerging markets or that derive a
majority of their revenues from operations in such countries.
These companies are referred to as "Emerging Market Companies."
For purposes of the Fund's operations, an "emerging market"
country is a country having an economy and market that the World
Bank or the United Nations 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 seeks to maintain a broadly diversified exposure to
emerging market countries and ordinarily will invest in the
securities of issuers in at least three different emerging market
countries.
The Fund invests in common stocks of Emerging Market Companies and
in depository receipts, which represent ownership of securities of
non-US companies. The Fund may also invest in rights, warrants and
convertible fixed-income securities. The Fund's securities are
denominated primarily in foreign currencies and may be held
outside the United States.
Some emerging markets countries do not permit foreigners to
participate directly in their securities markets or otherwise
present difficulties for efficient foreign investment. Therefore,
when it believes it is appropriate to do so, the Fund may invest
in pooled investment vehicles, such as other investment companies,
which enjoy broader or more efficient access to shares of Emerging
Market Companies in certain countries.
The Fund employs a multi-manager approach whereby portions of the
Fund are allocated to different money managers who employ distinct
investment styles. The Fund intends these styles to complement one
another. When determining how to allocate its assets among money
managers, the Fund considers a variety of factors. These factors
include a money manager's investment style and performance record
as well as the characteristics of the money manager's typical
portfolio investments (e.g., capitalization size, growth and
profitability measures, valuation ratios, economic sector
weightings, and earnings and price volatility statistics). The
Fund also considers the manner in which money managers' historical
and expected investment returns correlate with one another.
The Fund may enter into repurchase agreements. Under those
agreements a bank or broker dealer sells securities to the Fund,
and agrees to repurchase the securities at the Fund's cost plus
interest, ordinarily on the next business day.
The Fund may agree to purchase securities for a fixed price at a
future date beyond customary settlement time. This kind of
agreement is known as a "forward commitment" or as a "when-issued"
transaction.
Up to 15% of the Fund's net assets may be "illiquid" securities
(i.e., securities that do not have a readily available market or
that are subject to resale restrictions). Additionally, the Fund
may lend up to one-third of its portfolio securities to earn
income. These loans may be terminated at any time. A Fund will
receive either cash or US government debt obligations as
collateral.
Because international equity investment performance has a
reasonably low correlation to US equity performance, this Fund may
be appropriate for investors who want to reduce their investment
portfolio's overall volatility by combining an investment in this
Fund with investments in US equities.
PRINCIPAL RISKS
The following table describes principal types of risks the LifePoints Funds
are subject to, based on the investments made by the Underlying Funds, and lists
next to each description the Underlying and LifePoints Funds most likely to be
affected by the risk. Other Underlying and LifePoints Funds that are not listed
may be subject to one or more of the risks, based on the allocation of assets
among the Underlying Funds, but will not do so in a way that is expected to
principally affect the performance of the LifePoints or Underlying Fund as a
whole. Please refer to the LifePoints Funds' Statement of Additional Information
for a discussion of risks associated with types of securities held by the Funds
and investment practices employed.
<TABLE>
<CAPTION>
<S> <C> <C>
Relevant
Risk Associated With: Description Fund
Multi-manager approach The investment styles employed by a Fund's All Funds
money managers may not be complementary.
The interplay of the various strategies (Underlying Funds: All
employed by a Fund's multiple money Funds)
managers may result in the Fund's holding a
concentration of certain types of securities.
This concentration may be beneficial or
detrimental to the Fund's performance
depending upon the performance
of those securities and the overall economic
environment. The multiple manager approach
could result in a high level of portfolio
turnover, resulting in higher Fund brokerage
expenses and increased tax liability from the
Fund's realization of capital gains.
Equity securities The value of equity securities will rise and fall Equity Aggressive Strategy
in response to the activities of the company Aggressive Strategy
that issued the stock, general market Balanced Strategy
conditions, and/or economic conditions. Moderate Strategy
(Underlying Funds:
Diversified Equity
Special Growth
Quantitative Equity
International Securities
Real Estate Securities
Emerging Markets)
Value Stocks Investments in value stocks are subject to risks Equity Aggressive Strategy
that (i) their intrinsic values may never be Aggressive Strategy
realized by the market or (ii) such stock may Balanced Strategy
turn out not to have been undervalued. Moderate Strategy
(Underlying Funds:
Diversified Equity
Special Growth
Quantitative Equity
International Securities)
Growth Stocks Growth company stocks may provide (Underlying Funds:
minimal Equity Aggressive Strategy dividends that can Diversified Equity
cushion stock prices in a market Aggressive Strategy Special Growth
decline. The value of growth company stocks may International Securities)
Balanced Strategy rise and fall dramatically based,
in part, on Moderate Strategy investors' perceptions
of the company rather than on fundamental analysis of
the stocks.
Market-Oriented Market-oriented investments are generally subject Equity Aggressive Strategy
Investments to the risks associated with growth and value Aggressive Strategy
stocks. Balanced Strategy
Moderate Strategy
(Underlying Funds:
Diversified Equity
Special Growth
Quantitative Equity
International Securities)
Securities of Investments in smaller companies may involve Equity Aggressive Strategy
small greater risks because these companies generally Aggressive Strategy
capitalization have a limited track record. Smaller companies Balanced Strategy
companies often have narrower markets and more limited Moderate Strategy
managerial and financial resources than larger,
more established companies. As a result, their (Underlying Fund: Special
performance can be more volatile, which could Growth)
increase the volatility of a Fund's portfolio.
Fixed-income securities Prices of fixed-income securities rise and fall in Balanced Strategy
response to interest rate changes. Generally, when Moderate Strategy
interest rates rise, prices of fixed-income securities Conservative Strategy
fall. The longer the duration of the security, the
more sensitive the security is to this risk. A 1% (Underlying Funds:
increase in interest rates would reduce the value of Diversified Bond
a $100 note by approximately one dollar if it had a Multistrategy Bond
one year duration, but would reduce its value by Short Term Bond)
approximately fifteen dollars if it had a 15 year
duration. There is also a risk that one or more of
the securities will be downgraded in credit rating or
go into default. Lower-rated bonds generally have
higher credit risks.
Non-investment grade Although lower rated debt securities generally Aggressive Strategy
fixed-income offer a higher yield than higher rated debt Balanced Strategy
securities securities, they involve higher risks.
They are especially subject to: (Underlying Funds:
o adverse changes in general economic Multistrategy Bond
conditions and in the industries in which their Short Term Bond)
issuers are engaged,
o changes in the financial condition of their
issuers, and
o price fluctuations in response to changes in
interest rates.
As a result, issuers of lower rated debt securities
are more likely than other issuers to miss principal
and interest payments or to default.
International securities A Fund's return and net asset value may be Equity Aggressive Strategy
significantly affected by political or economic Aggressive Strategy
conditions and regulatory requirements in a Balanced Strategy
particular country. Foreign markets, economies
and political systems may be less stable than US (Underlying Funds:
markets, and changes in exchange rates of International Securities
foreign currencies can affect the value of a Multistrategy Bond
Fund's foreign assets. Foreign laws and Emerging Markets
accounting standards typically are not as strict as Short Term Bond)
they are in the US and there may be less public
information available about foreign companies.
A Fund's foreign debt securities are typically
obligations of sovereign governments. These
securities are particularly subject to a risk of
default from political instability.
Non-U.S. debt A Fund's foreign debt securities are typically Aggressive Strategy
securities obligations of sovereign governments. These Balanced Strategy
securities are particularly subject to a risk of
default from political instability. (Underlying Funds:
Multistrategy Bond
Short Term Bond)
Emerging market Investments in emerging or developing markets (Underlying Fund:
Countries involve exposure to economic structures that are Emerging Markets)
generally less diverse and mature, and to political
systems which have less stability than those of more
developed countries. Emerging market securities are
subject to currency transfer restrictions and may
experience delays and disruptions in securities
settlement procedures.
Instruments of US Non-US corporations and banks issuing dollar Balanced Strategy
and foreign denominated instruments in the US are not Moderate Strategy
banks necessarily subject to the same regulatory Conservative Strategy
and branches and requirements that apply to US corporations and
foreign corporations, banks, such as accounting,
auditing and (Underlying Funds:
including Yankee recordkeeping standards, the public
availability of Diversified Bond
information and, for banks, reserve
requirements, Multistrategy Bond
loan limitations, and examinations. This increases Short Term Bond)
the possibility that a non-US
corporation or bank may become insolvent or
otherwise unable to fulfill its obligations on
these instruments.
Derivatives (e.g. futures If a Fund incorrectly forecasts interest rates in using Balanced Strategy
contracts, options on derivatives, the Fund could lose money. Price Moderate Strategy
futures, interest rate movements of a futures contract, option or Conservative Strategy
swaps) structured note may not be identical to price
movements of portfolio securities or a securities (Underlying Funds:
index resulting in the risk that, when a Fund buys a Diversified Bond
futures contract or option as a hedge, the hedge may Multistrategy Bond
not be completely effective. Short Term Bond)
Real estate securities Just as real estate values go up and down, (Underlying Fund:
companies involved in the industry, and in which a Real Estate Securities)
Fund invests, also fluctuate. Such a Fund is subject
to the risks associated with direct ownership of real
estate. Additional risks include declines in the value
of real estate, changes in general and local
economic conditions, increases in property taxes
and changes in tax laws and interest rates. The
value of securities of companies that service the real
estate industry may also be affected by such risks.
o REITs REITs may be affected by changes in the value of (Underlying Fund:
the underlying properties owned by the REITs and Real Estate Securities)
by the quality of any credit extended. Moreover, the
underlying portfolios of 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 federal tax laws or to
maintain their exemption from certain Federal
securities laws.
Municipal Obligations Municipal obligations are affected by economic, Balanced Strategy
business or political developments. These securities Moderate Strategy
may be subject to provisions of litigation, Conservative Strategy
bankruptcy and other laws affecting the rights and
remedies of creditors, or may become subject to (Underlying Funds:
future laws extending the time for payment of Diversified Bond
principal and/or interest, or limiting the rights of Multistrategy Bond
municipalities to levy taxes. Short Term Bond)
Exposing Liquidity By exposing its liquidity reserves to the equity
Reserves to Equity market, a Fund's performance tends to correlate All Funds
Markets more closely to the performance of the market as
a whole. Although this increases a Fund's (Underlying Funds:
performance if equity markets rise, it reduces a Diversified Equity
Fund's performance if equity markets decline. Special Growth
Quantitative Equity
International Securities
Real Estate Securities)
Securities Lending If a borrower of a Fund's securities fails (Underlying Funds:
financially, the Fund's recovery of the loaned All Funds)
securities may be delayed or the Fund may lose its
rights to the collateral.
Year 2000
o Year 2000 and The Funds' operations depend on the smooth All LifePoints Funds
Fund operations functioning of their service providers' computer
systems. The Funds and their shareholders could (Underlying Funds:
be adversely affected if those computer systems do All Funds)
not properly process and calculate date-related
information on or after January 1, 2000. Many
computer software systems in use today cannot
distinguish between the year 2000 and the year 1900.
Although year 2000-related computer problems could
have a negative effect on the Funds and their
shareholders, the Funds' service providers have
advised the Funds that they are working to avoid such
problems. Because it is the obligation of those
service providers to ensure the proper functioning of
their computer systems, the Funds do not expect to
incur any material expense in connection with year
2000 preparations.
o Year 2000 and Fund The Funds and their shareholders could be All Funds
portfolio investments adversely affected if the com puter systems of the
issuers in which the Funds invest or those of the (Underlying Funds:
service providers they depend upon, do not All Funds)
properly process and calculate date-related
information on or after January 1, 2000. If such
an event occurred, the value of those issuer's
securities could be reduced.
o Year 2000 and Fund A Fund that invests significantly in non-US All Funds
portfolio investments issuers may be exposed to a higher degree of risk
in non-U.S. issuers from Year 2000 issues than other Funds. It is (Underlying Funds:
generally believed that non-US governments and
International Securities, issuers are less
prepared for Year 2000 related Emerging Markets)
contingencies than the US government and US-
based issuers, which could result in a more
significant diminution in value of non-US
issuer's securities on or after January 1, 2000.
</TABLE>
DIVIDENDS AND DISTRIBUTIONS
Income Dividends
Each LifePoints 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, for each LifePoints
Fund on a quarterly basis, with payment being made in April, July, October and
December.
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 LifePoints Fund may declare
a 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 LifePoints Fund and received by
you on December 31 of the prior year, provided that the LifePoints Fund pays
them by January 31. Capital gains realized during November and December will be
distributed to you generally during 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 LifePoints Funds'
allocation percentages.
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 LifePoints 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 LifePoints 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 LifePoints Funds' Transfer Agent, at Operations Department,
P.O. Box 1591, Tacoma, WA 98401.
TAXES
In general, distributions from a LifePoints Fund are taxable to you as either
ordinary income or capital gains. This is true whether you reinvest your
distributions in additional shares of the LifePoints Fund or receive them in
cash. Any capital gains distributed by a LifePoints Fund are taxable to you as
long-term capital gains no matter how long you have owned your shares. Every
January, you will receive a statement that shows the tax status of distributions
you received for the previous year. Distributions declared in December but paid
in January are taxable as if they were paid in December. Distributions taxed as
capital gains may be taxable at different rates depending on how long a
LifePoints Fund holds its assets.
When you sell or exchange your shares of a LifePoints Fund, you may have a
capital gain or loss. The tax rate on any gain from the sale or exchange of your
shares depends on how long you have held your shares.
LifePoints Fund distributions and gains from the sale or exchange of your
shares will generally be subject to state and local income tax. Non-US investors
may be subject to US withholding and estate tax. You should consult your tax
professional about federal, state, local or foreign tax consequences in holding
shares of a LifePoints Fund.
Any foreign taxes paid by an Underlying Fund on its investments may be passed
through to its shareholders as foreign tax credits.
By law, a LifePoints Fund must withhold 31% of your distributions and
proceeds if you do not provide your correct taxpayer identification number, or
certify that such number is correct, or if the IRS instructs the LifePoints Fund
to do so.
The tax discussion set forth above is included for general information only.
Prospective investors should consult their own tax advisers concerning the
federal, state, local or foreign tax consequences of an investment in 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 SAI.
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
LifePoints Fund on each business day on which shares are offered or redemption
orders are tendered. For all LifePoints Funds, a business day is one on which
the New York Stock Exchange (NYSE) is open for trading. The NYSE is not open on
national holidays. All Underlying Funds and LifePoints Funds determine net asset
value as of the close of the NYSE (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
Securities held by the Underlying Funds are typically priced using market
quotations or pricing services when the prices are believed to be reliable--that
is, when the prices reflect the fair market value of the securities. The
Underlying 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. If you hold shares in a LifePoints Fund
that invests in an Underlying Fund, such as the International Securities Fund,
and that holds portfolio securities listed primarily on foreign exchanges, the
net asset value of that both the Underlying and LifePoints Fund's shares may
change on a day when you will not be able to purchase or redeem LifePoints Fund
shares. This is because the value of those portfolio securities may change on
weekends or other days when the LifePoints Fund does not price its shares.
DISTRIBUTION AND SHAREHOLDER
SERVICING ARRANGEMENTS
The LifePoints Funds offer multiple classes of shares: Class C Shares, Class
D Shares, Class E Shares and Class S Shares.
Class C Shares participate in the Funds' Rule 12b-1 distribution plan and
in the LifePoints Funds' shareholder servicing plan. Under distribution plan,
Class C Shares pay distribution fees of 0.75% annually for the sale and
distribution of Class C Shares. Under the shareholder servicing plan, the Class
C Shares pay shareholder servicing fees of 0.25% annually for services provided
to Class C shareholders. Because both of these fees are paid out of the Class C
Share assets on an ongoing basis, over time these fees will increase the cost of
a Class C Share investment in the LifePoints Funds, and the distribution fee may
cost an investor more than paying other types of sales charges.
Class D Shares participate in the Funds' Rule 12b-1 distribution plan and
in the LifePoints Funds' shareholder servicing plan. Under distribution plan,
the Class D shares pay distribution fees of 0.25% annually for the sale and
distribution of Class D Shares. Under the shareholder servicing plan, the Class
D Shares pay shareholder servicing fees of 0.25% annually for services provided
to Class D shareholders. Because both of these fees are paid out of the Class D
Share assets on an ongoing basis, over time these fees will increase the cost of
a Class D share investment in the LifePoints Funds, and the distribution fee may
cost an investor more than paying other types of sales charges.
Class E Shares participate in the Funds' shareholder servicing plan. Under
the shareholder servicing plan, the Class E Shares pay daily fees equal to 0.25%
on an annualized basis for services provided to Class E shareholders. The
shareholder servicing fees are paid out of the Class E Share assets on an
ongoing basis, and over time will increase the cost of your investment in the
LifePoints Funds.
Class S Shares do not participate in either the Funds'distribution plan or
the Funds' shareholder services plan.
HOW TO PURCHASE SHARES
LifePoints Funds are generally available only through a select network of
qualified Financial Intermediaries. If you are not currently working with one of
these Financial Intermediaries, please call Russell Investor Services at (800)
RUSSEL4, (800-787-7354) for assistance in contacting an investment professional
near you.
There is no minimum investment in Class C, Class E or Class S Shares of the
LifePoints Funds. The initial minimum aggregate investment in the Class D Shares
of any combination of the LifePoints Funds is $5 million. FRIMCo, on behalf of
each LifePoints Fund, reserves the right to change, as to any LifePoints Fund or
any class thereof, the categories of investors eligible to purchase shares of
that LifePoints Fund or class. You may be eligible to purchase shares of the
Class D Shares of the LifePoints 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. Trustees, officers, employees, and certain third-party
contractors of FRIC and its affiliates and their spouses and children are not
subject to any initial minimum investment requirement.
Financial Intermediaries may charge their customers a fee for providing
investment-related services. Financial Intermediaries that maintain omnibus
accounts with the Funds may receive administrative fees from the Funds or their
transfer agent. Financial Intermediaries may receive shareholder servicing
compensation with respect to Class C, Class D and Class E Shares of the Funds,
and may receive distribution compensation with respect to Class C and Class D
shares.
Paying for Shares
You may purchase shares of the LifePoints Funds through a Financial
Intermediary on any business day the Funds are open. Purchase orders are
processed at the next net asset value per share calculated after the LifePoints
Funds' receive your order in proper form (defined in the "Written Instructions"
section), and accept the order.
All purchases must be made in US dollars. Checks and other negotiable bank
drafts must be drawn on US banks and made payable to "Frank Russell Investment
Company." The LifePoints Funds reserve the right to reject any purchase order
for any reason including, but not limited to, receiving a check which does not
clear the bank or a payment which does not arrive in proper form by settlement
date. You will be responsible for any resulting loss to the Funds. An overdraft
charge may also be applied. Cash, third party checks and checks drawn on credit
card accounts generally will not be accepted. However, exceptions may be made by
prior special arrangement with certain Financial Intermediaries.
Offering Dates and Times
Orders must be received by the LifePoints Funds prior to the close of the
NYSE (currently 4:00 p.m. Eastern Time). Purchases can be made on any day when
LifePoints Fund shares are offered. Because Financial Intermediaries' processing
time may vary, please ask your Financial Intermediary representative when your
account will be credited.
Order and Payment Procedures
Generally, you must place purchase orders for LifePoints Fund shares through
a Financial Intermediary. You may pay for your purchase by mail or electronic
funds transfer. Initial purchases require a completed and signed Application for
each new account regardless of the investment method. Specific payment
arrangements should be made with your Financial Intermediary.
By Mail
For new accounts, please mail the completed Application to your Financial
Intermediary. Payment for orders may be made by check or other negotiable bank
draft and sent to the LifePoints Funds' Transfer Agent. Certified checks are not
necessary, but checks are accepted subject to collection at full face value in
US funds. Third party checks will not be accepted. Checks should be made payable
to "Frank Russell Investment Company."
By Federal Funds Wire
You can pay for orders by wiring federal funds to the LifePoints Funds'
Custodian, State Street Bank and Trust Company. All wires must include your
account registration and account number for identification. Inability to
properly identify a wire transfer may prevent or delay timely settlement of
your purchase.
By Automated Clearing House ("ACH")
You can make initial or subsequent investments through ACH to the Funds'
Custodian, State Street Bank and Trust Company.
Automated Investment Program
You can make regular investments (minimum $50) in LifePoints Funds in an
established account on a monthly, quarterly, semiannual or annual basis by
automatic electronic funds transfer from a bank account. You must make a
separate transfer for each LifePoints Fund in which you purchase shares. You may
change the amount or stop the automatic purchase at any time. Contact your
Financial Intermediary for further information on this program and an enrollment
form.
Three Day Settlement Program
The LifePoints Funds will accept orders through Financial Intermediaries to
purchase shares of the LifePoints Funds for settlement on the third business day
following the receipt of the order. These orders are paid for by a federal funds
wire if the Financial Intermediary has enrolled in the program and agreed in
writing to indemnify the LifePoints Funds against any losses resulting from
non-receipt of payment.
EXCHANGE PRIVILEGE
By Mail or Telephone
Through your Financial Intermediary, you may exchange Class C, Class D, Class
E or Class S Shares of any LifePoints Fund you own for shares of any other
LifePoints Fund offered by this Prospectus on the basis of the 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 FRIC
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 your Financial Intermediary.
Exchanges may be made by mail or by telephone if the registration of the two
accounts is identical. Contact your Financial Intermediary for assistance in
exchanging shares and, because Financial Intermediaries' processing time may
vary, to find out when your account will be credited or debited. To request an
exchange in writing, please follow the procedures in the "Written Instructions"
section before mailing to your Financial Intermediary.
An exchange involves the redemption of shares, which is treated as a sale for
income tax purposes. Thus, capital gain or loss may be realized. Please consult
your tax adviser for more information. The LifePoints 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) at the next net asset value per
share calculated after the Funds received the exchange request in good order.
In-Kind Exchange of Securities
FRIMCo, in its capacity as the LifePoints Funds' investment advisor, may, at
its discretion, permit you to acquire LifePoints Fund shares in exchange for
securities you currently own. Any securities exchanged must: meet the investment
objective, policies and limitations of the applicable LifePoints 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 for 15 days following the purchase by exchange or until the transfer
has settled, whichever comes first. If you are a taxable investor, you will
generally realize a gain or loss for federal income tax purposes on the
exchange. If you are contemplating an in-kind exchange you should consult your
tax adviser.
The basis of the exchange will depend upon the relative net asset value of
the LifePoints Fund shares purchased and securities exchanged. Securities
accepted by a LifePoints Fund will be valued in the same way the LifePoints Fund
values its assets. Any interest earned on the securities following their
delivery to the LifePoints Funds and prior to the exchange will be considered in
valuing the securities. All interest, dividends, subscription or other rights
attached to the securities becomes the property of the LifePoints Fund, along
with the securities. Please contact your Financial Intermediary for further
information.
HOW TO REDEEM SHARES
Shares of the LifePoints Funds may be redeemed through your Financial
Intermediary on any business day the LifePoints Funds are open at the next net
asset value per share calculated after the Funds' Transfer Agent receives an
order in proper form (defined in the "Written Instructions" section). Payment
will ordinarily be made within seven days after receipt of your request in
proper form. Shares recently purchased by check may not be available for
redemption for 15 days following the purchase or until the check clears,
whichever occurs first, to assure payment has been collected.
Redemption Dates and Times
Redemption requests must be placed through a Financial Intermediary and
received by the LifePoints Funds prior to the close of the NYSE (currently 4:00
p.m. Eastern Time). Because Financial Intermediaries' processing times may vary,
please ask your Financial Intermediary representative when your account will be
debited. Requests can be made by mail or telephone on any day when LifePoints
Fund shares are offered, or through the Systematic Withdrawal Program.
By Mail or Telephone
You may redeem your shares by calling or writing to your Financial
Intermediary. Written requests to sell shares are in proper form when the
instructions are signed by all registered owners, with a signature guarantee if
necessary.
Systematic Withdrawal Program
The LifePoints Funds offer a systematic withdrawal program which allows you
to redeem your shares and receive regular payments from your account on a
monthly, quarterly, semiannual or annual basis. If you would like to establish a
systematic withdrawal program, please complete the proper section of the account
application and indicate how you would like to receive your payments. You will
generally receive your payment by the end of the month in which a payment is
scheduled. When you redeem your shares under a systematic withdrawal program, it
is a taxable transaction.
You may choose to have the payments mailed to you or directed to your bank
account by ACH transfer. You may discontinue the systematic withdrawal program,
or change the amount and timing of withdrawal payments by contacting your
Financial Intermediary.
Accounts in Street Name
Many brokers, employee benefit plans and bank trusts combine their client's
holdings in a single omnibus account held in the brokers', plans', or bank
trusts' own name or "street name." Therefore, if you hold LifePoints Fund shares
through a brokerage account, employee benefit plan or bank trust fund, the
LifePoints Funds may have records only of the omnibus account. In this case,
your broker, employee benefit plan or bank is responsible for keeping track of
your account information. This means that you may not be able to request
transactions in your LifePoints Fund shares directly through the Funds, but can
do so only through your broker, plan administrator or bank. Ask your Financial
Intermediary for information on whether your LifePoints Fund shares are held in
an omnibus account.
PAYMENT OF REDEMPTION PROCEEDS
By Check
When you redeem your shares, a check for the redemption proceeds will be sent
to the shareholder(s) of record at the address of record within seven days after
the LifePoints Funds receive a redemption request in proper form.
By Wire
If you have established the electronic redemption option, your redemption
proceeds can be wired to your predesignated bank account on the next bank
business day after the LifePoints Funds receive your redemption request. The
LifePoints Funds may charge a fee to cover the cost of sending a wire transfer
for redemptions less than $1,000, and your bank may charge an additional fee to
receive the wire. Wire transfers can be sent to US commercial banks that are
members of the Federal Reserve System.
WRITTEN INSTRUCTIONS
Proper Form: Written instructions must be in proper form. They must
include:
A description of the request
The name of the Fund(s)
The class of shares, if applicable
The account number(s)
The amount of money or number of shares being purchased, exchanged,
transferred or redeemed
The name(s) on the account(s)
The signature(s) of all registered account owners
For exchanges, the name of the Fund you are exchanging into
Your daytime telephone number
Signature Requirements Based on Account Type
Account Type Requirements for Written Requests
Individual, Joint Written instructions must be signed by each
Tenants, Tenants shareholder, exactly as the names appear in
in Common the account registration.
UGMA or UTMA Written instructions must be signed by the
(custodial custodian in his/her capacity as it appears
accounts for minors) in the account registration.
Corporation, Written instructions must be signed by
Association authorized person(s), stating his/her
capacity as indicated by the corporate resolution to act
on the account. A copy of the corporate resolution,
certified within the past 90 days, authorizing the signer
to act.
Estate, Trust, Written instructions must be signed by all
Pension, Profit trustees. If the name of the trustee(s)
Sharing Plan does not appear in the account registration, please
provide a copy of the trust document certified within the
last 60 days.
Joint tenancy Written instructions must by signed by the
shareholders whose surviving tenant(s). A certified copy of
co-tenants are the death certificate must accompany the
deceased request.
Signature Guarantee
The LifePoints Funds reserve the right to require a signature guarantee under
certain circumstances. A signature guarantee verifies the authenticity of your
signature. You should be able to obtain a signature guarantee from a bank,
broker, credit union, savings association, clearing agency, or securities
exchange or association, but not a notary public. Call your financial
institution to see if it has the ability to guarantee a signature.
ACCOUNT POLICIES
Third Party Transactions
If you purchase LifePoints Fund shares as part of a program of services
offered by a Financial Intermediary, you may be required to pay additional fees.
You should contact your Financial Intermediary for information concerning what
additional fees, if any, may be charged.
Redemption In-Kind
A Fund may pay for any portion of the redemption amount in excess of $250,000
by a distribution in-kind of securities from the Fund's portfolio, instead of in
cash. If you receive an in-kind distribution of portfolio securities, and choose
to sell them, you will incur brokerage charges.
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the
LifePoints Fund's financial performance for the past 5 years (or, if a
LifePoints Fund or Class has not been in operation for 5 years, since the
beginning of operations for that LifePoints Fund or Class). Certain information
reflects financial results for a single LifePoints Fund share throughout each
year or period ended December 31 and for the six months ended June 30, 1999. The
total returns in the table represent how much your investment in the LifePoints
Fund would have increased (or decreased) during each period, assuming
reinvestment of all dividends and distributions. This information, except the
six months ended June 30, 1999 data, has been audited by PricewaterhouseCoopers
LLP, whose report, along with the LifePoints Fund's financial statements, are
included in the Funds' annual report, which is available upon request. The
Funds' semi-annual report for the period ended June 30, 1999 is also available
upon request. The information in the tables below represents the financial
highlights for each of the LifePoints Fund's Class D and Class E Shares,
respectively, for the periods shown. No Class S Shares were issued during the
periods shown and no Class C Shares were issued during the period ended December
31, 1998.
<TABLE>
<CAPTION>
Equity Aggressive Strategy Fund+--Class C
<S> <C>
1999*
Net Asset Value Beginning of Period...................... $9.80
-----
Income From Investment Operations:
Net investment income (c).............................. .02
Net realized and unrealized gain (loss) on investments. .95
-----
Total Income From Investment Operations............. .97
-----
Less Distributions:
Net investment income.................................. (.06)
Net realized gain on investments....................... (.13)
-----
Total Distributions................................. (.19)
-----
Net Asset Value, End of Period............................ $10.58
-----
Total Return (%)(a)....................................... 10.07
Ratios/Supplemental Data:
Net Assets, end of period ($000 omitted)............... 2,069
Ratios to average net assets (%):
Operating expenses, net (b)(c)....................... 1.00
Operating expenses, gross ........................... --
Net investment income (c)............................ .59
Portfolio turnover rate (%)(b)......................... 108.61
+ Prior to May 1, 1999, this Fund was known as the Equity Balanced Strategy
Fund.
* For the period February 11, 1999 (commencement of sale) to June 30, 1999
(unaudited).
(a) Periods less than one year are not annualized.
(b) The ratios for the period ended June 30, 1999 are annualized.
(c) Average month-end shares outstanding were used for this calculation.
(d) The ratio for the period ended June 30, 1999 is not meaningful due to the
Class' short period of operation.
</TABLE>
<TABLE>
<CAPTION>
Equity Aggressive Strategy Fund+--Class D
<S> <C> <C>
1999* 1998**
Net Asset Value Beginning of Period................ $9.81 $9.92
----- -----
Income From Investment Operations:
Net investment income (c)....................... .09 .01
Net realized and unrealized gain (loss)
on investments................................ .88 .10
----- -----
Total Income From Investment Operations.......... .97 .11
----- -----
Less Distributions:
Net investment income........................... (.06) (.17)
Net realized gain on investments................ (.13) (.05)
----- -----
Total Distributions.......................... (.19) (.22)
----- -----
Net Asset Value, End of Period..................... $10.59 $9.81
----- -----
Total Return (%)(a)................................ 10.07 1.17
Ratios/Supplemental Data:
Net Assets, end of period ($000 omitted)........ 5,350 4,923
Ratios to average net assets (%)(b):
Operating expenses, net....................... .50 .50
Operating expenses, gross..................... .87 .89
Net investment income......................... 1.74 .01
Portfolio turnover rate (%)(b).................. 108.61 73.95
</TABLE>
+ Prior to May 1, 1999, this Fund was known as the Equity Balanced Strategy
Fund.
* For the six months ended June 30, 1999 (unaudited).
** For the period March 24, 1998 (commencement of operations) to December 31,
1998.
(a) Periods less than one year are not annualized.
(b) Annualized.
(c) Average month-end shares outstanding were used for this calculation.
<TABLE>
<CAPTION>
Equity Aggressive Strategy Fund+--Class E
<S> <C> <C> <C>
1999* 1998 1997**
Net Asset Value, Beginning of Period................ $9.80 $8.83 $10.00
----- ----- ----
Income From Investment Operations:
Net investment income (d)....................... .10 .03 .09
Net realized and unrealized gain
(loss) on investments................... .89 1.18 (.33)
----- ----- -----
Total Income From Investment Operations...... .99 1.21 (.24)
----- ----- ----
Less Distributions:
Net investment income........................... (.06) (.19) (.33)
Net realized gain on investments................ (.13) (.05) (.60)
----- ----- ----
Total Distributions............................. (.19) (.24) (.93)
----- ----- ----
Net Asset Value, End of Period........................ $10.60 $9.80 $8.83
----- ----- ----
Total Return (%)(a)................................... 10.35 13.75 (2.42)
Ratios/Supplemental Data:
Net Assets, end of period ($000 omitted)........... 165,271 91,459 2,985
Ratios of average net assets (%):
Operating expenses, net (b)...................... .25 .25 .25
Operating expenses, gross ....................... .63 .62 3.58
Net investment income (c)........................ 1.95 .28 .45
Portfolio turnover rate (%)(b)..................... 108.61 73.95 48.30
</TABLE>
+ Prior to May 1, 1999, this Fund was known as the Equity Balanced Strategy
Fund.
* For the six months ended June 30, 1999 (unaudited).
** 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 periods ended June 30, 1999 and December 31, 1997 are
annualized.
(c) The ratio for the period ended December 31, 1997 has not been annualized
due to the Class' short period of operation.
(d) For the periods subsequent to December 31, 1998, average month-end shares
outstanding were used for this calculation.
<TABLE>
<CAPTION>
Aggressive Strategy Fund--Class C
<S> <C>
1999*
Net Asset Value Beginning of Period...................... $10.11
Income From Investment Operations:
Net investment income (c)............................. .01
Net realized and unrealized gain (loss) on investments. .56
Total Income From Investment Operations............ .57
Less Distributions:
Net investment income................................. (.05)
Net realized gain on investments...................... (.15)
Total Distributions................................ (.20)
Net Asset Value, End of Period........................... $10.48
Total Return (%)(a)...................................... 5.81
Ratios/Supplemental Data:
Net Assets, end of period ($000 omitted).............. 2,896
Ratios to average net assets (%):
Operating expenses, net (b)......................... 1.00
Operating expenses, gross (d)....................... --
Net investment income............................... .50
Portfolio turnover rate (%)(b)........................ 116.46
</TABLE>
* For the period January 29, 1999 (commencement of sale) to June 30, 1999
(unaudited).
(a) Periods less than one year are not annualized.
(b) Annualized.
(c) Average month-end shares outstanding were used for this calculation.
(d) The ratio for the period ending June 30, 1999 is not meaningful due to the
Class' short period of operations.
<TABLE>
<CAPTION>
Aggressive Strategy Fund--Class D
<S> <C> <C>
1999* 1998**
Net Asset Value Beginning of Period.................. $9.95 $10.09
Income From Investment Operations:
Net investment income (c)......................... .09 .13
Net realized and unrealized gain (loss)
on investments.................................. (.67) (.05)
Total Income From Investment Operations........ .76 .08
Less Distributions:
Net investment income............................. (.05) (.21)
Net realized gain on investments.................. (.15) (.01)
Total Distributions............................ (.20) (.22)
Net Asset Value, End of Period....................... $10.51 $9.95
Total Return (%)(a).................................. 7.81 .96
Ratios/Supplemental Data:
Net Assets, end of period ($000 omitted).......... 3,589 3,649
Ratios to average net assets (%)(b):
Operating expenses, net......................... .50 .50
Operating expenses, gross....................... .91 .93
Net investment income........................... 1.77 1.74
Portfolio turnover rate (%)(b).................... 116.46 93.08
</TABLE>
* For the six months ended June 30, 1999 (unaudited).
** For the period March 24, 1998 (commencement of operations) to December 31,
1998.
(a) Periods less than one year are not annualized.
(b) Annualized.
(c) For the period ended December 31, 1998, average month-end shares
outstanding were used for this calculation.
<TABLE>
<CAPTION>
Aggressive Strategy Fund--Class E
<S> <C> <C> <C>
1999* 1998 1997**
----- ----- -----
Net Asset Value, Beginning of Period................ $9.94 $9.14 $10.00
----- ----- -----
Income From Investment Operations:
Net investment income (d)........................ .09 .19 .10
Net realized and unrealized gain (loss) on
investments.................................... .69 .87 (.11)
----- ----- -----
Total Income From Investment Operations..... .78 1.06 (.01)
----- ----- -----
Less Distributions:
Net investment income............................ (.06) (.25) (.31)
Net realized gain on investments................. (.15) (.01) (.54)
----- ----- -----
Total Distributions........................... (.21) (.26) (.85)
----- ----- -----
Net Asset Value, End of Period...................... $10.51 $9.94 $9.14
Total Return (%)(a)................................. 7.99 11.69 (.19)
Ratios/Supplemental Data:
Net Assets, end of period ($000 omitted)......... 120,641 62,188 5,307
Ratios of average net assets (%)(b):
Operating expenses, net........................ .25 .25 .25
Operating expenses, gross ..................... .67 .66 2.88
Net investment income (c)...................... 1.79 1.88 .97
Portfolio turnover rate (%)(b)................... 116.46 93.08 56.88
</TABLE>
* For the six months ended June 30, 1999 (unaudited).
** 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 periods ended June 30, 1999 and December 31, 1997 are
annualized.
(c) The ratio for the period ended December 31, 1997 has not been annualized
due to the Class' short period of operation.
(d) For the period ended December 31, 1998, average month-end shares
outstanding were used for this calculation.
Balanced Strategy Fund--Class C
1999*
Net Asset Value Beginning of Period....................... $10.26
-----
Income From Investment Operations:
Net investment income (c).............................. .03
Net realized and unrealized gain (loss) on investments. .31
-----
Total Income From Investment Operations............. .34
-----
Less Distributions:
Net investment income.................................. (.08)
Net realized gain on investments....................... (.12)
-----
Total Distributions................................. (.20)
-----
Net Asset Value, End of Period............................ $10.40
-----
Total Return (%)(a)....................................... 3.41
Ratios/Supplemental Data:
Net Assets, end of period ($000 omitted)............... 6,393
Ratios to average net assets (%):
Operating expenses, net (b).......................... 1.00
Operating expenses, gross (d)........................ --
Net investment income................................ 1.17
Portfolio turnover rate (%)(b)......................... 97.31
* For the period January 29, 1999 (commencement of sale) to June 30, 1999
(unaudited).
(a) Periods less than one year are not annualized.
(b) Annualized.
(c) Average month-end shares outstanding were used for this calculation.
(d) The ratio for the period ending June 30, 1999 is not meaningful due to the
Class' short period of operation.
<TABLE>
Balanced Strategy Fund--Class D
<S> <C> <C>
1999* 1998**
Net Asset Value Beginning of Period.................. $10.13 $10.22
------ ------
Income From Investment Operations:
Net investment income (c)......................... .15 .24
Net realized and unrealized gain (loss)
on investments............................. .36 .07
------ ------
Total Income From Investment Operations........ .51 .31
------ ------
Less Distributions:
Net investment income............................. (.08) (.37)
Net realized gain on investments.................. (.12) (.03)
------ ------
Total Distributions............................ (.20) (.40)
------ ------
Net Asset Value, End of Period....................... $10.44 $10.13
------ ------
Total Return (%)(a).................................. 5.11 3.23
Ratios/Supplemental Data:
Net Assets, end of period ($000 omitted).......... 2,930 4,953
Ratios to average net assets (%)(b):
Operating expenses, net......................... .50 .50
Operating expenses, gross....................... .86 .86
Net investment income........................... 2.92 3.18
Portfolio turnover rate (%)(b).................... 97.31 78.85
* For the six months ended June 30, 1999 (unaudited).
** For the period March 24, 1998 (commencement of operations) to December 31,
1998.
(a) Periods less than one year are not annualized.
(b) Annualized.
(c) Average month-end shares outstanding were used for this calculation.
</TABLE>
<TABLE>
<CAPTION>
Balanced Strategy Fund--Class E
<S> <C> <C> <C>
1999* 1998 1997**
----- ----- ----
Net Asset Value, Beginning of Period................ $10.12 $9.46 $10.00
----- ----- ----
Income From Investment Operations:
Net investment income (d)........................ .15 .31 .09
Net realized and unrealized gain (loss) on
investment..................................... .37 .78 .02
------ ------ -----
Total Income From Investment Operations...... .52 1.09 .11
------ ------ -----
Less Distributions:
Net investment income............................ (.09) (.40) (.24)
Net realized gain on investments................. (.12) (.03) (.41)
------ ------ -----
Total Distributions........................... (.21) (.43) (.65)
----- ----- -----
Net Asset Value, End of Period...................... $10.43 $10.12 $9.46
----- ----- -----
Total Return (%)(a)................................. 5.17 11.66 1.04
Ratios/Supplemental Data:
Net Assets, end of period ($000 omitted)......... 255,405 161,108 3,554
Ratios of average net assets (%)(b):
Operating expenses, net........................ .25 .25 .25
Operating expenses, gross ..................... .61 .61 4.03
Net investment income (c)...................... 2.91 3.05 1.30
Portfolio turnover rate (%)(b)................... 97.31 78.85 29.58
</TABLE>
* For the six months ended June 30, 1999 (unaudited).
** 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 periods ended June 30, 1999 and December 31, 1997 are
annualized.
(c) The ratio for the period ended December 31, 1997 is not meaningful due to
the Class' short period of operation.
(d) The ratio for the period ended December 31, 1997 has not been annualized
due to the Class' short period of operation.
(e) For the period ended December 31, 1998, average month-end shares
outstanding were used for this calculation.
Moderate Strategy Fund--Class C
1999*
-----
Net Asset Value Beginning of Period...................... $10.15
-----
Income From Investment Operations:
Net investment income (c)............................. .09
Net realized and unrealized gain (loss) on investments. .27
-----
Total Income From Investment Operations............ .36
-----
Less Distributions:
Net investment income................................. (.11)
Net realized gain on investments...................... (.06)
-----
Total Distributions................................ (.17)
-----
Net Asset Value, End of Period........................... $10.34
-----
Total Return (%)(a)...................................... 3.58
Ratios/Supplemental Data:
Net Assets, end of period ($000 omitted).............. 848
Ratios to average net assets (%):
Operating expenses, net (b)......................... 1.00
Operating expenses, gross (d)....................... --
Net investment income............................... 2.95
Portfolio turnover rate (%)(b)........................ 183.18
- --------------------
* For the period February 11, 1999 (commencement of sale) to June 30, 1999
(unaudited).
(a) Periods less than one year are not annualized.
(b) Annualized.
(c) Average month-end shares outstanding were used for this calculation.
(d) The ratio for the period ending June 30, 1999 is not meaningful due to the
Class' short period of operation.
Moderate Strategy Fund--Class D
1999* 1998**
------ -----
Net Asset Value Beginning of Period.................. $10.15 $10.18
------ -----
Income From Investment Operations:
Net investment income (c)......................... .15 .26
Net realized and unrealized gain
(loss) on investments........................... .22 .09
------ -----
Total Income From Investment Operations........ .37 .35
------ -----
Less Distributions:
Net investment income............................. (.11) (.37)
Net realized gain on investments.................. (.06) (.01)
------ -----
Total Distributions............................ (.17) (.38)
------ -----
Net Asset Value, End of Period....................... $10.35 $10.15
------ -----
Total Return (%)(a).................................. 3.68 3.57
Ratios/Supplemental Data:
Net Assets, end of period ($000 omitted).......... 1,886 1,780
Ratios to average net assets (%)(b):
Operating expenses, net......................... .50 .50
Operating expenses, gross....................... 1.19 1.01
Net investment income........................... 2.95 3.41
Portfolio turnover rate (%)(b).................... 183.18 175.58
* For the six months ended June 30, 1999 (unaudited).
** For the period March 24, 1998 (commencement of operations) to December 31,
1998.
(a) Periods less than one year are not annualized.
(b) Annualized.
(c) Average month-end shares outstanding were used for this calculation.
Moderate Strategy Fund--Class E
1999* 1998 1997**
------ ------ -----
Net Asset Value, Beginning of Period................ $10.15 $9.61 $10.00
------ ------ -----
Income From Investment Operations:
Net investment income (e)........................ .17 .39 .07
Net realized and unrealized gain (loss)
on investments................................. .20 .57 (.08)
------ ------ -----
Total Income From Investment Operations....... .37 .96 (.01)
------ ------ -----
Less Distributions:
Net investment income............................ (.11) (.41) (.14)
Net realized gain on investments................. (.06) (.01) (.24)
------ ------ -----
Total Distributions........................... (.17) (.42) (.38)
------ ------ -----
Net Asset Value, End of Period...................... $10.35 $10.15 $9.61
------ ------ -----
Total Return (%)(a)................................. 3.75 10.19 (.06)
Ratios/Supplemental Data:
Net Assets, end of period ($000 omitted)......... 36,653 18,573 385
Ratios of average net assets (%):
Operating expenses, net (b).................... .25 .25 .25
Operating expenses, gross (c).................. .96 .94 --
Net investment income (d)...................... 3.25 3.71 1.01
Portfolio turnover rate (%)(b)................... 183.18 175.58 9.66
* For the six months ended June 30, 1999 (unaudited).
** 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 periods ended June 30, 1999 and December 31, 1997 are
annualized.
(c) The ratio for the period ended December 31, 1997 is not meaningful due to
the Class' short period of operation.
(d) The ratio for the period ended December 31, 1997 has not been annualized due
to the Class' short period of operation.
(e) For the periods subsequent to December 31, 1997, average month-end shares
outstanding were used for this calculation.
Conservative Strategy Fund--Class C
1999*
-----
Net Asset Value Beginning of Period....................... $10.26
-----
Income From Investment Operations:
Net investment income (c).............................. .05
Net realized and unrealized gain (loss) on investments. .16
-----
Total Income From Investment Operations............. .21
-----
Less Distributions:
Net investment income.................................. (.14)
Net realized gain on investments....................... (.02)
-----
Total Distributions................................. (.16)
-----
Net Asset Value, End of Period............................ $10.31
-----
Total Return (%)(a)....................................... 2.09
Ratios/Supplemental Data:
Net Assets, end of period ($000 omitted)............... 89
Ratios to average net assets (%):
Operating expenses, net (b).......................... 1.00
Operating expenses, gross (d)........................ --
Net investment income................................ 1.73
Portfolio turnover rate (%)(b)......................... 249.12
- ------------------------
* For the period February 11, 1999 (commencement of sale) to June 30, 1999
(unaudited).
(a) Periods less than one year are not annualized.
(b) Annualized.
(c) Average month-end shares outstanding were used for this calculation.
(d) The ratio for the period ending June 30, 1999 is not meaningful due
to the Class' short period of operation.
Conservative Strategy Fund--Class D
1999* 1998*
----- -----
Net Asset Value Beginning of Period.................. $10.25 $10.20
----- -----
Income From Investment Operations:
Net investment income (c)......................... .14 .32
Net realized and unrealized gain
(loss) on investments.......................... .09 .06
----- -----
Total Income From Investment Operations......... .23 .38
----- -----
Less Distributions:
Net investment income............................. (.14) (.33)
Net realized gain on investments.................. (.02) ----
----- -----
Total Distributions............................ (.16) (.33)
----- -----
Net Asset Value, End of Period....................... $10.32 $10.25
----- -----
Total Return (%)(a).................................. 2.27 3.77
Ratios/Supplemental Data:
Net Assets, end of period ($000 omitted).......... 1,292 618
Ratios to average net assets (%)(b):
Operating expenses, net......................... .50 .50
Operating expenses, gross....................... 2.75 1.73
Net investment income........................... 2.79 3.99
Portfolio turnover rate (%)(b).................... 249.12 169.79
- ----------------------
* For the six months ended June 30, 1999 (unaudited).
** For the period March 24, 1998 (commencement of operations) to December 31,
1998.
(a) Periods less than one year are not annualized.
(b) Annualized.
(c) Average month-end shares outstanding were used for this calculation.
<TABLE>
<CAPTION>
Conservative Strategy Fund--Class E
<S> <C> <C> <C>
1999* 1998 1997**
----- ----- ------
Net Asset Value, Beginning of Period............... $10.24 $9.88 $10.00
----- ----- ------
Income From Investment Operations:
Net investment income (e)........................ .18 .46 .07
Net realized and unrealized gain
(loss) on investments......................... .07 .29 .07
----- ----- ------
Total Income From Investment Operations....... .25 .75 .14
----- ----- ------
Less Distributions:
Net investment income............................ (.15) (.39) (.10)
Net realized gain on investments................. (.02) --- (.16)
----- ----- ------
Total Distributions........................... (.17) (.39) (.26)
----- ----- ------
Net Asset Value, End of Period...................... $10.32 $10.24 $9.88
----- ----- ------
Total Return (%)(a)................................. 2.43 7.70 1.36
Ratios/Supplemental Data:
Net Assets, end of period ($000 omitted)......... 14,088 4,411 23
Ratios of average net assets (%)(b):
Operating expenses, net........................ .25 .25 .25
Operating expenses, gross (c).................. 2.50 2.50 --
Net investment income (d)...................... 3.41 4.41 .67
Portfolio turnover rate (%)(b)................... 249.12 169.79 .00
* For the six months ended June 30, 1999 (unaudited).
** 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 periods ended June 30, 1999 and December 31, 1997 are
annualized.
(c) The ratio for the period ended December 31, 1997 is not meaningful
due to the Class' short period of operation.
(d) The ratio for the period ended December 31, 1997 has not been annualized
due to the Class' short period of operation.
(e) For the periods subsequent to December 31, 1997, average month-end shares
outstanding were used for the calculation.
</TABLE>
MONEY MANAGER INFORMATION
The money managers have no affiliations with the LifePoints Funds or the
LifePoints Funds' service providers other than their management of Underlying
Fund assets. 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 Funds in FRIC, or to
other clients of Russell, including its wholly owned subsidiary, Frank Russell
Trust Company.
This section identifies the money managers for the Underlying Funds in which
the LifePoints Funds invest.
DIVERSIFIED EQUITY FUND
Alliance Capital Management L.P., US Bank Place, 601 2nd Ave. South, Suite
5000, Minneapolis, MN 55402-4322.
Barclays Global Fund Advisors N.A., 45 Fremont Street, San Francisco, CA
94105.
Equinox Capital Management, Inc., 590 Madison Avenue, 41st Floor, New York,
NY 10022.
Jacobs Levy Equity Management, Inc., 280 Corporate Center, 3 ADP Boulevard,
Roseland, NJ 07068.
Lincoln Capital Management Company, 200 South Wacker Drive, Suite 2100,
Chicago, IL 60606.
Marsico Capital Management Company, LLC, 1200 17th Street, Suite 1200,
Denver, CO 80202.
Peachtree Asset Management, One Peachtree Center, Suite 4500, 303 Peachtree
Street N.E., Atlanta, GA 30308.
Sanford C. Bernstein & Co., Inc., 767 Fifth Avenue, 21st Floor, New York, NY
10153.
Suffolk Capital Management, Inc., 1633 Broadway, 40th Floor, New York, NY
10107.
Trinity Investment Management Corporation, 75 Park Plaza, Boston, MA 02116.
SPECIAL GROWTH FUND
Delphi Management, Inc., 50 Rowes Wharf, Suite 440, Boston, MA 02110.
Fiduciary International, Inc., 2 World Trade Center, New York, NY 10048.
GlobeFlex Capital, L.P., 4365 Executive Drive, Suite 720, San Diego, CA
92121.
Jacobs Levy Equity Management, Inc., 280 Corporate Center, 3 ADP Boulevard,
Roseland, NJ 07068.
Sirach Capital Management, Inc., One Union Square, Suite 3323, 600 Union
Street, Seattle, WA 98101.
Wellington Management Company LLP, 75 State Street, Boston, MA 02109.
Westpeak Investment Advisors, L.P. 1011 Walnut Street, Suite 400, Boulder,
CO 80302.
QUANTITATIVE EQUITY FUND
Barclays Global Fund Advisors, See: Diversified Equity Fund.
Franklin Portfolio Associates LLC, Two International Place, 22nd Floor,
Boston, MA 02110-4104.
J.P. Morgan Investment Management, Inc., 522 Fifth Ave., 6th Floor, New
York, NY 10036.
Jacobs Levy Equity Management, Inc., See: Diversified Equity Fund.
INTERNATIONAL SECURITIES FUND
Delaware International Advisers Limited, 80 Cheapside, 3rd Floor, London
EC2V6EE England.
Fidelity Management Trust Company, 82 Devonshire Street, Boston, MA, 02109.
J.P. Morgan Investment Management, Inc., See: Quantitative Equity Fund.
Mastholm Asset Management, LLC, 10500 N.E. 8th Street, Suite 660, Bellevue,
WA 98004.
Montgomery Asset Management, LLC, 101 California Street, San Francisco, CA
94111
Oeschle International Advisors, LLC, One International Place, 23rd Floor,
Boston, MA 02110.
Sanford C. Bernstein & Co., Inc., See: Diversified Equity Fund.
The Boston Company Asset Management, Inc., One Boston Place, 14th Floor,
Boston, MA 02108-4402.
EMERGING MARKETS FUND
Foreign & Colonial Emerging Markets Limited, Exchange House, Primrose Street,
London, England EC2A 2NY.
Genesis Asset Managers, Ltd., 21 Knights Bridge, London, SW1X 7LY England.
J.P. Morgan Investment Management Inc., See: Quantitative Equity Fund.
Montgomery Asset Management LLC, See: International Securities Fund.
Nicholas-Applegate Capital Management, 600 W. Broadway 32nd Fl. San Diego,
CA 92101.
Sanford C. Burstein & Co. Inc., See: Diversified Equity.
Schrodes Capital Management International Limited, 31 Greshmon Street,
London, UK EC2V 7QA.
REAL ESTATE SECURITIES FUND
Cohen & Steers Capital Management, 757 Third Avenue, New York, NY 10017.
AEW Capital Management, L.P., 225 Franklin Street, Boston, MA 02110-2803.
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.
Standish, Ayer & Wood, Inc., One Financial Center, Boston, MA 02111.
MULTISTRATEGY BOND FUND
Credit Suisse Asset Management, One Citicorp Center, 153 East 53rd Street,
58th Floor, New York, NY 10022.
Pacific Investment Management Company, See: Diversified Bond Fund.
Standish, Ayer & Wood, Inc., See: Diversified Bond Fund.
SHORT TERM BOND FUND
BlackRock Financial Management, 345 Park Ave., 29th Floor, New York, NY
10154.
Standish, Ayer & Wood, Inc., See: Diversified Bond Fund.
STW Fixed Income Management Ltd., 26 Victoria Street, 3rd Floor, P.O. Box
2910 Hamilton HM KX, Bermuda.
IN CONSIDERING INVESTMENT IN THE LIFEPOINTS FUNDS, DO NOT RELY ON ANY
INFORMATION UNLESS IT IS CONTAINED IN THIS PROSPECTUS OR IN THE LIFEPOINTS
FUNDS' STATEMENT OF ADDITIONAL INFORMATION. THE LIFEPOINTS FUNDS HAVE NOT
AUTHORIZED ANYONE TO ADD ANY INFORMATION OR TO MAKE ANY ADDITIONAL STATEMENTS
ABOUT THE LIFEPOINTS FUNDS. THE LIFEPOINTS FUNDS MAY NOT BE AVAILABLE IN SOME
JURISDICTIONS OR TO SOME PERSONS. THE FACT THAT YOU HAVE RECEIVED THIS
PROSPECTUS SHOULD NOT, IN ITSELF, BE TREATED AS AN OFFER TO SELL LIFEPOINTS FUND
SHARES TO YOU. CHANGES IN THE AFFAIRS OF THE LIFEPOINTS FUNDS OR IN THE
UNDERLYING FUNDS' MONEY MANAGERS MAY OCCUR AFTER THE DATE ON THE COVER PAGE OF
THIS PROSPECTUS. THIS PROSPECTUS WILL BE AMENDED OR SUPPLEMENTED TO REFLECT ANY
MATERIAL CHANGES TO THE INFORMATION IT CONTAINS.
For more information about the LifePoints Funds, the following documents are
available without charge:
Annual/Semiannual Reports: Additional information about the LifePoints Funds'
investments is available in the LifePoints Funds' annual and semiannual reports
to shareholders. In each LifePoints Fund's annual report, you will find a
discussion of the market conditions and investment strategies that significantly
affected the LifePoints Fund's performance during its last fiscal year.
Statement of Additional Information (SAI): The SAI provides more detailed
information about the LifePoints Funds.
The annual report for each LifePoints Fund and the SAI are incorporated into
this Prospectus by reference. You may obtain free copies of the reports and the
SAI, and may request other information, by contacting your Financial
Intermediary or the LifePoints Funds at:
Frank Russell Investment Company
909 A Street
Tacoma, WA 98402
Telephone: 1-800-787-7354
Fax: 253-591-3495
Internet: http://www.russell.com
You can review and copy information
about the LifePoints Funds (including Distributor:
the SAI) at the Securities and Exchange Russell Fund
Commission's Public Reference Room in Distributors, Inc.
Washington, D.C. You can obtain SEC File No. 811-3153
information on the operation of the
Public Reference Room by calling the 36-08-058 (5/99
Commission at 1-800-SEC-0330. You can
obtain copies of this information upon
paying a duplicating fee by writing to
the Public Reference Section of the
Commission, Washington, D.C.
20549-6009. Reports and other
information about the LifePoints Funds
are also available on the Commission's
Internet website at http://www.sec.gov.
FRANK RUSSELL INVESTMENT COMPANY
Class C, D, E and S Shares:
Equity Aggressive Strategy Fund
Aggressive Strategy Fund
Balanced Strategy Fund
Moderate Strategy Fund
Conservative Strategy Fund
FRANK RUSSELL INVESTMENT COMPANY
909 A Street
Tacoma, Washington 98402
Telephone (800) 972-0700
In Washington (253) 627-7001
STATEMENT OF ADDITIONAL INFORMATION
December 1, 1999
Frank Russell Investment Company ("FRIC") is a single legal entity organized
as a Massachusetts business trust. FRIC operates investment portfolios referred
to as "Funds." FRIC offers shares of beneficial interest in the Funds in
multiple separate Prospectuses.
As of the date of this Statement of Additional Information ("Statement" or
"SAI"), FRIC is comprised of the following Funds, each of which commenced
operations on the date indicated:
Fund Inception Prospectus
Fund Date Date
Equity I Fund October 15, May 1, 1999
1981
Equity II Fund December 28, May 1, 1999
1981
Equity III Fund November 27, May 1, 1999
1981
Equity Q Fund May 29, 1987 May 1, 1999
Tax-Managed Large Cap Fund October 7, December 1,
(formerly Equity T Fund) 1996 1999
Tax-Managed Small Cap Fund December 1, 1999 December 1,
1999
International Fund January 31, May 1, 1999
1983
Emerging Markets Fund January 29, May 1, 1999
1993
Fixed Income I Fund October 15, 1981 May 1, 1999
Fixed Income III Fund January 29, 1993 May 1, 1999
Money Market Fund October 15, 1981 May 1, 1999
Diversified Equity Fund September 5, May 1, 1999
1985
Special Growth Fund September 5, May 1, 1999
1985
Equity Income Fund September 5, May 1, 1999
1985
Quantitative Equity Fund May 15, 1987 May 1, 1999
International Securities Fund September 5, May 1, 1999
1985
Real Estate Securities Fund July 28, 1989 May 1, 1999
Diversified Bond Fund September 5, May 1, 1999
1985
Short Term Bond Fund October 30, 1981 May 1, 1999
Multistrategy Bond Fund January 29, 1993 May 1, 1999
Tax Exempt Bond Fund September 5, December 1,
1985 1999
U.S. Government Money Market September 5, May 1, 1999
Fund 1985
Tax Free Money Market Fund May 8, 1987 December 1,
1999
The Funds had aggregate net assets of approximately $17 billion on August 16,
1999.
A shareholder of the Equity I Fund, Equity II Fund, Equity III Fund, Equity Q
Fund, Tax-Managed Large Cap Fund, International Fund, Emerging Markets Fund,
Fixed Income I Fund, Fixed Income III Fund, Short Term Bond 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 (except the Money Market Fund) presently offers interests in
different classes of Shares as described in the table below. For purposes of
this Statement, each Fund that issues multiple classes of shares is referred to
as a "Multiple Class Fund." Seven of the Funds, the Equity I Fund, Equity II
Fund, Equity III Fund, Equity Q Fund, International Fund, Fixed Income I Fund
and Fixed Income III Funds, are referred to in this Statement as the
"Institutional Funds." Unless otherwise indicated, this Statement relates to all
classes of Shares of the Funds.
- ------------------------------------------------------------
Fund Class Class Class S Class Class Premier
C E I Y Class
- ------------------------------------------------------------
- ------------------------------------------------------------
Equity I Fund X X X X
- ------------------------------------------------------------
- ------------------------------------------------------------
Equity II Fund X X X X
- ------------------------------------------------------------
- ------------------------------------------------------------
Equity III Fund X X X X
- ------------------------------------------------------------
- ------------------------------------------------------------
Equity Q Fund X X X X
- ------------------------------------------------------------
- ------------------------------------------------------------
Tax-Managed X X
Large Cap Fund
- ------------------------------------------------------------
- ------------------------------------------------------------
Tax-Managed X X
Small Cap Fund
- ------------------------------------------------------------
- ------------------------------------------------------------
International X X X X
Fund
- ------------------------------------------------------------
- ------------------------------------------------------------
Emerging X X X
Markets
- ------------------------------------------------------------
- ------------------------------------------------------------
Fixed Income I X X X X
- ------------------------------------------------------------
- ------------------------------------------------------------
Fixed Income X X X X
III
- ------------------------------------------------------------
- ------------------------------------------------------------
Money Market X
- ------------------------------------------------------------
- ------------------------------------------------------------
Diversified X X X
Equity
- ------------------------------------------------------------
- ------------------------------------------------------------
Special Growth X X X
- ------------------------------------------------------------
- ------------------------------------------------------------
Equity Income X X X
Fund
- ------------------------------------------------------------
- ------------------------------------------------------------
Quantitative X X X
Equity
- ------------------------------------------------------------
- ------------------------------------------------------------
International X X X
Securities
- ------------------------------------------------------------
- ------------------------------------------------------------
Real Estate X X X
Securities
- ------------------------------------------------------------
- ------------------------------------------------------------
Diversified X X X
Bond
- ------------------------------------------------------------
- ------------------------------------------------------------
Short Term Bond X X X
- ------------------------------------------------------------
- ------------------------------------------------------------
Multistrategy X X X
Bond
- ------------------------------------------------------------
- ------------------------------------------------------------
Tax Exempt Bond X X X
- ------------------------------------------------------------
- ------------------------------------------------------------
U.S. Government X
Money Market
- ------------------------------------------------------------
- ------------------------------------------------------------
Tax Free Money X
Market
- ------------------------------------------------------------
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 FRIC 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 FRIC's Annual Reports to Shareholders
for the year ended December 31, 1998 and FRIC's Semi-Annual Report to
Shareholders for the period ended June 30, 1999. Copies of the Funds' Annual
Reports and Semi-Annual Reports accompany this Statement.
<PAGE>
TABLE OF CONTENTS
CERTAIN TERMS USED IN THIS STATEMENT OF ADDITIONAL INFORMATION
ARE DEFINED IN THE
GLOSSARY, WHICH BEGINS ON PAGE 61
Page
STRUCTURE AND GOVERNANCE........................................
Organization and Business History...........................
Shareholder Meetings........................................
Controlling Shareholders....................................
Trustees and Officers.......................................
OPERATION OF THE TRUST..........................................
Service Providers...........................................
Consultant..................................................
Advisor and Administrator...................................
Money Managers..............................................
Distributor.................................................
Custodian...................................................
Transfer and Dividend Disbursing Agent......................
Order Placement Designees...................................
Independent Accountants.....................................
Plan Pursuant to Rule 18f-3.................................
Distribution Plan...........................................
Shareholder Services Plan...................................
Fund Expenses...............................................
Valuation of Fund Shares....................................
Valuation of Portfolio Securities...........................
Portfolio Transaction Policies..............................
Portfolio Turnover Rate.....................................
Brokerage Allocations.......................................
Brokerage Commissions.......................................
Yield and Total Return Quotations...........................
INVESTMENT RESTRICTIONS, POLICIES AND CERTAIN INVESTMENTS.......
Investment Restrictions.....................................
Investment Policies.........................................
Certain Investments.........................................
TAXES...........................................................
MONEY MANAGER INFORMATION.......................................
RATINGS OF DEBT INSTRUMENTS.....................................
FINANCIAL STATEMENTS............................................
GLOSSARY........................................................
STRUCTURE AND GOVERNANCE
ORGANIZATION AND BUSINESS HISTORY. FRIC commenced business operations as a
Maryland corporation on October 15, 1981. On January 2, 1985, FRIC reorganized
by changing its domicile and legal status to a Massachusetts business trust.
FRIC is currently organized and operating under an amended Master Trust
Agreement dated July 26, 1984, and the provisions of Massachusetts's law
governing the operation of a Massachusetts business trust. The Board of Trustees
("Board" or the "Trustees") may amend the Master Trust Agreement from time to
time; provided, however, that any amendment which would materially and adversely
affect shareholders of FRIC as a whole, or shareholders of a particular Fund,
must be approved by the holders of a majority of the shares of FRIC or the Fund,
respectively.
FRIC 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." Each Fund is a
separate trust under Massachusetts law. 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.
FRIC'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.
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 class of Shares is designed to meet different
investor needs. The Class C Shares are subject to a Rule 12b-1 fee of up to
0.75%, and a shareholder services fee of up to 0.25%. Class E Shares are subject
to a shareholder services fee of up to 0.25%. The Class I, Class Y, Premier and
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
all classes of 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 FRIC 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.
Frank Russell Company has the right to grant (and withdraw) the nonexclusive use
of the name "Frank Russell" or any variation.
SHAREHOLDER MEETINGS. FRIC 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
FRIC's 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.
Each shares of a class of a Fund has one vote in Trustee elections and other
matters submitted for shareholder vote. On any matter which affects only a
particular Fund or class, only shares of that Fund or class are entitled to
vote. There are no cumulative voting rights.
CONTROLLING SHAREHOLDERS. The Trustees have the authority and responsibility to
manage the business of FRIC, and hold office for life unless they resign or are
removed by, in substance, a vote of two-thirds of FRIC shares outstanding. Under
these circumstances, no one person, entity or shareholder "controls" FRIC.
At August 16, 1999 the following shareholders owned 5% or more of the voting
shares of FRIC or of the Funds:
Diversified Bond - Class C: NFSC FEBO # 0NN-101451, NFSC/FMTC IRA Rollover, FBO
Bobby J. Lane, 1845 Putnam Dr., Bartlesville, OK 74006-6805, 9.28%, record.
Diversified Bond - Class E: Metropolitan National Bank, TTEE, For Bowie Cass
Electric Co-Op Retirement Plan, PO Box 8010, Little Rock, AR 72203-8010, 7.60%,
record; The Citizens Bank of Batesville, Employee 401(k) Profit Sharing Plan,
3rd & College Street, Batesville, AR 72501, 6.23%, record; Maltrust & Co., c/o
Eastern Bank & Trust/Gibralter, Attn: Retirement Plan Services 3rd Floor, 217
Essex Street, Salem, MA 01970-3728, 9.18%, record; Metropolitan National Bank,
TTEE for William Gary Darwin, MD PA PSP, P.O. Box 8010, Little Rock, AR
72203-8010, 9.96%, record; Carey & Co., Huntington National Bank, Attn: Mutual
Funds MC1024, PO Box 1558, Columbus, OH 43216-1558, 16.16%, record; Zions First
National Bank, TTEE, Tucker, Sadler Profit Sharing Plan, PO Box 30880, Salt Lake
City, UT 84130-0880, 24.33%, record.
Diversified Bond - Class S: Balanced Strategy Fund, C/O Frank Russell Investment
Co., PO Box 1591, Tacoma, WA 98401-1591, 8.31%, record; Citizens Bank Saginaw,
Attn: Trust/Investment Dept., 101 N. Washington, Saginaw, MI 48607-1206, 14.85%,
record.
Diversified Equity - Class E: Bowie Cass Electric Co-op 401(k), 111 Center
Street, Little Rock, AR 72201-4402, 5.25%, record; Zions First National Bank,
TTE Tucker, Sadler Profit Sharing Plan, P.O. Box 30880, Salt Lake City, UT
84130-0880, 5.84%, record; Maltrust & Co., c/o Eastern Bank & Trust/Gibralter,
Attn: Retirement Plan Services 3rd Floor, 217 Essex St., Salem, MA 01970-3728,
39.45%, record.
Emerging Markets - Class C: NFSC FEBO # 0NN-101451, NFSC/FMTC IRA Rollover, FBO
Bobby J. Lane, 1845 Putnam Drive, Bartlesville, OK 74006-6805, 5.32%, record.
Emerging Markets - Class E: Advisors Trust Company FBO, Building Industry
Associates PSP, 1225 17th St. Ste. 1400, Denver, CO 80202-5514, 5.17%, record;
Northern Colorado Water Conservancy Defined Benefit Plan, Attn: Dale Mitchell,
1250 N. Wilson, Loveland, CO 80537-4461, 6.46%, record; Mary M Beazley, 1225
17th St. Ste. 1400, Denver, CO 80202-5514, 10.35%, record; Junior Achievement
Inc. Retirement Plan, 1225 17th St. Ste. 1400, Denver, CO 80202-5514, 20.37%
record.
Emerging Markets - Class S: Charles Schwab & Co., Inc., Special Custody Account
For the Exclusive Benefit of Customers, Attn: Mutual Funds, 101 Montgomery St.,
San Francisco, CA 94104-4122, 6.59%, record; Var. & Co., First Trust, N.A.,
Funds Accounting, PO Box 64482, St. Paul, MN 55164-0482, 8.55%, record.
Equity I - Class I: Jato Reinv, National City Bank of Minneapolis, Attn: Trust
Dept., PO Box E 1919, Minneapolis, MN 55480, 5.28%, record; Var. & Co., First
Trust, N.A., Funds Accounting, PO Box 64482, St. Paul, MN 55164-0482, 7.03%,
record; Charles Schwab & Co., Inc., Special Custody Acct for the Exclusive
Benefit of Customers, ATTN: Mutual Funds, 101 Montgomery Street, San Francisco,
CA 94104-4122, 7.03%, record; Var. & Co., First Trust, N.A., Funds Accounting,
PO Box 64482, St. Paul, MN 55164-0482, 13.72%, record.
Equity I - Class E: Junior Achievement Inc. Retirement Plan, 1225 - 17th Street
Suite 1400, Denver, CO 80202-5514, 5.48% record; Northern Colorado Water
Conservancy Defined Benefit Plan, Attn: Dale Mitchell, 1250 N. Wilson, Loveland,
CO 80537-4461, 7.73%, record; FM Co., Huntington National Bank, One Financial
Plaza, Holland, MI 49423-9166, 43.87%, record.
Equity II - Class I: Var. & Co., First Trust, N.A., Funds Accounting, PO Box
64482, St. Paul, MN 55164-0482, 6.15%, record; Charles Schwab & Co. Inc.,
Special Custody Acct for the Exclusive Benefit of Customers, Attn: Mutual Funds,
101 Montgomery Street, San Francisco, CA 94104-4122, 7.60%, record; Jato Reinv.,
National City Bank of Minneapolis, CGC Account, Trust Department, PO Box E1919,
Minneapolis, MN 55480-9999, 8.97%, record.
Equity II - Class E: Junior Achievement Inc. Retirement Plan, 1225 17th Street,
Suite 1400, Denver, CO 80202-5514, 7.41%, record; FM Co., Huntington National
Bank, One Financial Plaza, Holland, MI 49423-9166, 55.66%, record.
Equity III - Class I: International Shipowners Reinsurance Co. S.A., B.P. 841,
L-2018, Luxembourg, 6.02%, record; Var. & Co., First Trust, N.A., Funds
Accounting, PO Box 64482, St. Paul, MN 55164-0482, 9.64%, record; Var. & Co.,
First Trust, N.A., Funds Accounting, PO Box 64482, St. Paul, MN 55164-0482,
14.01%, record.
Equity III - Class E: Advisors Trust Company, Master IRA, 1225 17th St. Ste.
1400, Denver, CO 80202-5514, 7.00%, record; Junior Achievement Inc. Retirement
Plan, 1225 17th St. Ste. 1400, Denver, CO 80202-5514, 16.41%, record; FM Co.,
Huntington National Bank, One Financial Plaza, Holland, MI 49423-9166, 36.40%,
record.
Equity Income - Class C: State Street Bank & Trust Co.; Cust. For the Rollover
IRA of Jennifer L. Stein; 25814 Beardborough Dr., Spring, TX 77386-1459, 8.55%,
record; NFSC FEBO # 0NN-076147, Donald J. Manton TTEE, The Willie Corp. EMPL
PS/PL, UA 1/1/89, PO Box 147, Dillon, CO 80435-0147, 9.50%, record.
Equity Income - Class E: The Citizens Bank of Batesville, Employee 401(K) Profit
Sharing Plan, 3rd & College St., Batesville AR 72501, 12.41%, record; Carey &
Co., Huntington National Bank, Attn: Mutual Funds MC1024, PO Box 1558, Columbus,
OH 43216-1558, 19.78%, record; Bowie Cass Electgric Co-op 401(k), 111 Center
Street, Little Rock, AR 72201-4402, 22.22%, record; Metropolitan National Bank
TTEE, For William Gray Darwin MD PA PSP, PO Box 8010, Little Rock, AR
72203-8010, 27.31%, record.
Equity Income - Class S: Carey & Co., Huntington National Bank, Attn: Mutual
Funds MC1024, PO Box 1558, Columbus, OH 43216-1558, 5.21%, record.
Equity Q - Class E: Advisors Trust Company FBO, Building Industry Associates
PSP, 1225 17th St. Ste. 1400, Denver, CO 80202-5514, 5.35%, record; Junior
Achievement Inc. Retirement Plan, 1225 17th St. Ste. 1400, Denver, CO
80202-5514, 8.78%, record; FM Co., Huntington National Bank, One Financial
Plaza, Holland, MI 49423-9166, 55.22%, record.
Equity Q - Class I: Var & Co., First Trust, N.A., Funds Accounting, P.O. Box
64482, St. Paul, MN 55164-0482, 5.37%, record; Charles Schwab & Co., Special
Custody Acct for the Exclusive Benefit of Customers, Attn: Mutual Funds, 101
Montgomery Street, San Francisco, CA 94104-4122, 6.11%, record; Jato Reinv,
National City Bank of Minneapolis, Account, Trust Department, PO Box E1919,
Minneapolis, MN 55480, 6.50%, record; Var & Co., First Trust, N.A., Funds
Accounting, P.O. Box 64482, St. Paul, MN 55164-0482, 16.29%, record.
Tax Managed Large Cap: Indiana Trust 5, Indiana Trust & Investment Management
Co., PO Box 5149, Mishawaka IN 46546-5149, 8.39%, record; Charles Schwab & Co.,
Special Custody Acct for the Exclusive Benefit of Customers, Attn: Mutual Funds,
101 Montgomery Street, San Francisco, CA 94104-4122, 21.11%, record.
Fixed Income I - Class I: Charles Schwab & Co., Special Custody Acct for the
Exclusive Benefit of Customers, Attn: Mutual Funds, 101 Montgomery Street, San
Francisco, CA 94104-4122, 5.01%, record; Var. & Co., First Trust, N.A., Funds
Accounting, PO Box 64482, St. Paul, MN 55164-0482, First Trust, N.A, 9.04%,
record; Jato Reinv, National City Bank of Minneapolis, Account, Trust
Department, PO Box E 1919, Minneapolis, MN 55480, 14.10%, record.
Fixed Income I - Class E: Northern Colorado Water Conservancy Defined Benefit
Plan, Attn: Dale Mitchell, 1250 N Wilson, Loveland, CO 80537-4461, 9.85%,
record; Junior Achievement Inc. Retirement Plan, 1225 17th St. Ste. 1400,
Denver, CO 80202-5514, 16.02%, record; FM Co., Huntington National Bank, One
Financial Plaza, Holland, MI 49423-9166, 31.90%, record.
Fixed Income III - Class I: Var. & Co., First Trust, N.A., Funds Accounting, PO
Box 64482, St. Paul, MN 55164-0482, 17.61%, record.
Fixed Income III - Class E: Advisors Trust Company FBO, Stephen M. Miller, M.D.
IRA; 10594 North 65th Street; Longmont, CO, 80503-9073, 5.18%, record; Stephen
M. Miller, M.D.; 10594 North 65th Street; Longmont, CO, 80503-9073, 5.41%,
record; Arnold W. Magasinn TTEE, Brigitte A. Hauber 1992 Crut, 4640 Admiralty
Way - Suite 402, Marina Del Rey, CA 90292-6617, 15.16%, record; National 4-H
Council, 1225 17th St. Ste. 1400, Denver, CO 80202-5514, 16.47%, record; Arnold
W. Magasinn TTEE, Peter Hauber 1992 Crut, 4640 Admiralty Way - Suite 402, Marina
Del Rey, CA 90292-6617, 17.18%, record; Advisors Trust Company FBO, Building
Industry Associates PSP, 1225 17th St, Ste. 1400, Denver, CO 80202-5514, 34.48%,
record.
International - Class I: Charles Schwab & Co., Special Custody Acct for the
Exclusive Benefit of Customers, Attn: Mutual Funds, 101 Montgomery Street, San
Francisco, CA 94104-4122, 6.18%, record; Jato Reinv, National City Bank of
Minneapolis, Account, Trust Department, PO Box E1919, Minneapolis, MN 55480,
6.32%, record; Var. & Co., First Trust, N.A., Funds Accounting, PO Box 64482,
St. Paul, MN 55164-0482, 15.49%, record.
International - Class E: The Fund for American Studies, 1225 17th St. Ste. 1400,
Denver, CO 80202-5514, 5.02%, record; Advisors Trust Company FBO, Building
Industry Associates PSP, 1225 17th St. Ste. 1400, Denver, CO 80202-5514, 6.03%,
record; Northern Colorado Water Conservancy Defined Benefit Plan, Attn: Dale
Mitchell, 1250 N Wilson, Loveland, CO 80537-4461, 6.08%, record; Mary M Beazley,
1225 17th St. Ste. 1400, Denver, CO 80202-5514, 9.53%, record; Junior
Achievement Inc. Retirement Plan, 1225 17th St. Ste. 1400, Denver, CO
80202-5514, 12.41% record; FM Co., Huntington National Bank, One Financial
Plaza, Holland, MI 49423-9166, 19.36%, record.
International Securities - Class C: Morgantown Urologic Associates Inc.,
Employee Profit Sharing Plan, 200 Wedgewood Dr. Ste. 202, Morgantown, WV
26505-2442, 5.09%, record.
International Securities - Class E: ; Metropolitan National Bank Defined Benefit
Plan, 111 Center Street, Little Rock, AR 72201-4402, 5.35%, record; Carey & Co.,
Huntington National Bank, Attn: Mutual Funds MC1024, PO Box 1558, Columbus, OH
43216-1558, 8.06%, record; Metropolitan National Bank TTEE, For Bowie Cass
Electric Co-Op Retirement Plan, PO Box 8010, Little Rock, AR 72203-8010, 8.59%,
record; Zions First National Bank, TTEE, Tucker, Sadler, Prof Sharing Plan,
P.O.Box 30880, Salt Lake City, UT 84130-0880, 10.72%, record; Maltrust & Co.,
c/o Eastern Bank & Trust/Gibralter, Attn: Retirement Plan Services 3rd Floor,
217 Essex St., Salem, MA 01970-3728, 11.48%, record.
Multi-Strategy Bond - Class C: James L. & Beverly A. Laurita JTWROS, 28 Keener
Rd., Morgantown, WV 26508-6207, 5.15%, record.
Multi-strategy Bond - Class E: Metropolitan National Bank Trustee For Conway
OB-GYN PSP, 2519 College Ave., Conway, AR 72032-6135, 5.53%, record;
Metropolitan National Bank TTEE, For William Gary Darwin MD PA PSP, PO Box 8010,
Little Rock, AR 72203-8010, 5.99%, record; Metropolitan National Bank Defined
Benefit Plan, 111 Center St., Little Rock, AR 72201-4402, 6.25%, record;
Arkansas Womens Center Employee Pension Plan, 9501 Lile Dr. Ste. 888, Little
Rock, AR 72205-0249, 6.55%, record; Metropolitan National Bank TTEE FBO, Alan
White Company PSP, PO Box 249, Hwy 82 East, Stamps AR 71860-0249, 6.61%, record;
Maltrust & Co., c/o Eastern Bank & Trust/Gibralter, Attn: Retirement Plan
Services 3rd Floor, 217 Essex St., Salem, MA 01970-3728, 6.92%, record; Zions
First National Bank, TTEE, Tucker, Sadler, Prof Sharing Plan, P.O.Box 30880,
Salt Lake City, UT 84130-0880 8.35%, record; Metropolitan National Bank TTEE,
For Bowie Cass Electric Co-Op Retirement Plan, 14.88%, record.
Multi-strategy Bond - Class S: Balanced Strategy Fund, C/O Frank Russell
Investment Co., PO Box 1591, Tacoma, WA 98401-1591, 7.68%, record .
Quantitative Equity - Class E: Metropolitan National Bank Defined Benefit Plan,
111 Center Street, Little Rock, AR 72201-4402, 5.35%, record; Metropolitan
National Bank, TTEE, For Bowie Cass Electric Co-Op Retirement Plan, PO Box 8010,
Little Rock, AR 72203-8010, 5.71%, record; Metropolitan National Bank, Trustee
For Alan White Co. Profit Sharing, PO Box 249, Hwy 82 East, Stamps, AR
71860-0249, 6.08%, record; ; Carey & Co., Huntington National Bank, Attn: Mutual
Funds MC1024, PO Box 1558, Columbus, OH 43216-1558, 7.72%, record; Bowie Cass
Electric Co-op 401(k), 111 Center Street, Little Rock, AR 72201-4402, 8.21%,
record; Zions First National Bank, TTEE, Tucker, Sadler, Prof Sharing Plan, PO
Box 30880, Salt Lake City, UT 84130-0880, 9.78%, record.
Real Estate Securities - Class C: NFSC FEBO # 0NN-101451, NFSC/FMTC IRA
Rollover, FBO Bobby J. Lane, 1845 Putnam Drive, Bartlesville, OK 74006-6805,
5.27%, record; NFSC FEB0 #0NN-076147, Donald J. Manton TTEE, The Willie Corp
Empl PS/PL, U/A 1/1/89, PO Box 147, Dillon, CO 80435-0147, 5.59%, record.
Real Estate Securities - Class E: Northern Colorado Water Conservancy Defined
Benefit Plan, Attn: Dale Mitchell, 1250 N. Wilson, Loveland, CO 80537-4461,
6.82%, record; Junior Achievement Inc. Retirement Plan, 1225 17th St. Ste. 1400,
Denver, CO 80202-5514, 16.26% record; FM Co., Huntington National Bank, One
Financial Plaza, Holland, MI 49423-9166, 23.02%, record.
Real Estate Securities - Class S: Var & Co., First Trust, N.A., Funds
Accounting, P.O. Box 64482, St. Paul, MN 55164-0482, 7.38%, record.
Short Term Bond - Class C: Donaldson Lufkin Jenerette Securities Corp. Inc., FBO
Margaret R. Krystyniak, P.O. Box 2052, Jersey City, NJ 07303-2052, 10.08%,
record; Joan W. Terrill TTEE, The Joan W. Terrill Trust, 182 Tanglewood Tr.,
Wadsworth, OH 44281-2351, 10.72%, record; State Street Bank & Trust Co., Cust.
for the IRA R/O FBO Lester J. Waguespack, 248 Tall Timbers Rd., New Caney, TX
77357-2826, 65.01%, record.
Short Term Bond - Class E: Zions First National Bank, TTEE, Tucker, Sadler, Prof
Sharing Plan, P.O.Box 30880, Salt Lake City, UT 84130-0880, 6.02%, record;
Advisors Trust Company Master IRA, 1225 17th St. Ste. 1400, Denver, CO
80202-5514, 7.13%, record; Junior Achievement Inc., Retirement Plan, 1225 17th
Ste., Ste. 1400, Denver, CO 80202-5514, 37.22%, record.
Short Term Bond - Class S: Charles Schwab & Co., Special Custody Acct for the
Exclusive Benefit of Customers, Attn: Mutual Funds, 101 Montgomery Street, San
Francisco, CA 94104-4122, 5.95%, record.
Special Growth - Class E: Metropolitan National Bank TTEE for Alan White Co.,
Profit Sharing, P.O. Box 249, Hwy 82 East, Stamps, AR 71860-0249, 5.43%, record;
Metropolitan National Bank, TTEE, For Bowie Cass Electric Co-Op Retirement Plan,
PO Box 8010, Little Rock, AR 72203-8010, 10.16%, record; ; Maltrust & Co., c/o
Eastern Bank & Trust/Gibralter, Attn: Retirement Plan Services 3rd Floor, 217
Essex St., Salem, MA 01970-3728, 14.62%, record.
Tax Exempt Bond - Class C: Painewebber for the Benefit of Robert J. Schubert,
279 Baltusrol Way, Springfield, NJ 07081-2108, 99.92%, record.
Tax Exempt Bond - Class E: Arnold Magasinn, TTEE For the Anthony L. West 1993
Charitable Remainder Unitrust, 4640 Admiralty Way, Suite 402, Marina Del Rey, CA
90292-6617, 6.75%, record; ; A Laurence Jones, Helayne B Jones JTIC, 1225 17th
St. Ste. 1400, Denver, CO 80202-5514, 7.08%, record; James T. & Jane Anderson,
1225 17th St. Ste. 1400, Denver, CO 80202-5514, 7.26%, record; Gary Deward Brown
& Johanna L. Brown, Inter Vivos Trust DTD 6/7/82, 1225 17th St. Ste. 1400,
Denver, CO 80202-5514, 16.89%, record; Mary M Beazley, 1225 17th St. Ste. 1400,
Denver, CO 80202-5514, 51.48%, record.
Tax Exempt Bond - Class E: Julius Bear Securities, 330 Madison Ave., New York,
NY 10017-5001, 5.07%, record; Mary M. Beazley, 1225 17th St. Ste. 1400, Denver,
CO 80202-5514, 51.48%, record.
Tax Free Money Market: ; CHC I, Inc., 10305 E. Calle De Las Brisas, Scottsdale,
AZ 85255-3763, 6.04%, record; Sandra N. Tillotson, TTEE, Sandra N. Tillotson
Family Trust DTD 10/1/96, 3500 E. Deer Hollow Dr., Sandy, UT 84092-4509, 7.82%,
record; Citizens Bank, Saginaw, Attn: Trust/Investment Dept., 101 N Washington,
Saginaw, MI 48607-1206, 32.82%, record.
At August 16, 1999, the following shareholders could be deemed by the 1940 Act
to "control" the indicated Fund because such shareholder owns more than 25% of
the voting shares of the indicated Fund:
Diversified Equity - Class E: Maltrust & Co., c/o Eastern Bank &
Trust/Gibralter, Attn: Retirement Plan Services 3rd Floor, 217 Essex St., Salem,
MA 01970-3728, 39.45%, record.
Equity Income - Class E: Metropolitan National Bank, Trustee for William Gary
Darwin, MD PA PSP, P.O. Box 8010, Little Rock, AR 72203-8010, 27.31%, record.
Equity I - Class E: FM Co., Huntington National Bank, One Financial Plaza,
Holland, MI 49423-9166, 43.87%, record.
Equity II - Class E: FM Co., Huntington National Bank, One Financial Plaza,
Holland, MI 49423-9166, 55.66%, record.
Equity III - Class E: FM Co., Huntington National Bank, One Financial Plaza,
Holland, MI 49423-9166, 36.40%, record.
Equity Q - Class E: FM Co., Huntington National Bank, One Financial Plaza,
Holland, MI 49423-9166, 55.22%, record.
Fixed Income I - Class E: FM Co., Huntington National Bank, One Financial Plaza,
Holland, MI 49423-9166, 31.90%, record.
Fixed Income III - Class E: Advisors Trust Company FBO, Building Industry
Associates PSP, 1225 17th St. Ste. 1400, Denver, CO 80202-5514, 34.48%, record.
Short Term Bond - Class C: State Street Bank & Trust Co., Cust. for the IRA R/O
FBO Lester J. Waguespack, 248 Tall Timbers Rd., New Caney, TX 77357-2826,
65.01%, record.
Short Term Bond - Class E: Junior Achievement Inc. Retirement Plan, 1225 17th
St. Ste. 1400, Denver, CO 80202-5514, 37.22%, record.
Tax Exempt Bond - Class C: Painewebber for the Benefit of Robert J. Schubert,
279 Baltusrol Way, Springfield, NJ 07081-2108, 99.92%, record.
Tax Exempt Bond - Class E: Mary M. Beazley, 1225 17th St. Ste. 1400, Denver, CO
80202-5514, 51.48%, record.
Tax Free Money Market: Citizens Bank, Saginaw, Attn: Trust/Investment Dept., 101
N Washington, Saginaw, MI 48607-1206, 32.82%, record.
The Trustees and officers of FRIC, as a group, own less than 1% of any Class of
each Fund.
TRUSTEES AND OFFICERS. The 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. A Trustee may be
removed at any time by, in substance, a vote of two-thirds of FRIC 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.
FRIC paid in aggregate $100,000 for the year ended December 31, 1998 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. FRIC's officers and employees are paid by FRIMCo or its
affiliates.
The following lists contains the Trustees and officers and their positions with
FRIC, their dates of birth, their present and principal occupations during the
past five years and the mailing addresses of Trustees who are not affiliated
with FRIC. The mailing address for all Trustees and officers affiliated with
FRIC is Frank Russell Investment Company, 909 A Street, Tacoma, WA 98402.
An asterisk (*) indicates that the Trustee or officer is an "interested person"
of FRIC 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.--Born 07/03/32--December 1998 to present,
Trustee Emeritus and Chairman of the Board. Trustee Emeritus and
Chairman of the Board, Russell Insurance Funds; Director, Chairman of
the Board and Chief Executive Officer, Russell Building Management
Company, Inc.; Director and Chairman of the Board, Frank Russell
Company, Frank Russell Investments (Delaware), Inc.; Chairman
Emeritus, Frank Russell Securities, Inc.; Director Emeritus, Frank
Russell Investment Management Company; Trustee Emeritus, Frank Russell
Trust Company; Director, Chairman of the Board and President, Russell
20/20 Association. From 1984 to December 1998, Trustee of FRIC. From
August 1996 to December 1998, Trustee of Russell Insurance Funds.
*Lynn L. Anderson--Born 04/22/39--Trustee, President and Chief Executive
Officer since 1987. Trustee, President and Chief Executive Officer,
Russell Insurance Funds; Director, Chief Executive Officer and
Chairman of the Board, Russell Fund Distributors, Inc.; Trustee,
Chairman of the Board 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 of the Board, Frank Russell Investment Company PLC; Director,
Frank Russell Investments (Ireland) Limited, Frank Russell Investments
(Cayman) Ltd. and Frank Russell Investments (UK) Ltd.; March 1997 to
December 1998, Director, Frank Russell Company; June 1993 to November
1995, Director, Frank Russell Company. Until September 1994, Director
and President, The Laurel Funds, Inc. (investment company).
Paul E. Anderson--Born 10/15/31--Trustee since 1984. 23 Forest Glen Lane,
Tacoma, Washington 98409. Trustee, Russell Insurance Funds; 1996 to
Present, President, Anderson Management Group LLC. 1984 to 1996,
President, Vancouver Door Company, Inc.
Paul Anton, Ph.D.--Born 12/01/19--Trustee since 1985. PO Box 212, 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--Born 06/08/25--Trustee since 1984. 800 North C Street,
Tacoma, Washington 98403. Trustee, Russell Insurance Funds, Retired.
Lee C. Gingrich--Born 10/06/30--Trustee since 1984. 1730 North Jackson,
Tacoma, Washington 98406. Trustee, Russell Insurance Funds. President,
Gingrich Enterprises, Inc. (Business and Property Management).
Eleanor W. Palmer--Born 05/05/26--Trustee since 1984. 2025 Narrows View
Circle #232-D, P.O. Box 1057, Gig Harbor, Washington 98335. Trustee,
Russell Insurance Funds; Director of Frank Russell Trust Company.
*Mark E. Swanson--Born 11/26/63--Treasurer and Chief Accounting Officer
since 1998, Treasurer and Chief Accounting Officer, Russell Insurance
Funds, Interim Director, Finance and Operations, Frank Russell Trust
Company; Senior Vice President and Assistant Fund Treasurer, SSgA
Funds (investment company); Interim Director of Fund Administration
and Accounting, Frank Russell Investment Management Company; Manager,
Funds Accounting and Taxes, Russell Fund Distributors, Inc. April 1996
to August 1998, Assistant Treasurer, Frank Russell Investment Company;
August 1996 to August 1998, Assistant Treasurer, Russell Insurance
Funds, November 1995 to July 1998, Assistant Secretary, the SSgA
Funds, February 1997 to July 1998, Director, Funds Accounting and
Taxes, Frank Russell Investment Management Company.
*Randall P. Lert--Born 10/03/53--Director of Investments since 1991.
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. Director-Futures Trading, Frank
Russell Investments (Ireland) Limited and Frank Russell Investments
(Cayman) Ltd., Senior Vice President and Director of Portfolio
Trading, Frank Russell Canada Limited/Limitee. April 1990 to November
1995, Director of Investments of Frank Russell Investment Management
Company.
*KarlJ. Ege--Born 10/08/41--Secretary and General Counsel since 1994.
Secretary and General Counsel of Russell Insurance Funds. Director,
Secretary and General Counsel, Russell Fiduciary Services Co., Frank
Russell Capital, Inc.; 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
Inc., Russell MLC Management Co., Russell International Services Co.,
Inc. and Russell 20-20 Association; Director and Assistant Secretary
of Frank Russell Company Limited (London) and Russell Systems Ltd.;
Director, Frank Russell Investment Company LLC, Frank Russell
Investments (Cayman) Ltd., Frank Russell Investment Company PLC, Frank
Russell Investments (Ireland) Limited, Frank Russell Company S.A.,
Frank Russell Japan Co. Ltd., Frank Russell Company (NZ) Limited,
Russell Investment Nominee Co PTY Ltd and Frank Russell Investments
(UK) Ltd.; From November 1995 to February 1997, Director and
Secretary, Frank Russell Investments (Delaware), Inc.; July 1992 to
June 1994, Director, President and Secretary of Frank Russell Shelf
Corporation; April 1992 to December, 1998, Director, Frank Russell
Company.
*Peter F. Apanovitch--Born 05/03/45--Manager of Short-Term Investment
Funds. Manager of Short-Term Investment Funds, Russell Insurance
Funds, Frank Russell Investment Management Company and Frank Russell
Trust Company.
TRUSTEE COMPENSATION TABLE*
AGGREGATE PENSION OR
COMPENSATION RETIREMENT ESTIMATED TOTAL
FROM THE BENEFITS ANNUAL COMPENSATION
TRUSTEE INVESTMENT ACCRUED AS BENEFITS FROM
COMPANY PART OF THE UPON THE INVESTMENT
INVESTMENT RETIREMENT COMPANY
COMPANY PAID TO
EXPENSES TRUSTEES
Lynn L. $0 $0 $0 $0
Anderson
Paul E. $20,000 $0 $0 $28,062*
Anderson
Paul Anton, $20,000 $0 $0 $28,062*
PhD.
William E. $20,000 $0 $0 $28,062*
Baxter
Lee C. $20,000 $0 $0 $28,062*
Gingrich
Eleanor W. $20,000 $0 $0 $28,062*
Palmer
* The Trustees received $8,062 for service as trustees on the Board of
Trustees for the Russell Insurance Funds.
OPERATION OF THE TRUST
SERVICE PROVIDERS. Most of FRIC's necessary day-to-day operations
are performed by separate business organizations under contract
to FRIC. The principal service providers are:
Consultant Frank Russell Company ("Russell")
Advisor, Administrator, Transfer Frank Russell Investment Management
and Dividend Disbursing Agent Company
Money Managers Multiple professional discretionary
investment management
organizations
Custodian and Portfolio State Street Bank and Trust Company
Accountant
CONSULTANT. Frank Russell Company, the corporate parent of FRIMCo, was
responsible for organizing FRIC and provides ongoing consulting services,
described in the Prospectuses, to FRIC 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), 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 US 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.
As affiliates, Frank Russell Company and FRIMCo may establish certain
intercompany cost allocations that reflect the consulting services supplied to
FRIMCo. George F. Russell, Jr., Trustee Emeritus and Chairman of FRIC, is the
Chairman of the Board of Russell. FRIMCo is a wholly owned subsidiary of
Russell.
Russell is a subsidiary of The Northwestern Mutual Life Insurance Company
("Northwestern Mutual"). Founded in 1857, Northwestern Mutual is a mutual
insurance corporation organized under the laws of Wisconsin. Northwestern
Mutual's products consist of a full range of permanent and term life insurance,
disability income insurance, long-term care insurance, mutual funds and
annuities for personal, estate, retirement, business, and benefits planning.
Northwestern Mutual provides its insurance products and services through an
exclusive network of approximately 7,200 agents associated with over 100 general
agencies nationwide. Northwestern Mutual leads the U.S. in both individual life
insurance sold annually and total individual life insurance in force.
ADVISOR AND ADMINISTRATOR. Frank Russell Investment Management Company
("FRIMCo") provides or oversees the provision of all general management and
administration, investment advisory and portfolio management, and distribution
services for the Funds. Prior to December 1, 1998, FRIMCo provided advisory and
administrative services to the Funds pursuant to one Management Agreement for
which each Fund paid a single fee. Effective December 1, 1998, FRIMCo's advisory
and administrative services are provided under two separate agreements. 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
Portfolio. (See, "Investment Policies--Liquidity Portfolio.") FRIMCo also acts
as FRIC's transfer agent, dividend disbursing agent and as the money manager for
the Money Market and US Government Money Market Funds. FRIMCo, as agent for
FRIC, pays the money managers' fees for the Funds, as a fiduciary for the Funds,
out of the advisory fee paid by the Funds to FRIMCo. The remainder of the
advisory fee is retained by FRIMCo as compensation for the services described
above and to pay expenses.
Prior to April 1, 1995, the Equity I, Equity II, Equity III, Equity Q,
Tax-Managed Large Cap, International, Emerging Markets, Fixed Income I, Fixed
Income III, Short Term Bond, 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, FRIC'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 continues to enter
into a separate written agreement with FRIMCo to obtain separate individualized
services, and to 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 advisory fee and an annual administrative 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.
Services which are administrative in nature will be provided by FRIMCo pursuant
to an Administrative Agreement for a fee of 0.05% of each Fund's average daily
net asset value. (See the applicable Prospectus for the Funds' annual advisory
percentage rates.)
FRIMCo has contractually agreed to waive all or a portion of its combined
advisory and administrative fees for certain Funds. This arrangement is not part
of the Advisory Agreement with FRIC or the Administrative Agreement and may be
changed or discontinued at any time. FRIMCo currently calculates its advisory
fee based on a Fund's average daily net assets less any advisory fee incurred on
the Fund's assets invested to the extent the Fund incurs advisory fees for
investing a portion of its assets in FRIC's Money Market Fund.
The following Funds paid FRIMCo the listed management fees for the years ended
December 31, 1998, 1997 and 1996 (representing the fee paid for both advisory
and administrative services):
YEARS ENDED
12/31/98 12/31/97 12/31/96
Diversified Equity $9,580,094 $6,906,245 $4,728,098
Special Growth 5,901,577 4,556,999 3,307,757
Equity Income 2,039,971 1,721,974 1,504,153
Quantitative Equity 9,056,015 6,616,377 4,455,041
International Securities 8,859,189 7,751,289 6,498,479
Real Estate Securities 5,183,218 4,428,351 2,943,292
Diversified Bond 3,407,594 2,755,500 2,360,391
Multistrategy Bond 3,241,445 2,225,087 1,673,473
Tax Exempt Bond 525,312 361,226 312,456
U.S. Government Money 372,920 542,075 481,642
Market
Tax Free Money Market 429,613 266,939 234,929
Equity I 7,626,293 6,457,044 5,261,926
Equity II 3,792,749 3,226,955 2,448,618
Equity III 1,403,784 1,381,167 1,340,374
Equity Q 6,563,229 6,049,752 4,392,254
Tax-Managed Large Cap 1,463,604 375,054 21,443
(formerly Equity T)*
International 7,709,349 7,576,927 6,569,285
Emerging Markets 4,020,121 4,167,163 2,773,817
Fixed Income I 2,631,177 2,149,298 1,977,178
Fixed Income III 2,380,980 1,835,798 1,483,875
Short Term Bond 1,216,062 1,184,588 988,312
Money Market 2,719,009 1,805,170 1,437,186
* Tax-Managed Large Cap Fund commenced operations on October 7, 1996.
Tax-Managed Small Cap Fund had not commenced operations prior to the date of
this Statement of Additional Information.
Effective April 1, 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. From May 1, 1996, FRIMCo has contractually agreed to reimburse a
portion of its 1.20% combined advisory and administrative fees 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. FRIMCo made no
reimbursements to the Emerging Markets Fund in 1996, 1997 or 1998.
FRIMCo has contractually agreed to waive a portion of its 0.75% combined
advisory and administrative fees for the Tax-Managed Large Cap Fund, up to the
full amount of those fees, equal to the amount by which the Fund-level total
operating expenses exceed 1.00% of the Fund's average daily net assets on an
annual basis. In addition, FRIMCo has contractually agreed to reimburse the Fund
for any remaining Fund-level operating expenses after any FRIMCo waiver which
exceed 1.00% of the Fund's average daily net assets on an annual basis. There
were no waivers by FRIMCo for the twelve months ended December 31, 1998.
FRIMCo voluntarily agreed to waive 0.15% of its combined advisory and
administrative fee for the Money Market Fund from October 15, 1997 through
December 31, 1998. The amount of fees waived for the twelve months ended
December 31, 1998 was $1,631,406.
Prior to June 15, 1998, FRIMCo voluntarily agreed to waive 0.13% of its 0.20%
advisory fee for the US Government Money Market Fund. Effective June 15, 1998,
FRIMCo voluntarily agreed to waive its advisory fee, up to the full amount of
that fee, equal to the amount by which the Fund's total operating expenses
exceed 0.30% of the Fund's average daily net assets on an annual basis. The
amount of such waiver for the year ended December 31, 1998 was $310,748. In
addition, FRIMCo reimbursed the US Government Money Market Fund $33,870 for
expenses over the cap in 1998.
Effective January 1, 1997, FRIMCo voluntarily agreed to waive 0.10% if its
0.25% combined advisory and administrative fees for the Tax Free Money Market
Fund. The amount of such waiver for the twelve months ended December 31, 1998
was $171,845.
Effective May 1, 1996, FRIMCo has agreed to waive a portion of its management
fee for the Multistrategy Bond Fund, to the extent Fund level expenses exceed
0.80% of average daily net assets on an annual basis. In 1996, waivers and
reimbursements for the Multistrategy Bond Fund amounted to $157,752. As a result
of the waivers and reimbursements, management and administrative fees paid by
the Multistrategy Bond Fund amounted to $1,515,721.
In 1997, waivers for the Multistrategy Bond Fund amounted to $126,393. As a
result of the waivers, management and administrative fees paid by the
Multistrategy Bond Fund amounted to $2,225,087.
In 1998, waivers for the Multistrategy Bond Fund amounted to $57,035. As a
result of the waivers, management and administrative fees paid by the
Multistrategy Bond Fund amounted to $3,184,410.
FRIMCo has contractually agreed to waive a portion of its 0.55% combined
advisory and administrative fees for the Fixed Income III Fund, 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, 1998.
FRIMCo has contractually agreed to waive a portion of its 1.03% combined
advisory and administrative fees for the Tax-Managed Small Cap Fund, up to the
full amount of those fees, equal to the amount by which the Fund-level operating
expenses exceed 1.25% of the Fund's average daily net assets on an annual basis.
In addition, FRIMCo has contractually agreed to reimburse the Fund for any
remaining Fund-level operating expenses after any FRIMCo waiver which exceed
1.25% of average daily net assets on an annual basis.
FRIMCo's mailing address is 909 A Street, Tacoma, WA 98402.
MONEY MANAGERS. Except with respect to the Money Market and US Government Money
Market Funds, the money managers have no affiliations or relationships with FRIC
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 advisory fees, FRIMCo, as agent for FRIC, 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, 1998, management fees paid to the money managers were:
Annual rate
Fund $ Amount Paid (as a % of average
daily net assets)
---- ------------- ------------------
Equity I $2,646,978 0.21%
Equity II 1,973,599 0.39%
Equity III 421,765 0.18%
Fixed Income I 620,482 0.07%
Short Term Bond 414,057 0.17%
Fixed Income III 861,391 0.19%
International 3,863,814 0.37%
Equity Q 2,026,435 0.19%
Tax-Managed 606,948 0.31%
Large Cap
(formerly Equity T)
Emerging Markets 2,230,317 0.66%
Diversified Equity 2,556,100 0.21%
Special Growth 2,419,648 0.39%
Equity Income 460,134 0.18%
Diversified Bond 529,842 0.07%
International 3,505,016 0.37%
Securities
Multistrategy Bond 990,456 0.19%
Quantitative Equity 2,153,019 0.19%
Real Estate 1,757,612 0.29%
Securities
Tax Exempt Bond 252,321 0.23%
Tax Free Money 134,817 0.08%
Market
Tax-Managed Small Cap Fund had not commenced operations prior to the date of
this Statement of Additional Information.
Each money manager has agreed that it will look only to FRIMCo for the payment
of the money manager's fee, after FRIC has paid FRIMCo. 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 FRIC shares. The Distributor receives no compensation from FRIC
for its services other than Rule 12b-1 compensation and shareholder services
compensation for certain classes of shares pursuant to FRIC's Rule 12b-1
Distribution Plan and Shareholder Services Plan, respectively. 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 FRIC. 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 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
$18,000 - $25,000 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 $7.50 to $100.00 per transaction;
monthly pricing fees of $375.00 per portfolio and $6.00 to $16.00 per security;
multiple class fees 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 is 1776 Heritage Drive,
North Quincy, MA 02171.
TRANSFER AND DIVIDEND DISBURSING AGENT. FRIMCo serves as Transfer Agent for
FRIC. For this service, FRIMCo is paid a per account fee for transfer agency and
dividend disbursing services provided to FRIC. From this fee FRIMCo compensates
unaffiliated agents who assist in providing these services. FRIMCO is also
reimbursed by FRIC 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. FRIC has authorized certain Financial Intermediaries
to accept on its behalf purchase and redemption orders for FRIC shares. Certain
Financial Intermediaries are authorized, subject to approval of FRIC's
Distributor, to designate other intermediaries to accept purchase and redemption
orders on FRIC's behalf. FRIC 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 applicable Fund's net asset value next computed after they are accepted by
such a Financial Intermediary or an authorized designee, provided that Financial
Intermediary or an authorized designee timely transmits the customer order to
FRIC.
INDEPENDENT ACCOUNTANTS. PricewaterhouseCoopers LLP serves as the independent
accountants of FRIC. PricewaterhouseCoopers LLP is responsible for performing
annual audits of the financial statements and financial highlights of the Funds
in accordance with generally accepted accounting practices and a review of
federal tax returns. The mailing address of PricewaterhouseCoopers LLP 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 to issue multiple classes of shares in
accordance with a written plan approved by the investment company's board of
trustees that is filed with the SEC. At a meeting held on April 22, 1996, the
Board adopted 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").
At a meeting held on June 3, 1998, the Board amended the Rule 18f-3 Plan to
create classes for the Institutional Funds. On November 9, 1998, the Board again
amended the Rule 18f-3 Plan to revise the previously authorized classes. On
August 9, 1999, the Board amended the Rule 18f-3 Plan to create classes for the
Tax-Managed Small Cap Fund, Tax-Managed Large Cap Fund and the Tax-Managed
LifePoints Funds. For purposes of this Statement of Additional Information, each
Fund that issues multiple classes of shares is referred to as 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 Rule 12b-1 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; (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 FRIC 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 Distribution
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 (such as 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 12b-1 Fees may be used to compensate (a) Selling Agents (as defined below)
for sales support services provided, and related expenses incurred with respect
to Class C 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 Trust
makes no distribution payments to the Distributor which respect to Class C
Shares except as described above. Therefore, the Trust does not pay for
unreimbursed expenses of the Distributor, including amounts expended by the
Distributor in excess of amounts received by it from the Trust, 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 Trust
under the Distribution Plan.
The Distribution Plan provides that each Multiple Class Fund may spend annually,
directly or indirectly, up to 0.75% 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 FRIC will
be calculated daily and paid periodically and shall not be made less frequently
than quarterly. 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
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.
Under the Distribution Plan, the following Multiple Class Funds' Class E and
Class C Shares (which are no longer subject to the Distribution Plan) accrued
expenses in the following amounts, payable to the Distributor, for the period
ended December 31, 1998 (these amounts were for compensation to dealers):
Class C Class E
------- -------
Diversified Equity -- $5,464
Special Growth -- 5,553
Equity Income -- 696
Quantitative Equity -- 4,035
International -- 2,245
Securities
Real Estate Securities -- 643
Diversified Bond -- 5,148
Tax-Managed Large Cap -- N.A.
Tax-Managed Small Cap -- N.A.
No Class C Shares were issued during the period ended December 31, 1998.
SHAREHOLDER SERVICES PLAN. A majority of the Trustees, including a majority of
Independent Trustees, has adopted and amended a Shareholder Services Plan for
certain classes of shares of the Funds ("Servicing Plan"). The Servicing Plan
was adopted on April 22, 1996. Subsequently amendments occurred on June 3, 1998,
November 9, 1998, and August 9, 1999.
Under the Service Plan, FRIC 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
the Class C, Class E or Premier Class, 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 FRIC's Class C, Class E or Premier Class. Such payments by
FRIC 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 any Class C, Class E or Premier Class may exceed, on an annual basis,
0.25% 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 FRIC'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 Service Plan, the following Multiple Class Funds' Class E and Class C
Shares accrued expenses in the following amounts payable to the Distributor, for
the period ended December 31, 1998:
Class C Class E
------- -------
Diversified Equity -- $12,201
Special Growth -- 10,155
Equity Income -- 1,449
Quantitative Equity -- 9,265
International -- 5,369
Securities
Real Estate Securities -- 1,235
Diversified Bond -- 9,314
Tax-Managed Large Cap -- N.A.
Tax-Managed Small Cap -- N.A.
No Class C Shares were issued during the period ended December 31, 1998. Premier
Class Shares were not issued during the period ended December 31, 1998.
The Glass-Steagall Act prohibits a depository institution (such as a commercial
bank or 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.
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 advisory fee
and the annual administrative fee, each 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,
Tax Exempt Bond, U.S. Government Money Market, 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 FRIC 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 expenses are allocated among the Funds based
primarily upon their relative net assets.
As of the date of this Statement, FRIMCo has contractually agreed to waive until
April 30, 2000 all or a portion of its aggregate combined advisory and
administrative fees with respect to certain Funds.
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
("NYSE") is open for trading, and for the Money Market, US Government Money
Market, and Tax Free Money Market Funds, any day on which both the NYSE is open
for trading and the Boston Federal Reserve Bank is open for business. Currently,
the NYSE is open for trading every weekday except New Year's Day, Martin Luther
King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas Day. The Boston Federal Reserve Bank
is open for business Good Friday and every day the NYSE is open, except Columbus
Day and Veterans' Day.
Net asset value per share is computed for each class of Shares of a Fund by
dividing the current value of the Fund's assets attributable to each class of
Shares, less liabilities attributable to that class of Shares, by the number of
each individual class of Shares of the Fund outstanding, and rounding to the
nearest cent.
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 their net asset values, events
affecting the value of the portfolio securities occurring between the time
prices are determined and the time the Funds calculate their net asset values
may not be reflected in the calculations of net asset value unless FRIMCo
determines that a particular event would materially affect the net asset value.
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. US 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
the 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. Money market
instruments maturing within 60 days of the valuation date held by the non-money
market 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.
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 III, Special Growth,
Short Term Bond, Multistrategy Bond and Tax Exempt 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 Funds. Conversely, the Tax-Managed
Large Cap Fund and the Tax-Managed Small Cap Fund, which seek to minimize the
impact of taxes on their shareholders, attempt 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 Tax-Managed
Large Cap Fund and the Tax-Managed Small Cap 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 Tax-Managed
Large Cap and Tax-Managed Small Cap Funds' investment objective and policies,
those Funds' ability to change money managers may be constrained.
The Funds, except the Tax Exempt Bond, Tax-Managed Large Cap and Tax-Managed
Small Cap Funds, do not give significant weight to attempting to realize
long-term, rather than short-term, capital gains when making portfolio
management decisions.
PORTFOLIO TURNOVER RATE. The portfolio turnover rate for each Fund is calculated
by dividing the lesser of purchases or sales of portfolio securities for the
particular year, by the monthly average value of the portfolio securities owned
by the Fund during the year. For purposes of determining the rate, all
short-term securities, including options, futures, forward contracts, and
repurchase agreements, are excluded.
The portfolio turnover rates for the last two years for each Fund (other than
the Money Market, US Government Money Market and Tax Free Money Market Funds)
were:
YEARS ENDED
12/31/98 12/31/97
-------- --------
Equity I 101% 111%
Equity II 129 103
Equity III 136 129
Equity Q 75 95
Tax-Managed Large Cap
(formerly Equity T)* 51 39
Tax-Managed Small Cap** -- --
International 64 79
Emerging Markets 59 51
Fixed Income I 227 166
Fixed Income III 342 275
Diversified Equity 100 114
Special Growth 129 97
Equity Income 150 139
Quantitative Equity 77 88
International Securities 68 74
Real Estate Securities 43 49
Diversified Bond 217 172
Short Term Bond 130 213
Multistrategy Bond 335 264
Tax Exempt Bond 74 41
* Tax-Managed Large Cap Fund commenced operations on October 7, 1996.
** The Tax-Managed Small Cap Fund had not commenced operations prior to the
date of this Statement of Additional Information.
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 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. FRIC's advisory agreements with FRIMCo and the money managers provide,
in substance and subject to specific directions from officers of FRIC 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 advisory 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 FRIC's procedures adopted in accordance
with Rule 17e-1 of the 1940 Act.
FRIMCo arranges for the purchase and sale of FRIC'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 FRIC 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. ("Securities"), 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
Securities, at the request of the FRIMCo, research services obtained from third
party service providers at market rates are provided to the Funds by Securities.
Such research services include performance measurement statistics, fund
analytics systems and market monitoring systems. As to other brokerage
transactions effected by the Funds through 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, Tax-Managed Large Cap,
Tax-Managed Small Cap, 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 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 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 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:
YEARS ENDED DECEMBER 31,
1998 1997 1996
---------- ---------- ----------
Equity I $2,185,209 $2,525,291 $1,988,671
Equity II 1,111,879 743,450 863,209
Equity III 671,292 616,005
540,862
Equity Q 1,328,183 1,323,995 950,684
Tax-Managed Large
Cap (formerly Equity T)* 176,555 40,539 10,305
Tax-Managed Small Cap** -- -- --
International 3,100,978 2,679,272 1,770,839
Emerging Markets 1,414,084 1,722,534 964,725
Diversified Equity 2,137,221 2,340,509 1,360,214
Special Growth 1,362,922 828,211 893,203
Equity Income 732,684 515,622 507,754
Quantitative Equity 1,404,098 1,069,927 744,245
International Securities 2,865,227
2,193,334 1,284,042
Real Estate Securities 1,127,266 641,659 915,952
---------- --------- ---------
Total $19,617,418 $17,165,205 $12,869,848
---------- --------- ---------
* Tax-Managed Large Cap commenced operations on October 7, 1996.
** Tax-Managed Small Cap Fund had not commenced operations prior to the date
of this Statement of Additional Information.
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 III, Diversified Bond, Short Term Bond,
Multistrategy Bond, Tax Exempt Bond, Money Market, US Government Money Market
and Tax Free Money Market Funds normally do not pay a stated brokerage
commission on transactions.
During the year ended December 31, 1998, approximately $3.2 million 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,
1998, from portfolio transactions effected for the Funds, were as follows:
PERCENT OF TOTAL
AFFILIATED BROKER/DEALER COMMISSIONS COMMISSIONS
- ------------------------ ----------- -----------
Autranet, Inc. $ 15,721 0.077%
Sanford C. Bernstein & Co., Inc. 22,280 0.109
Donaldson, Lufkin & Jenrette 100,451 0.493
Dresdner Kleinwort Benson 101,048 0.496
Frank Russell Securities 1,787,765 8.774
J.P. Morgan Securities, Inc. 166,774 0.819
Montgomery Securities 612 0.003
Morgan Stanley Dean Witter 166,899 0.819
Ord Minnett, Inc. 6,979 0.034
Robert Fleming, Inc. 153,497 0.753
Robert W. Baird & Co. 8,163 0.040
Robinson-Humphrey, Inc. 745 0.004
Salomon Smith Barney, Inc. 328,114 1.610
Unibanco Holdings SA 6,618 0.032
--------- -------
Total Affiliated Commissions $2,865,666 14.063%
---------- -------
The percentage of total affiliated transactions (relating to trading activity)
to total transactions during the year ended December 31, 1998 for the Funds was
14%.
During the year ended December 31, 1998, 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, 1998, was as
follows:
FUND
BEAR GOLDMAN MERRILL MORGAN PAINE
STEARNS SACHS & LYNCH STANLEY WEBBER
CO.
- ----------------------------------------------------------------
Equity I $280,000 $6,482,000 $1,694,000
- ----------------------------------------------------------------
Equity II $1,078,000
- ----------------------------------------------------------------
Equity III 2,343,000
- ----------------------------------------------------------------
Equity Q 1,206,000 9,737,000
- ----------------------------------------------------------------
Fixed Income 1,798,000 1,497,000 558,000
I
- ----------------------------------------------------------------
Fixed Income 4,970,000 2,070,000
III
- ----------------------------------------------------------------
Tax-Managed 2,048,000
Large Cap
(formerly
Equity T)
- ----------------------------------------------------------------
Diversified 300,000 5,907,000 1,338,000
Equity
- ----------------------------------------------------------------
Special 1,227,000
Growth
- ----------------------------------------------------------------
Equity Income 3,003,000
- ----------------------------------------------------------------
Quantitative 1,320,000 988,000
Equity
- ----------------------------------------------------------------
Diversified 1,997,000
Bond 812,000
- ----------------------------------------------------------------
Short Term 1,140,000 1,493,000
Bond
- ----------------------------------------------------------------
Multistrategy 4,970,000 5,002,000
Bond
- ----------------------------------------------------------------
The Tax-Managed Small Cap Fund had not yet commenced operations prior to the
date of this Statement of Additional Information.
At December 31, 1998, the Funds did not have any holdings in the
following top 10 broker-dealers:
- - Frank Russell Securities
- - Investment Technology
- - Instinet Corp.
- - S.G. Warburg
YIELD AND TOTAL RETURN QUOTATIONS. The 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 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 other classes of
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 appropriate), that would
equate the initial amount invested to the ending redeemable value, according to
the following formula:
P(1+T)n = ERV
Where: P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; and
ERV = ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the one, five or ten year period at
the end of the one, five or ten year period (or fractional
portion
thereof).
The calculation assumes that all dividends and distributions of each Fund are
reinvested at the price stated in the Prospectuses on the dividend dates during
the period, and includes all recurring fees that are charged to all shareholder
accounts. The average annual total returns for all classes of Shares are
reported in the respective Prospectuses.
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 that 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
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
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 indexes.
Tax-equivalent yields for the Tax Exempt Bond 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 (36.9%)
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 Tax Exempt Bond and Tax
Free Money Market Funds are reported in the Funds' respective Prospectuses.
INVESTMENT RESTRICTIONS, POLICIES AND CERTAIN INVESTMENTS
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. Other
policies may be changed by a Fund 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, and 13.
(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. (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.
6. Purchase or sell commodities or commodities contracts except stock index
and financial futures contracts.
7. Borrow money, except that the Fund may borrow as a temporary measure for
extraordinary or emergency purposes, and not in excess of five percent of its
net assets; provided, that the Fund may borrow to facilitate redemptions (not
for leveraging or investment), provided that borrowings do not exceed an
amount equal to 33 1/3% of the current value of the Fund's assets taken at
market value, less liabilities other than borrowings. If at any time the
Fund's borrowings exceed this limitation due to a decline in net assets, such
borrowings will be reduced to the extent necessary to comply with this
limitation within three days. Reverse repurchase agreements will not be
considered borrowings for purposes of the foregoing restrictions, provided
that the Fund will not purchase investments when borrowed funds (including
reverse repurchase agreements) exceed 5% of its total 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 Tax Exempt Bond and Tax Free
Money Market Funds' investment objectives.
10. FRIC 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.
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
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'.
12. 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 Tax
Exempt Bond 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.
13. FRIC 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.
14. Purchase from or sell portfolio securities to the officers, Trustees or
other "interested persons" (as defined in the 1940 Act) of FRIC, including
the Fund's money managers and their affiliates, except as permitted by the
1940 Act, SEC rules or exemptive orders.
15. 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.
An additional fundamental policy is that (a) Fixed Income I, Diversified Bond
and Short Term Bond Funds may acquire convertible bonds which will be
disposed of by the Funds in as timely a manner as is practical after
conversion, and (b) Tax Exempt Bond Fund will not invest in interests in oil,
gas or other mineral exploration or development programs.
For purposes of these investment restrictions, the Tax Exempt Bond 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.
INVESTMENT POLICIES
Fund Investment Securities
The following tables illustrate the investments that the Funds primarily
invest in or are permitted to invest in:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Diversified Equity Quantitative International Diversified MultiStrategy Real
Type of Equity Income Equity Securities Bond Bond Estate
portfolio Fund Bond Securities Fund Fund Fund Securities
Security Fund
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Common stocks |X| |X| |X| |X| |X|
- ---------------------------------------------------------------------------------------------------------------
Common stock
equivalents
- ---------------------------------------------------------------------------------------------------------------
(warrants) |X| |X| |X| |X| |X|
- ---------------------------------------------------------------------------------------------------------------
(options) |X| |X| |X| |X| |X|
- ---------------------------------------------------------------------------------------------------------------
(convertible
debt |X| |X| |X| |X| |X|
securities)
- ---------------------------------------------------------------------------------------------------------------
(depository |X| |X| |X|
receipts)
- ---------------------------------------------------------------------------------------------------------------
Preferred |X| |X| |X| |X| |X|
stocks
- ---------------------------------------------------------------------------------------------------------------
Equity |X| |X| |X| |X| |X|
derivative
securities
- ---------------------------------------------------------------------------------------------------------------
Debt
securities
(below |X|
investment
grade or junk
bonds)
- ---------------------------------------------------------------------------------------------------------------
US government |X| |X| |X| |X| |X| |X| |X| |X|
securities
- ---------------------------------------------------------------------------------------------------------------
Municipal |X|
obligations
- ---------------------------------------------------------------------------------------------------------------
Investment
company |X| |X| |X| |X| |X| |X| |X| |X|
Securities
- ---------------------------------------------------------------------------------------------------------------
Foreign |X| |X| |X| |X| |X| |X|
securities
</TABLE>
<TABLE>
<CAPTION>
US Tax
Tax Tax Tax Short Government Free
Emerging Managed Managed Special Exempt Term Money Money Money
Type of Markets Large Cap Small Cap Growth Bond Bond Market Market Market
Portfolio Fund Fund Fund Fund Fund Fund Fund Fund Fund
Securities
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Common stocks |X| |X| |X| |X|
- ---------------------------------------------------------------------------------------------------------------
Common stock
equivalents
- ---------------------------------------------------------------------------------------------------------------
(warrants) |X| |X| |X| |X|
- ---------------------------------------------------------------------------------------------------------------
(options) |X| |X| |X| |X|
- ---------------------------------------------------------------------------------------------------------------
(convertible
debt |X| |X| |X| |X| |X|
securities)
- ---------------------------------------------------------------------------------------------------------------
(depository |X| |X| |X| |X| |X|
receipts)
- ---------------------------------------------------------------------------------------------------------------
Preferred |X| |X| |X| |X| |X|
stocks
- ---------------------------------------------------------------------------------------------------------------
Equity |X| |X| |X| |X|
derivative
securities
- ---------------------------------------------------------------------------------------------------------------
Debt
securities
(below |X|
investment
grade or junk
bonds)
- ---------------------------------------------------------------------------------------------------------------
US government |X| |X| |X| |X| |X| |X| |X| |X| |X|
securities
- ---------------------------------------------------------------------------------------------------------------
Municipal |X| |X|
obligations
- ---------------------------------------------------------------------------------------------------------------
Investment
company |X| |X| |X| |X| |X| |X| |X| |X| |X|
Securities
- ---------------------------------------------------------------------------------------------------------------
Foreign |X| |X| |X| |X| |X|
securities
</TABLE>
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 located at the back of the
Statement of Additional Information describes each of the investment techniques
identified below.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Fixed Fixed
Type of Equity I Equity II Equity III Equity Q International Income I Income III
portfolio Fund Bond Securities Fund Fund Fund Fund
Security
<S> <C> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
Common stocks |X| |X| |X| |X| |X|
- ---------------------------------------------------------------------------------------------------------------
Common stock
equivalents
- ---------------------------------------------------------------------------------------------------------------
(warrants) |X| |X| |X| |X| |X|
- ---------------------------------------------------------------------------------------------------------------
(options) |X| |X| |X| |X|
- ---------------------------------------------------------------------------------------------------------------
(convertible
debt |X| |X| |X| |X|
securities)
- ---------------------------------------------------------------------------------------------------------------
(depository |X| |X| |X|
receipts)
- ---------------------------------------------------------------------------------------------------------------
Preferred |X| |X| |X| |X| |X|
stocks
- ---------------------------------------------------------------------------------------------------------------
Equity |X| |X| |X| |X| |X|
derivative
securities
- ---------------------------------------------------------------------------------------------------------------
Debt
securities
(below |X|
investment
grade or junk
bonds)
- ---------------------------------------------------------------------------------------------------------------
US government |X| |X| |X| |X| |X| |X| |X|
securities
- ---------------------------------------------------------------------------------------------------------------
Municipal
obligations
- ---------------------------------------------------------------------------------------------------------------
Investment
company |X| |X| |X| |X| |X| |X| |X|
Securities
- ---------------------------------------------------------------------------------------------------------------
Foreign |X| |X| |X| |X| |X| |X| |X|
securities
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Diversified Equity Quantitative International Diversified MultiStrategy
Type of Equity Income Equity Securities Bond Bond
portfolio Fund Bond Securities Fund Fund Fund
Security
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
Cash reserves |X| |X| |X| |X| |X| |X|
- ---------------------------------------------------------------------------------------------------------------
Repurchase |X| |X| |X|
agreements(1)
- ---------------------------------------------------------------------------------------------------------------
When-issued
and forward |X| |X| |X|
commitment
securities
- ---------------------------------------------------------------------------------------------------------------
Reverse
repurchase |X| |X| |X|
agreements
- ---------------------------------------------------------------------------------------------------------------
Lending
portfolio |X| |X| |X| |X| |X| |X|
securities
not to
exceed 33 1/3%
of total
Fund assets
- ---------------------------------------------------------------------------------------------------------------
Illiquid
securities |X| |X| |X| |X| |X| |X|
limited to
15% of a
Fund's net
assets)
- ---------------------------------------------------------------------------------------------------------------
Forward
currency |X| |X| |X|
contracts(2)
- ---------------------------------------------------------------------------------------------------------------
Write (sell)
call and put
options on
securities, |X| |X| |X| |X| |X| |X|
securities
indexes and
foreign
currencies(3)
- ---------------------------------------------------------------------------------------------------------------
Purchase
options on
securities, |X| |X| |X| |X| |X| |X|
securities
indexes, and
currencies(3)
- ---------------------------------------------------------------------------------------------------------------
Interest rate
futures
contracts,
stock index
futures |X| |X| |X| |X| |X| |X|
contracts,
foreign
currency
contracts and
options on
futures(4)
- ---------------------------------------------------------------------------------------------------------------
Liquidity |X| |X| |X| |X|
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 Securities, Diversified Bond, and Multistrategy Bond Funds
each 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.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
Real Tax- Tax- Tax Short
Estate Emerging Managed Managed Special Exempt Term
Type of Securities Markets Large Cap Small Cap Growth Bond Bond
portfolio Fund Fund Fund Fund Fund Fund Fund
Security
<S> <C> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------
Cash reserves |X| |X| |X| |X| |X| |X| |X|
- ---------------------------------------------------------------------------------------
Repurchase
agreements(1) |X| |X| |X| |X|
- ---------------------------------------------------------------------------------------
When-issued
and forward |X| |X| |X| |X|
commitment
securities
- ---------------------------------------------------------------------------------------
Reverse
repurchase |X| |X| |X| |X|
agreements
- ---------------------------------------------------------------------------------------
Lending
portfolio |X| |X| |X| |X| |X| |X|
securities
not to
exceed 33 1/3%
of total
Fund assets
- ---------------------------------------------------------------------------------------
Illiquid
securities |X| |X| |X| |X| |X| |X| |X|
limited to
15% of a
Fund's net
assets)
- -----------------------------------------------------------------------------------------
Forward
currency |X| |X|
contracts(2)
- -----------------------------------------------------------------------------------------
Write (sell)
call and put
options on
securities, |X| |X| |X| |X| |X| |X|
securities
indexes and
foreign
currencies(3)
- -----------------------------------------------------------------------------------------
Purchase
options on
securities, |X| |X| |X| |X| |X| |X|
securities
indexes, and
currencies(3)
- -----------------------------------------------------------------------------------------
Interest rate
futures
contracts,
stock index
futures |X| |X| |X| |X|
contracts,
foreign
currency
contracts and
options on
futures(4)
- ------------------------------------------------------------------------------------------
Credit and
liquidity
enhancements |X|
- ------------------------------------------------------------------------------------------
Liquidity |X| |X| |X| |X| |X| |X|
portfolios
- ------------------------------------------------------------------------------------------
</TABLE>
- ----------------------------------------------------
Money Money Money
Type of Market Market Market
portfolio Fund Fund Fund
Security
- -----------------------------------------------------
Cash reserves
- -----------------------------------------------------
Repurchase
agreements(1) |X| |X|
----------------------------------------------------
When-issued
and forward |X| |X| |X|
commitment
securities
- -----------------------------------------------------
Reverse
repurchase |X| |X| |X|
agreements
- -----------------------------------------------------
Lending
portfolio |X| |X|
securities
not to
exceed 33 1/3%
of total
Fund assets
- -----------------------------------------------------
Illiquid
securities
limited to
15% of a
Fund's net
assets)
- -----------------------------------------------------
Forward
currency |X| |X| |X|
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 |X|
- -----------------------------------------------------
Liquidity
portfolios
(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 and Short Term Bond Funds each 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.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
Equity Equity Equity Equity Interna- Fixed Fixed
Type of I II III Q tional Income I Income III
portfolio Fund Fund Fund Fund Fund Fund Fund
Security
<S> <C> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------
Cash reserves |X| |X| |X| |X| |X| |X| |X|
- ---------------------------------------------------------------------------------------
Repurchase
agreements(1) |X| |X| |X|
- ---------------------------------------------------------------------------------------
When-issued
and forward |X| |X| |X|
commitment
securities
- ---------------------------------------------------------------------------------------
Reverse
repurchase |X| |X| |X|
agreements
- ---------------------------------------------------------------------------------------
Lending
portfolio |X| |X| |X| |X| |X| |X| |X|
securities
not to
exceed 33 1/3%
of total
Fund assets
- ---------------------------------------------------------------------------------------
Illiquid
securities |X| |X| |X| |X| |X| |X| |X|
limited to
15% of a
Fund's net
assets)
- -----------------------------------------------------------------------------------------
Forward
currency |X| |X| |X|
contracts(2)
- -----------------------------------------------------------------------------------------
Write (sell)
call and put
options on
securities, |X| |X| |X| |X| |X| |X| |X|
securities
indexes and
foreign
currencies(3)
- -----------------------------------------------------------------------------------------
Purchase
options on
securities, |X| |X| |X| |X| |X| |X| |X|
securities
indexes, and
currencies(3)
- -----------------------------------------------------------------------------------------
Interest rate
futures
contracts,
stock index
futures |X| |X| |X| |X| |X| |X| |X|
contracts,
foreign
currency
contracts and
options on
futures(4)
- ------------------------------------------------------------------------------------------
Liquidity |X| |X| |X| |X| |X|
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 Securities, Fixed Income I and Fixed Income III Funds each may
not invest more than 25% 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. Only
the Fixed Income III Fund currently intends to write or purchase options on
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.
Cash Reserves. Each Fund (except the Money Market, U.S. Government Money
Market and Tax Free Money Market Funds), and its money managers, may elect to
invest the Fund's cash reserves in one or more of FRIC's money market funds.
Those money market funds and the Funds investing in them treat such investments
as the purchase and redemption of the money market funds' shares. Any fund
investing in a money market fund pursuant to those 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 FRIC's Master Trust Agreement, including voting rights. However,
shares of a money market fund issued to other Funds will be voted by the
Trustees in the same proportion as the shares of the money market fund that are
held by shareholders that are not Funds. Funds investing in a money market fund
effectively do not pay an advisory or administrative fee to a money market fund
and thus do not pay duplicative advisory or administrative fees, as FRIMCo
waives a portion of its advisory or administrative fees due from those Funds in
an amount that offsets the advisory or administrative fees it receives from the
applicable money market fund in respect of those investments.
Liquidity Portfolio. 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, Tax-Managed Large
Cap, Tax-Managed Small Cap, International, Diversified Equity, Special Growth,
Equity Income, Quantitative Equity and International Securities Funds. The more
cash these Funds hold, the more difficult it is for their returns to meet or
surpass their respective benchmarks.
A Liquidity Portfolio addresses this potential detriment by having 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, US 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 Money Market Funds will
maintain a dollar-weighted average maturity of 90 days or less. Each of the
Funds will invest in securities maturing within 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(R) 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.
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. A 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 a 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. A 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 a Fund equal in value to the repurchase price, including any
accrued interest, will be segregated on the Fund's records while a reverse
repurchase agreement is in effect.
High Risk Bonds. The Funds, other than the 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 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.
FRIC 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 Board determines that their use is consistent with the Funds' investment
objectives, and provided that their use is consistent with restrictions
applicable to options and futures contracts currently eligible for use by the
Funds (i.e., that written call or put options will be "covered" or "secured" and
that futures and options on futures contracts will be used only for hedging
purposes).
Options On Securities And Indexes. Each Fund, except as noted above, may
purchase and write both call and put options on securities and securities
indexes in standardized contracts traded on foreign or national securities
exchanges, boards of trade, or similar entities, or quoted on NASDAQ or on a
regulated foreign over-the-counter market, and agreements, sometimes called cash
puts, which may accompany the purchase of a new issue of bonds from a dealer.
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.
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 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 US 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
instrument (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 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. 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 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 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-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 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 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, Tax-Managed Large
Cap, Tax-Managed Small Cap, 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 III, International Securities, Diversified
Bond, Short Term Bond, Multistrategy Bond and Tax Exempt Bond 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 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 Tax Exempt Bond 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.
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 US 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.
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. A 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 a Fund's 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 US 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.
Bank Instruments. The Diversified Bond, Multistrategy Bond, Short Term Bond,
Money Market, Fixed Income I and Fixed Income III Funds 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 US and foreign banks; ETDs are US dollar
denominated time deposits in a foreign branch of a US bank or a foreign bank;
and Yankee CDs are certificates of deposit issued by a US branch of a foreign
bank denominated in US dollars and held in the United States. 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 managers when evaluating credit risk in the
selection of investments for the Multistrategy Bond Fund.
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.
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
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. Accordingly, such US government obligations
may involve risk of loss of principal and interest. The Funds may invest in
fixed-rate and floating or variable rate US government obligations. 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 Fund 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.
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.
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 Tax Exempt
Bond and Tax Free Money Market Funds to maintain liquidity. The Funds'
money managers will continually monitor the pricing, quality and liquidity
of the floating and variable rate demand instruments held by the Funds,
including the participation certificates.
A participation certificate gives a Fund an undivided interest in the
municipal obligation in the proportion that the Fund's participation
interest bears to the total principal amount of the municipal obligation
and provides the demand feature described below. Each participation is
backed by: an irrevocable letter of credit or guaranty of a bank which may
be the bank issuing the participation certificate, a bank issuing a
confirming letter of credit to that of the issuing bank, or a bank serving
as agent of the issuing bank with respect to the possible repurchase of
the certificate of participation; or insurance policy of an insurance
company that the money manager has determined meets the prescribed quality
standards for the Fund. The Fund has the right to sell the participation
certificate back to the institution and draw on the letter of credit or
insurance on demand after thirty days' notice for all or any part of the
full principal amount of the Fund's participation interest in the security
plus accrued interest. The Funds' money managers intend to exercise the
demand feature only (1) upon a default under the terms of the bond
documents, (2) as needed to provide liquidity to the Funds in order to
make redemptions of Fund shares, or (3) to maintain the required quality
of its investment portfolios.
The institutions issuing the participation certificates will retain a
service and letter of credit fee and a fee for providing the demand
feature, in an amount equal to the excess of the interest paid on the
instruments over the negotiated yield at which the participations were
purchased by a Fund. The total fees generally range from 5% to 15% of the
applicable prime rate or other interest rate index. The Fund will attempt
to have the issuer of the participation certificate bear the cost of the
insurance. The Fund retains the option to purchase insurance if necessary,
in which case the cost of insurance will be a capitalized expense of the
Fund.
DEMAND NOTES. The Tax Exempt Bond 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 Tax Exempt Bond 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 III, Short Term 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. 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 their portfolios or to protect against any increase in
the price of securities they anticipate purchasing at a later date. 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 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.
Investment In Foreign Securities. The Funds may invest in foreign securities
traded on US or foreign exchanges or in the over-the-counter market. Investing
in securities issued by foreign governments and corporations involves
considerations and possible risks not typically associated with investing in
obligations issued by the US government and domestic corporations. Less
information may be available about foreign companies than about domestic
companies, and foreign companies generally are not subject to the same uniform
accounting, auditing and financial reporting standards or to other regulatory
practices and requirements comparable to those applicable to domestic companies.
The values of foreign investments are affected by changes in currency rates or
exchange control regulations, application of foreign tax laws, including
withholding taxes, changes in governmental administration or economic or
monetary policy (in the United States or abroad) or changed circumstances in
dealings between nations. Costs are incurred in connection with conversions
between various currencies. In addition, foreign brokerage commissions are
generally higher than in the United States, and foreign securities markets may
be less liquid, more volatile and less subject to governmental supervision than
in the United States. Investments in foreign countries could be affected by
other factors not present in the United States, including nationalization,
expropriation, confiscatory taxation, lack of uniform accounting and auditing
standards and potential difficulties in enforcing contractual obligations and
could be subject to extended settlement periods or restrictions affecting the
prompt return of capital to the United States.
Investment In Emerging Markets. Foreign investment may include emerging
market debt. 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 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 other fixed-income securities issued or
guaranteed by banks or other companies in emerging markets which the money
managers believe are suitable investments for the Funds. The risks associated
with investing in foreign securities are often heightened for investments in
developing or emerging markets. Investments in emerging or developing markets
involve exposure to economic structures that are generally less diverse and
mature, and to political systems which can be expected to have less stability,
than those of more developed countries. Moreover, the economies of individual
emerging market countries may differ favorably or unfavorably from the US
economy in such respects as the rate of growth in gross domestic product, the
rate of inflation, capital reinvestment, resource self-sufficiency and balance
of payments position. Because the Funds' foreign securities will generally be
denominated in foreign currencies, the value of such securities to the Funds
will be affected by changes in currency exchange rates and in exchange control
regulations. A change in the value of a foreign currency against the US dollar
will result in a corresponding change in the US dollar value of the Funds'
foreign securities. In addition, some emerging market countries may have fixed
or managed currencies which are not free-floating against the US dollar.
Further, certain emerging market countries' currencies may not be
internationally traded. Certain of these currencies have experienced a steady
devaluation relative to the US dollar. Many emerging 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.
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.
Other Debt Securities. Multistrategy Bond 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.
Multistrategy Bond and Fixed Income III Funds 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 Economic Community. The
Counsel of Ministers of the European Economic Community 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.
Brady Bonds. The Fixed Income III, Multistrategy Bond, International
Securities 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
Distributions
Distributions of Net Investment Income. The Funds receive income generally
in the form of dividends and interest on their investments. This income, less
expenses incurred in the operation of a Fund, constitutes its net investment
income from which dividends may be paid to you. Any distributions by a Fund from
such income will be taxable to you as ordinary income, whether you take them in
cash or in additional shares.
Distributions of Capital Gains. The Funds may derive capital gains and
losses in connection with sales or other dispositions of their portfolio
securities. Distributions derived from the excess of net short-term capital gain
over net long-term capital loss will be taxable to you as ordinary income.
Distributions paid from long-term capital gains realized by a Fund will be
taxable to you as long-term capital gain, regardless of how long you have held
your shares in the Fund. Any net short-term or long-term capital gains realized
by a Fund (net of any capital loss carryovers) generally will be distributed
once each year, and may be distributed more frequently, if necessary, in order
to reduce or eliminate federal excise or income taxes on a Fund.
Information on the Tax Character of Distributions. Each Fund will inform you
of the amount and character of your distributions at the time they are paid, and
will advise you of the tax status for federal income tax purposes of such
distributions shortly after the close of each calendar year. If you have not
held a Fund's shares for a full year, you may have designated and distributed to
you as ordinary income or capital gain a percentage of income that is not equal
to the actual amount of such income earned during the period of your investment
in a Fund.
Taxes
Election to be Taxed as a Regulated Investment Company. Each Fund has
elected to be treated as a regulated investment company under Subchapter M of
the Internal Revenue Code (the "Code"), has qualified as such for its most
recent fiscal year, and intends to so qualify during the current fiscal year. As
a regulated investment company, a Fund generally pays no federal income tax on
the income and gains it distributes to you. The Board reserves the right not to
maintain the qualification of a Fund as a regulated investment company if it
determines such course of action to be beneficial to you. In such case, a Fund
will be subject to federal, and possibly state, corporate taxes on its taxable
income and gains, and distributions to you will be taxed as ordinary dividend
income to the extent of a Fund's available earnings and profits.
Excise Tax Distribution Requirements. The Code requires a Fund to distribute
at least 98% of its taxable ordinary income earned during the calendar year and
98% of its capital gain net income earned during the twelve month period ending
October 31 (in addition to undistributed amounts from the prior year) to you by
December 31 of each year in order to avoid federal excise taxes. Each Fund
intends to declare and pay sufficient dividends in December (or in January that
are treated by you as received in December) but does not guarantee and can give
no assurances that its distributions will be sufficient to eliminate all such
taxes.
Redemption of Fund Shares. Redemptions and exchanges of a Fund's shares are
taxable transactions for federal and state income tax purposes that cause you to
recognize a gain or loss. If you hold your shares as a capital asset, the gain
or loss that you realize will be capital gain or loss. Any loss incurred on the
redemption or exchange of shares held for six months or less will be treated as
a long-term capital loss to the extent of any long-term capital gains
distributed to you by a Fund on those shares.
All or a portion of any loss that you realize upon the redemption of your
Fund shares will be disallowed to the extent that you purchase other shares in
such Fund (through reinvestment of dividends or otherwise) within 30 days before
or after your share redemption. Any loss disallowed under these rules will be
added to your tax basis in the new shares you purchase.
US Government Obligations. Many states grant tax-free status to dividends
paid to you from interest earned on direct obligations of the US government,
subject in some states to minimum investment requirements that must be met by a
Fund. Investments in GNMA/FNMA securities, bankers' acceptances, commercial
paper and repurchase agreements collateralized by US government securities do
not generally qualify for tax-free treatment. The rules on exclusion of this
income are different for corporations.
Dividends-Received Deduction For Corporations. Distributions from
Diversified Equity, Equity Income, Quantitative Equity, Real Estate Securities,
Special Growth, Tax-Managed Large Cap, Tax-Managed Small Cap, Equity I, Equity
II, Equity III and Equity Q Funds may qualify in part for the 70%
dividends-received deduction for corporations. The portion of the dividends so
qualified depends on the aggregate taxable qualifying dividend income received
by such Funds from domestic (US) sources. The Fund will send to shareholders
statements each year advising the amount of the dividend income which qualifies
for such treatment. All dividends, including those which qualify for the
dividends-received deduction, must be included in your alternative minimum
taxable income calculation.
Effect of Foreign Investments on Distributions. Most foreign exchange gains
realized on the sale of debt instruments are treated as ordinary income by Funds
which invest in foreign securities. Similarly, foreign exchange losses realized
by such Funds on the sale of debt instruments are generally treated as ordinary
losses. These gains when distributed will be taxable to you as ordinary
dividends, and any losses will reduce such Fund's ordinary income otherwise
available for distribution to you. This treatment could increase or reduce such
Fund's ordinary income distributions to you, and may cause some or all of such
Fund's previously distributed income to be classified as a return of capital.
The Funds may be subject to foreign withholding taxes on income from certain
of their foreign securities. If more than 50% of a Fund's total assets at the
end of the fiscal year are invested in securities of foreign corporations, such
Fund may elect to pass-through to you your pro rata share of foreign taxes paid
by the Fund. If this election is made, the year-end statement you receive from
the Fund will show more taxable income than was actually distributed to you.
However, you will be entitled to either deduct your share of such taxes in
computing your taxable income or claim a foreign tax credit for such taxes
against your US federal income tax. Each of these Funds will provide you with
the information necessary to complete your individual income tax return if such
election is made.
If a Fund invests in an entity that is classified as a "passive foreign
investment company" (a "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 to the Fund. Under the Code, a Fund
can elect to mark-to-market their PFIC holdings in lieu of paying taxes on gains
or distributions therefrom. In addition, Emerging Markets Fund may invest up to
10% of its total assets in the stock of foreign investment companies that may be
treated as 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, whether or not the
corresponding income is distributed to you. In this case, you would not be
permitted to claim a credit on your own tax return for the tax paid by the fund.
In some cases, 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 Emerging Markets 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 US has entered into tax treaties with many
foreign countries which may 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 assets invested
within various countries is not known.
Exempt Interest Dividends. The Tax Exempt Bond Fund and Tax Free Money
Market Fund do not intend to purchase any municipal obligations required, in the
opinion of bond counsel, to be treated as a preference item by shareholders when
determining their alternative minimum tax liability. Exempt income paid by the
Funds is includable in the tax base for determining the extent to which a
shareholder's Social Security or railroad retirement benefits will be subject to
federal income tax. The Code also provides that interest on indebtedness
incurred, or continued, to purchase or carry Tax Exempt Bond Fund and Tax Free
Money Market Fund shares, is not deductible; and that persons who are
"substantial users" (or persons related thereto) of facilities financed by
private activity 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 Tax Exempt Bond Fund or Tax Free Money Market Fund.
Investment in Complex Securities. The Funds may invest in complex
securities. Such investments may be subject to numerous special and complicated
tax rules. These rules could affect whether gains and losses recognized by a
Fund are treated as ordinary income or capital gain and/or accelerate the
recognition of income to a Fund or defer a Fund's ability to recognize losses.
In turn, these rules may affect the amount, timing or character of the income
distributed to you by a Fund.
From November 1, 1998 to December 31, 1998, the Real Estate Securities Fund,
Emerging Markets Fund, Special Growth Fund, Short Term Bond Fund, Money Market
Fund, US Government Money Market Fund, Tax Free Money Market Fund and the
Multistrategy Bond Fund incurred net realized capital losses of $2,518,944,
$14,723,700, $157,599, $5,555, $5,784, $545, $884 and $838,719, respectively. As
permitted by tax regulations, the Real Estate Securities Fund, Emerging Markets
Fund, Special Growth Fund, Short Term Bond Fund, Money Market Fund, US
Government Money Market Fund, Tax Free Money Market Fund and the Multistrategy
Bond Fund intend to elect to defer these losses and treat them as arising in the
year ending December 31, 1999.
At December 31, 1998, certain of the Funds had net tax basis capital loss
carryforwards which may be applied against any realized net taxable gains of
each succeeding year until their respective expiration dates, whichever occurs
first. Available capital loss carryforwards and expiration dates are as follows:
<TABLE>
<CAPTION>
FUND 12/31/99 12/31/2002 12/31/2003 12/31/2004 12/31/2005 12/31/2006 TOTALS
<S> <C> <C> <C> <C> <C> <C> <C>
Real Estate Securities -- -- -- -- -- $ 2,693,062 $ 2,693,062
Emerging Markets -- -- $2,887,175 $ 348,806 -- 56,335,864 59,571,845
Tax-Managed Large
Cap (formerly Equity T) -- -- -- -- -- 655,722 655,722
Short Term Bond -- $3,290,212 698,949 1,746,912 $574,853 -- 6,310,926
Tax Exempt Bond $383,404 345,504 110,634 15,075 -- 141,152 995,769
Money Market -- -- 41,009 814 -- 3,245 45,068
US Government -- 1,309 4,913 3,331 1,570 762 11,885
Money Market
Tax Free Money Market -- -- -- -- 1,583 4,102 5,685
International
Securities -- -- -- -- -- 2,107,743 2,107,743
</TABLE>
MONEY MANAGER INFORMATION
DIVERSIFIED EQUITY FUND
Alliance Capital Management L.P. 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. is an indirect, wholly
owned subsidiary of Barclays Bank PLC.
Equinox Capital Management, Inc. is a registered investment
adviser with majority ownership held by Ron Ulrich.
Jacobs Levy Equity Management, Inc. is 100% owned by Bruce
Jacobs and Kenneth Levy.
Lincoln Capital Management Company is a division of Lincoln Capital
Management Company, and is a registered investment adviser with majority
ownership held by Dave Flower, Jay Freedman, Parker Hall, Richard Knee, Ken
Meyer and Ray Zemon.
Marsico Capital Management, LLC is owned 50% by Marsico Management Holdings,
LLC and 50% by TFM Holdings, LLLP. Marsico Management Holdings is a wholly owned
subsidiary of NationsBank, N.A. that in turn is a wholly owned subsidiary of
Bank of America. TFM Holdings, LLLP is a Colorado limited liability limited
partnership whose sole general partner is TFM Managers, Inc. that is wholly
owned by Thomas F. Marsico.
Peachtree Asset Management is division of SSBC Fund Management
LLC. SSBC Fund Management is owned 100% by Salomon Smith Barney
Inc. which is a wholly owned subsidiary of Citigroup Inc.
Sanford C. Bernstein & Co., Inc. is a registered investment
adviser. 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.
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 is a corporation with seven
shareholders, with Stanford M. Calderwood holding majority ownership.
EQUITY INCOME FUND
Equinox Capital Management, Inc. See: Diversified Equity Fund.
Trinity Investment Management Corporation. See: Diversified
Equity Fund.
Westpeak Investment Advisors, L.P. is a registered investment
adviser that is directly controlled by Metropolitan Life
Insurance Company.
QUANTITATIVE EQUITY FUND
Barclays Global Fund Advisors. See: Diversified Equity Fund.
Franklin Portfolio Associates LLC is a Massachusetts business trust owned by
Mellon Financial Services Corporation, a holding company of Mellon Bank
Corporation.
J.P. Morgan Investment Management, Inc. is a wholly owned
subsidiary of J.P. Morgan & Co., Inc., a publicly held bank
holding company.
Jacobs Levy Equity Management, Inc. See: Diversified Equity
Fund.
INTERNATIONAL SECURITIES FUND
Delaware International Advisers Limited is an investment adviser whose
ultimate parent is Lincoln National Corporation, a publicly traded company.
Fidelity Management Trust Company is a bank, as defined in the Investment
Advisors Act of 1940, and is a wholly owned subsidiary of FMR Corp. Members of
the Edward C. Johnson 3rd family are predominant owners of a class of shares of
common stock representing approximately 49% of the voting power of FMR Corp.
J.P. Morgan Investment Management, Inc. See: Quantitative
Equity Fund.
Mastholm Asset Management, LLC is a Washington limited
liability company that is controlled by the following founding
members: Thomas M. Garr, Robert L. Gernstetter, Joseph P. Jordan,
Arthur M. Tyson and Theordore J. Tyson.
Montgomery Asset Management LLC is a Delaware limited liability company with
majority ownership held by Commerzbank AG, a foreign banking organization.
Oechsle International Advisors, LLC is a Delaware limited
liability company that is controlled by its member manager,
Oechsle Group, LLC a Delaware limited liability company. Oechsle
Group, LLC is controlled by the following members: S. Dewey
Keesler, Stephen P. Langer, L. Sean Roche and Warren R. Walker.
Sanford C. Bernstein & Co., Inc. See: Diversified Equity Fund.
The Boston Company Asset Management, Inc. is 100% owned by
Mellon Bank Corporation, a publicly held corporation.
DIVERSIFIED BOND FUND
Lincoln Capital Management Company. See: Diversified Equity
Fund.
Pacific Investment Management Company 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.'s ownership is divided among seventeen
directors, with no director having more than a 25% ownership interest.
MULTISTRATEGY BOND FUND
Credit Suisse Asset Management 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.
REAL ESTATE SECURITIES FUND
Cohen & Steers Capital Management 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. is a wholly owned affiliate of New England
Investment Companies, L.P. ("NEIC"). NEIC is a publicly held limited
partnership. Metropolitan Life Insurance Company, a publicly held corporation,
owns approximately 53% of NEIC. AEW Capital Management, Inc., a wholly owned
subsidiary of NEIC, is the general partner, and NEIC is the sole limited
partner, of AEW Capital Management, L.P.
EMERGING MARKETS FUND
Foreign & Colonial Emerging Markets Limited, an investment adviser
registered with the United Kingdom Investment Management Regulatory
Organisation, is a wholly owned subsidiary of Hypo Foreign & Colonial Management
(Holding) Limited ("HFCM"), the holding company of the Foreign & Colonial Group
of Fund managers which manages $40 billion worldwide. HFCM is controlled by
Bayerische Hypo-und Vereinsbank AG, the second largest commercial bank in
Germany.
Genesis Asset Managers, Ltd. 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. See: International
Securities Fund.
Nicholas-Applegate Capital Management is a California limited partnership
whose general partner is Nicholas-Applegate Capital Management Holdings, L.P., a
California limited partnership controlled by Nicholas-Applegate Capital
Management Holdings, Inc., a California corporation controlled by Arthur E.
Nicholas.
Sanford C. Bernstein & Co. Inc. See: Diversified Equity Fund.
Schroders Capital Management International Limited is 100% owned by
Schroders plc, which is publicly traded on the London Stock Exchange.
TAX-MANAGED LARGE CAP FUND
J.P. Morgan Investment Management Inc. See: Quantitative
Equity Fund.
TAX-MANAGED SMALL CAP FUND
Geewax, Terker & Company is a general partnership with its general partners,
John J. Geewax and Bruce E. Terker, each owning 50% of the firm. Money
management is the principal occupation of both.
SPECIAL GROWTH FUND
Delphi Management, Inc. is 100% owned by Scott Black.
Fiduciary International, Inc., 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. is a California limited partnership
and an SEC registered investment adviser. Its general partners
are Robert J. Anslow, Jr. and Marina L. Marrelli.
Jacobs Levy Equity Management, Inc. See: Diversified Equity
Fund.
Sirach Capital Management, Inc. is a wholly owned subsidiary
of United Asset Management Company, a publicly traded
corporation.
Wellington Management Company LLP 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.
Westpeak Investment Advisors, L.P. See: Equity Income Fund.
TAX EXEMPT BOND FUND
MFS Institutional Advisors, Inc. is a wholly owned, indirect
subsidiary of Sun Life Assurance Company of Canada (US), a mutual
insurance company.
Standish, Ayer & Wood, Inc. See: Diversified Bond Fund.
SHORT TERM BOND FUND
BlackRock Financial Management is a wholly owned indirect subsidiary of PNC
Bank.
Standish, Ayer & Wood, Inc. See: Diversified Bond Fund.
STW Fixed Income Management Ltd. is a Bermuda exempted
company. William H. Williams III is the sole shareholder.
MONEY MARKET FUND
Frank Russell Investment Management Company is a registered investment
adviser wholly owned by Frank Russell Company which is a subsidiary of The
Northwestern Mutual Life Insurance Company.
US GOVERNMENT MONEY MARKET FUND
Frank Russell Investment Management Company. See: Money Market
Fund.
TAX FREE MONEY MARKET FUND
Weiss, Peck & Greer, L.L.C. is a registered investment adviser
and a wholly owned subsidiary of Robeco Groep N.V.
EQUITY I FUND
Alliance Capital Management L.P. See: Diversified Equity
Fund.
Barclays Global Fund Advisors. See: Diversified Equity Fund.
Equinox Capital Management, Inc. See: Diversified Equity Fund.
Jacobs Levy Equity Management Inc. See: Diversified Equity
Fund.
Lincoln Capital Management Company. See: Diversified Equity
Fund.
Marsico Capital Management, LLC. See: Diversified Equity Fund
Peachtree Asset Management. See: Diversified Equity Fund.
Sanford C. Bernstein & Co., Inc. See: Diversified Equity Fund.
Suffolk Capital Management, Inc. See: Diversified Equity
Fund.
Trinity Investment Management Corporation. See: Diversified
Equity Fund.
EQUITY II FUND
Delphi Management, Inc. See: Special Growth Fund.
Fiduciary International, Inc. See: Special Growth Fund.
GlobeFlex Capital, L.P. See: Special Growth Fund.
Jacobs Levy Equity Management Inc. See: Diversified Equity
Fund.
Sirach Capital Management, Inc. See: Special Growth Fund.
Wellington Management Company LLP. See: Special Growth Fund.
Westpeak Investment Advisors, L.P. See: Equity Income Fund.
EQUITY III FUND
Equinox Capital Management, Inc. See: Diversified Equity Fund.
Trinity Investment Management Corporation. See: Diversified
Equity Fund.
Westpeak Investment Advisors, L.P. See: Equity Income Fund.
EQUITY Q FUND
Barclays Global Fund Advisors. See: Diversified Equity Fund.
Franklin Portfolio Associates LLC. See: Quantitative Equity
Fund.
J.P. Morgan Investment Management, Inc. See: Quantitative
Equity Fund.
Jacobs Levy Equity Management Inc. See: Diversified Equity
Fund.
INTERNATIONAL FUND
Delaware International Advisers Limited. See: International
Securities Fund.
Fidelity Management Trust Company. See: International
Securities Fund.
J.P. Morgan Investment Management, Inc. See: Quantitative
Equity Fund.
Mastholm Asset Management, LLC. See: International Securities
Fund.
Montgomery Asset Management, LLC. See: International
Securities Fund.
Oechsle International Advisors, LLC. See: International
Securities Fund.
Sanford C. Bernstein & Co., Inc. See: Diversified Equity Fund
The Boston Company Asset Management, Inc. See: International
Securities Fund.
FIXED INCOME I FUND
Lincoln Capital Management Company. See: Diversified Equity
Fund.
Pacific Investment Management Company. See: Diversified Bond
Fund.
Standish, Ayer & Wood, Inc. See: Diversified Bond Fund.
FIXED INCOME III FUND
Credit Suisse Asset Management. See: Multistrategy Bond Fund.
Pacific Investment Management Company. See: Diversified Bond
Fund.
Standish, Ayer & Wood, Inc. See: Diversified Bond Fund.
<PAGE>
RATINGS OF DEBT INSTRUMENTS
CORPORATE AND MUNICIPAL BOND RATINGS.
MOODY'S INVESTORS SERVICE, INC. (MOODY'S):
Aaa -- Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt-edge." Interest payments are protected by a large or exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other
elements present which make the long-term risks appear somewhat larger than
in Aaa securities.
A -- Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may
be present which suggest a susceptibility to impairment sometime in the
future.
Baa -- Bonds which are rated Baa are considered as medium-grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable
over any great period of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba -- Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during other good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or
maintenance of other terms of the contract over any long period of time may
be small.
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 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.
Symbols used are as follows:
MIG-1--Notes bearing this designation are of the best quality, enjoying
strong protection from established cash flows of funds for their servicing or
from established and broad-based access to the market for refinancing or
both.
MIG-2--Notes bearing this designation are of high quality, with margins of
protection ample although not so large as in the preceding group.
S&P:
A S&P note rating, reflects the liquidity concerns and market access risks
unique to notes. Notes due in 3 years or less will likely receive a note
rating. Notes maturing beyond 3 years will most likely receive a long-term
debt rating. The following criteria will be used in making that assessment:
-- Amortization schedule (the larger the final maturity relative to
other maturities, the more likely it will be treated as a note).
-- Source of payment (the more dependent the issue is on the market for
its refinancing, the more likely it will be treated as a note).
Note rating symbols are as follows:
SP-1--Very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics will be
given a plus (+) designation.
SP-2--Satisfactory capacity to pay principal and interest.
S&P assigns "dual" ratings to all long-term debt issues that have as part
of their provisions a variable rate demand or double feature.
The first rating addresses the likelihood of repayment of principal and
interest as due, and the second rating, addresses only the demand feature.
The long-term debt rating symbols are used to denote the put option (for
example, "AAA/A-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, 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.
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 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- 1 +' and 'F- 1' ratings.
F-3 -- Fair credit quality. Issues assigned this rating have characteristics
suggesting that the degree of assurance for timely payment is adequate,
however, near-term adverse changes could cause these securities to be rated
below investment grade.
F-5 -- Weak credit quality. Issues assigned this rating have characteristics
suggesting a minimal degree of assurance for timely payment and are
vulnerable to near-term adverse changes in financial and economic conditions.
D -- Default. Issues assigned this rating are in actual or imminent payment
default.
THOMSON BANKWATCH ("TBW") SHORT-TERM RATINGS:
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-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 1998 annual financial statements of the Funds, including notes to the
financial statements and financial highlights and the Report of Independent
Accountants, are included in FRIC's Annual Reports to Shareholders. Copies of
these Annual Reports accompany this Statement of Additional Information and are
incorporated herein by reference.
<PAGE>
GLOSSARY
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"). ECDs are dollar denominated certificates of deposit issued by foreign
branches of US and foreign banks; ETDs are US dollar denominated time deposits
in a foreign branch of a US bank or a foreign bank; and Yankee CDs are
certificates of deposit issued by a US branch of a foreign bank demonimated is
US dollars and held in the United States.
Brady Bonds -- Product of the "Brady Plan," under which bonds are issued in
exchange for cash and certain of the country's outstanding commercial bank
loans.
Board -- The Board of Trustees of FRIC.
Cash reserves -- The Funds, other than the Money Market Funds, are 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 of comparable 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 FRIC's
Money Market Fund. To prevent duplication of fees, FRIMCo waives its management
fee on that portion of a Fund's assets invested in FRIC'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, FRIC's custodian and
portfolio accountant.
Depository receipts -- These include American Depository Receipts ("ADRs"),
European Depository Receipts, Global Depository Receipts, 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 US 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 US government and foreign government
securities and currencies.
Distributor -- Russell Fund Distributors, Inc., the organization that sells
the shares of the Funds under a contract with FRIC.
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 been selected by FRIMCo or by FRIC's Distributor, and
institutions or individuals who have acquired Fund shares through such
institutions or Financial Intermediaries, and trustees, officers, employees and
certain third-party contractors of FRIC and its affiliates and their spouses and
children.
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 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 -- A bank trust department, registered investment
adviser, broker-dealer or other financial services organization that has been
selected by FRIMCo or by FRIC's Distributor.
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. The 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 a 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 US 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 US
dollar, the Fund 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. A 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
a Fund from adverse currency movements, they involve the risk that currency
movements will not be accurately predicted.
FRIC -- Frank Russell Investment Company, an open-end management investment
company which is registered with the SEC
FRIMCo -- Frank Russell Investment Management Company, FRIC's administrator,
manager and transfer and dividend paying agent.
Funds -- The 32 investment series of FRIC. 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.
Futures and options on futures -- An interest rate futures contract is an
agreement to purchase or sell debt securities, usually US 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, other than the Money Market 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 -- Each Fund, other than each Money Market 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), US government or US government
agency obligations as collateral in an amount equal to at least 102% (for loans
of US securities) or 105% (for non-US 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,
Equity Income, Quantitative Equity, International Securities, Real Estate
Securities, Emerging Markets, Special Growth, Tax-Managed Large Cap, 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, US Government Money Market and Tax-Free
Money Market Funds, each a Fund of FRIC. 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
US government or fully collateralized by US government obligations; industrial
development bonds; and variable rate obligations.
NASD -- National Association of Securities Dealers, Inc.
Net asset value (NAV) -- The value of a 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 US
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 US banks on loans to their
most creditworthy customers
REITs -- Real estate investment trusts
Repurchase agreements -- A 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 -- A 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 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 FRIC and to the
Funds
S&P -- Standard & Poor's Ratings Group, an NRSRO
S&P 500 -- Standard & Poor's 500 Composite Price Index
SAI -- FRIC's Statement of Additional Information.
SEC -- US Securities and Exchange Commission
Shares -- The Class Shares in the Funds described in the Prospectuses. Each
Class Share of a Fund represents a share of beneficial interest in the Fund.
Transfer Agent -- FRIMCo, in its capacity as FRIC's transfer and
dividend paying agent
US -- United States
US government obligations -- These include US Treasury bills, notes, bonds
and other obligations issued or guaranteed by the US government, its agencies or
instrumentalities. US Treasury bills, notes and bonds, and GNMA participation
certificates, are issued or guaranteed by the US government. Other securities
issued by US 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 US Treasury.
Variable amount demands master notes -- These notes represent borrowing
arrangements between commercial paper issuers and institutional lenders, such as
the Funds.
Variable rate obligation -- 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 FRIC and the Funds.
1933 Act -- The Securities Act of 1933, as amended.
FRANK RUSSELL INVESTMENT COMPANY
909 A Street
Tacoma, Washington 98402
Telephone (800) 972-0700
In Washington (253) 627-7001
LIFEPOINTS(R) FUNDS AND
LIFEPOINTS TAX-MANAGED FUNDS
STATEMENT OF ADDITIONAL INFORMATION
December 1, 1999
Frank Russell Investment Company ("FRIC") is a single legal entity organized
as a Massachusetts business trust. FRIC operates investment portfolios referred
to as "Funds." FRIC offers shares of beneficial interest in the Funds in
multiple separate prospectuses.
This Statement of Additional Information ("Statement" or "SAI") describes the
Class C, Class D and Class E Shares of the LifePoints Funds and the Class C and
Class S Shares of the LifePoints Tax-Managed Funds listed below (the "Fund of
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.
FUND INCEPTION DATE PROSPECTUS DATE
LifePoints Funds
Equity Aggressive Strategy September 30, December 1, 1999
Fund* 1997
Aggressive Strategy Fund September 16, December 1, 1999
1997
Balanced Strategy Fund September 16, December 1, 1999
1997
Moderate Strategy Fund October 2, 1997 December 1, 1999
Conservative Strategy Fund November 7, 1997 December 1, 1999
LifePoints Tax-Managed Funds
Tax-Managed Equity Aggressive January 1, 2000 December 1, 1999
Strategy Fund
Tax-Managed Aggressive Strategy January 1, 2000 December 1, 1999
Fund
Tax-Managed Moderate Strategy January 1, 2000 December 1, 1999
Fund
Tax-Managed Conservative January 1, 2000 December 1, 1999
Strategy Fund
* Prior to May 1, 1999, this Fund was known as Equity Balanced Strategy
Fund.
The Underlying Funds in which the Fund of Funds currently invest commenced
operations on the dates indicated below:
FUND INCEPTION DATE
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
Short Term Bond Fund October 30, 1981
Multistrategy Bond Fund January 29, 1993
Real Estate Securities Fund July 28, 1989
Emerging Markets Fund January 29, 1993
Tax-Managed Large Cap Fund (formerly October 7, 1996
Equity T Fund)
Tax-Managed Small Cap Fund December 1, 1999
Tax Exempt Bond Fund September 5, 1985
Tax Free Money Market Fund May 8, 1987
The LifePoints Funds had aggregate net assets of approximately $647 million
on August 16, 1999. The LifePoints Tax-Managed Funds did not commence operations
prior to the date of this Statement of Additional Information.
This Statement is not a Prospectus; the Statement should be read in
conjunction with the LifePoints Funds' and the LifePoints Tax-Managed Funds'
Prospectuses, which may be obtained without charge by telephoning or writing
FRIC 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 LifePoints Funds Annual Report
to Shareholders for the year ended December 31, 1998 and the LifePoints Funds'
Semi-Annual Report to Shareholders for the period ended June 30, 1999. Copies of
the LifePoints Funds' Annual Report and Semi-Annual Report accompany this
Statement. The LifePoints Tax-Managed Funds did not commence operations prior to
the date of this Statement of Additional Information and therefore have not yet
issued an Annual Report to shareholders.
<PAGE>
TABLE OF CONTENTS
CERTAIN TERMS USED IN THIS STATEMENT OF ADDITIONAL INFORMATION ARE
DEFINED IN THE
GLOSSARY, WHICH BEGINS ON PAGE 51
Page
STRUCTURE AND GOVERNANCE........................................
Organization and Business History...........................
Shareholder Meetings........................................
Controlling Shareholders....................................
Trustees and Officers.......................................
OPERATION OF THE TRUST..........................................
Service Providers...........................................
Consultant..................................................
Advisor and Administrator...................................
Money Managers..............................................
Distributor.................................................
Custodian...................................................
Transfer and Dividend Disbursing Agent......................
Order Placement Designees...................................
Independent Accountants.....................................
Plan Pursuant to Rule 18f-3.................................
Distribution Plan...........................................
Shareholder Services Plan...................................
Underlying Fund Expenses....................................
Fund of Funds Operating Expenses............................
Valuation of the Fund of Fund Shares.......................
Pricing of Securities.......................................
Portfolio Turnover Rates of the Fund of Funds...............
Portfolio Transaction Policies of the Underlying Funds......
Brokerage Allocations.......................................
Brokerage Commissions.......................................
Yield and Total Return Quotations...........................
INVESTMENT RESTRICTIONS, POLICIES AND PRACTICES OF THE FUNDS OF
FUNDS...........................................................
Investment Restrictions.....................................
Investment Policies and Practices of the Funds of Funds.....
INVESTMENT POLICIES OF THE UNDERLYING FUNDS.....................
TAXES...........................................................
MONEY MANAGER INFORMATION FOR UNDERLYING FUNDS..................
RATINGS OF DEBT INSTRUMENTS.....................................
GLOSSARY........................................................
<PAGE>
STRUCTURE AND GOVERNANCE
ORGANIZATION AND BUSINESS HISTORY. FRIC commenced business operations as a
Maryland corporation in October 1981. On January 2, 1985, FRIC reorganized by
changing its domicile and legal status to a Massachusetts business trust.
FRIC is currently organized and operating 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 FRIC
as a whole, or shareholders of a particular Fund, must be approved by the
holders of a majority of the shares of FRIC or the Fund, respectively.
FRIC 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." Each Fund is a
separate trust under Massachusetts law. 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.
FRIC 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 $0.01 per
share, are fully paid and nonassessable, and have no preemptive or conversion
rights. 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 class of Shares is designed to meet
different investor needs. Each of the LifePoints Funds described in this
Statement offers shares of beneficial interest in the Class C, Class D, Class E
and Class S Shares. The Class C, Class D and Class E Shares are 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%) and the
Class C Shares are subject to a 0.75% Rule 12b-1 fee. Each of the LifePoints
Tax-Managed Funds described in this statement offers shares of beneficial
interest in the Class C and Class S Shares. The Class C Shares are subject to a
shareholder servicing fee of up to .25% and a Rule 12b-1 fee of .75%. Unless
otherwise indicated, "shares" in this Statement refers to the Class C, Class D
and Class E Shares of the LifePoints Funds and Class C and Class S Shares of the
LifePoints Tax-Managed 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 FRIC 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.
Frank Russell Company has the right to grant (and withdraw) the nonexclusive
use of the name "Frank Russell" or any variation.
SHAREHOLDER MEETINGS. FRIC will not hold annual meetings of shareholders, but
special meetings may be held. Special meetings may be convened (i) by 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.
Each shares of a class of a Fund has one vote in Trustee elections and other
matters submitted for shareholder vote. On any matter which affects only a
particular Fund or class, only shares of that Fund or class are entitled to
vote. There are no cumulative voting rights.
CONTROLLING SHAREHOLDERS. The Trustees have the authority and responsibility
to manage the business of FRIC, and hold office for life unless they resign or
are removed by, in substance, a vote of two-thirds of FRIC shares outstanding.
Under these circumstances, no one person, entity or shareholder "controls" FRIC.
The following shareholders owned 5% or more of the voting shares of FRIC or
of the Funds at August 16, 1999:
Aggressive Strategy - Class D: Columbus Circle Trust Co., 1 station Place
Metro Center, Stamford, CT 06902, 6.24%, record; Levin, Ford & Paulekas, LLP,
401(k) Plan, One State St., Hartford, CT 06103-3100, 9.76%, record; Webster
Trust Co. TTEE, For Beecher & Bennett 401(k) PSP, Attn: Christopher Rand, 346
Main St., Kensington, CT 06037-2652, 12.43%, record; Rosen Enterprises, Inc.
401(k), Retirement Savings Plan, 7 Taylor Rd., Enfield, CT 06082-4001, 9.71%,
record; Standard-Knapp, Inc., Profit Sharing & Savings Plan, 127 Main St.,
Portland, CT 064810-1860, 12.93%, record; Maltrust & Co., c/o Eastern Bank &
Trust AM & M, Attn: Retirement Plan Services 3rd Floor, 217 Essex St., Salem, MA
01970-3728, 48.54%, record.
Aggressive Strategy - Class E: Charles Schwab & Co., Inc., Special Custody
Account for the Exclusive Benefit of Customers, Attn: Mutual Funds, 101
Montgomery St., San Francisco, CA 94104-4122, 8.57%, record.Board of Pensions of
the Church of God Inc. TTEES, Church of God Pension Plan, Attn: Doug Hamlin, PO
Box 2559, Anderson, IN 46018-2559, 11.91%, record.
Aggressive Strategy Fund - Class C: Center for Digestive Health Inc., 401(k)
Profit Sharing Plan, Neil A. Jacobson TTEE, FBO Richard P. Rood, 155 Valencia
Circle, Orange Village, OH 44022-1562, 5.29%, record; Center for Digestive
Health Inc., 401(k) PSP, Neil A. Jacobson, TTEE, FBO Neil A Jacobson, 30949
Gates Mills Boulevard, Pepper Pike OH 44124-4358, 9.46%, record.
Equity Aggressive Strategy - Class D: Maltrust & Co., c/o Eastern Bank &
Trust AM & M, Attn: Retirement Plan Services 3rd Floor, 217 Essex St., Salem, MA
01970-3728, 16.60%, record; Hall Estill PSP & 401(k) Plan, c/o Bank of Oklahoma,
Attn: Paula Jackson, PO Box 880, Tulsa, OK 74101-0880, 11.40%, record; Investors
Bank & Trust Co., c/o Diversified Investment Adv. Inc., Attn: Transfer Agency
Group, 4 Manhattanville Rd., Purchase, NY 10577-2119, 65.17%, record.
Equity Aggressive Strategy - Class E: Board of Pensions of the Church of God
Inc. TTEES, Church of God Pension Plan, Attn: Doug Hamlin, PO Box 2559,
Anderson, IN 46018-2559, 8.30%, record; Charles Schwab & Co., Inc., Special
Custody Account for the Exclusive Benefit of Customers, Attn: Mutual Funds, 101
Montgomery Street, San Francisco, CA 94104-4122, 10.37%, record; ; E
Entertainment Television Inc., Keysop FBO Jarl Mohn SARS, 1418 Monte Grande Pl.,
Pacific Palisades, CA 90272-1913, 12.84%, record;Capinco/Sargento Firstar Trust
Company FBO Sargento, Attn: Income/Mutual Funds Dept., PO Box 1787, Milwaukee,
WI 53201-1787, 22.98%, record.
Equity Aggressive Strategy Fund - Class C: Timothy McCormick 403 (b), 71
Misty Pine Rd., Fairport, NY 14450-2656, 16.56%, record; Center for Digestive
Health Inc., 401(k) PSP, Neil A. Jacobson, TTEE, FBO Neil A. Jacobson, 30949
Gates Mills Boulevard, Pepper Pike, OH 44124-4358, 20.15%, record.
Conservative Strategy - Class D: Webster Trust Co. TTEE, For Beecher &
Bennett 401(k) PSP, Attn: Christopher Rand, 346 Main St., Kensington, CT
06037-2652, 7.08%, record; Hall Estill PSP & 401(k) Plan, c/o Bank of Oklahoma,
Attn: Paula Jackson, PO Box 880, Tulsa, OK 74101-0880, 18.98%, record; Maltrust
& Co., c/o Eastern Bank & Trust AM & M, Attn: Retirement Plan Services 3rd
Floor, 217 Essex St., Salem, MA 01970-3728, 69.19%, record.
Conservative Strategy - Class E: E Entertainment Television Inc., Keysop, FBO
David T Cassaro Sars, 75 Brook St., Garden City, NY, 11530-6312, 7.26%, record;
FTC & Co. Datalynx # T03, FBO Wesleyan Pension Plan 403 (b), PO Box 173736,
Denver, CO 80217-3736, 9.13%, record; Charles Schwab & Co., Inc., Special
Custody Account for the Exclusive Benefit of Customers, Attn: Mutual Funds, 101
Montgomery St., San Francisco, CA 94104-4122, 9.94%, record; Board of Pensions
of the Church of God Inc. TTEES, Church of God Pension Plan, Attn: Doug Hamlin,
PO Box 2559, Anderson, IN 46018-2559, 15.14%, record.
Conservative Strategy - Class C: State Street Bank & Trust Co., Cust. for the
IRA of FBO Gordon Paquin, P.O. Box 60, Elwood, IN 46036-0060, 5.10%, record;
Donaldson Lufkin Jenrette Securities Corporation, Inc., P.O. Box 2052, Jersey
City, NJ 07303-2052, 8.36%, record; Martin Ryan & Frank Kenny Trustees, Ryan
Engineering Inc., 141 S. Maple Ave., San Fransisco, CA 94080-6303, 8.59%,
record; Donaldson Lufkin Jenrett Securities Corporation, Inc., P.O. Box 2052,
Jersey City, NJ 07303-2052, 8.63%, record; State Street Bank & Trust Co., Cust.
for the IRA of FBO Yik Lau Lip, 1024 E. 53rd Street, Anderson, IN 46013-2814,
9.95%, record; Alan E. Potter, Madeline E. Potter JT TEN, 448 Edgetree Dr.,
Murrysville, PA 15668-1203, 12.11%, record; Keneth Myers Trustee, Stan Karteeni
Living Trust, UA dated 06/14/1991, P.O. Box 322, Sweetser, IN 46987-0322,
14.54%, record; Marie I. Latendresse, c/o St. Joseph Ctr., 1440 W. Division Rd.,
Tipton, IN 46072-8584, 19.19%, record.
Moderate Strategy - Class D: Rosen Enterprises Inc., 401(k) Retirement
Savings Plan, 7 Taylor Rd., Enfield, CT 06082-4001, 5.51%, record; Hall Estill
PSP & 401(k) Plan, c/o Bank of Oklahoma, attn: Paula Jackson, P.O. Box, Tulsa,
OK 74101-0880, 19.31%, record; Maltrust & Co., c/o Eastern Bank & Trust AM & M,
Attn: Retirement Plan Services 3rd Floor, 217 Essex St., Salem, MA 01970-3728,
70.06%, record.
Moderate Strategy - Class E: Charles Schwab & Co., Inc., Special Custody
Account for the Exclusive Benefit of Customers, Attn: Mutual Funds, 101
Montgomery St., San Francisco, CA 94104-4122, 9.79%, record; FTC & Co. Datalynx
# T03, FBO Wesleyan Pension Plan 403 (b), PO Box 173736, Denver, CO 80217-3736,
12.35%, record;Board of Pensions of the Church of God Inc. TTEES, Church of God
Pension Plan, Attn: Doug Hamlin, PO Box 2559, Anderson, IN 46018-2559, 24.64%,
record.
Moderate Strategy Fund - Class C: State Street Bank & Trust Co., Cust. For
the Rollover IRA of Eleanor M. Kawka, 40 Wanda St., Rochester, NY 14621-2418,
8.30%, record; State Street Bank & Trust Co., Cust. for the Rollover IRA of
Connie P Johnson, 575 Post Ave., Rochester, NY 14619-2060, 5.41%, record;
Painewebber for the Benefit of Painewebber CDN FBO Irene Collins, PO Box 3321,
Weehawken, NJ 07087-8154, 5.23%, record. Marian A. Cuthbert, 11905 Castelgate
Ct., Rockville, MD 20852-4895, 11.45%, record.
Balanced Strategy - Class D: Webster Trust Co. TTEE, For Beecher & Bennett
401(k) PSP, Attn: Christopher Rand, 346 Main St., Kensington, CT 06037-2652,
9.65%, record; Rosen Enterprises Inc. 401(k), Retirement Savings Plan, 7 Taylor
Rd., Enfield CT 06082-4001, 8.10%, record; Maltrust & Co., c/o Eastern Bank &
Trust AM & M, Attn: Retirement Plan Services 3rd Floor, 217 Essex St., Salem, MA
01970-3728, 58.47%, record.
Balanced Strategy - Class E: Charles Schwab & Co., Inc., Special Custody
Account for the Exclusive Benefit of Customers, Attn: Mutual Funds, 101
Montgomery St., San Francisco, CA 94104-4122, 6.59%, record; Board of Pensions
of the Church of God Inc. TTEES, Church of God Pension Plan, Attn: Doug Hamlin,
PO Box 2559, Anderson, IN 46018-2559, 8.51%, record; Capinco/Sargento Firstar
Trust Company FBO Sargento, Attn: Income/Mutual Funds Dept., PO Box 1787,
Milwaukee, WI 53201-1787, 9.23%, record; Board of Pensions of the Church of God
Inc. TTEES, Church of God Pension Plan-Annuity, Attn: Doug Hamlin, PO Box 2559,
Anderson, IN 46018-2559, 21.78%, record.
Balanced Strategy Fund - Class C: James B. King DDS Profit Sharing Plan, FBO
James B. King, 1580 Elwood Ave., Rochester, NY 14620-3620, 6.76%, record; James
Deascentis, 5603 Cooper Road, Westerville, OH 43081, 5.14%, record; Joan B.
Leech, 732 S. Park, Neenah, WI 54956-3448, 7.53%, record.
At August 16, 1999 the following shareholders could be deemed by the 1940 Act
to "control" the indicated Fund because such shareholder owns more than 25% of
the voting shares of the indicated Fund:
Aggressive Strategy - Class D: Maltrust & Co., c/o Eastern Bank &
Trust AM & M, Attn: Retirement Plan Services 3rd Floor, 217 Essex
St., Salem, MA 01970-3728, 48.54%, record.
Equity Aggressive Strategy - Class D: Investors Bank & Trust Co.,
c/o Diversified Investment Adv. Inc., Attn: Transfer Agency Group, 4
Manhattanville Rd., Purchase, NY 10577-2119, 65.17%, record.
Conservative Strategy - Class D: Maltrust & Co., c/o Eastern Bank
& Trust AM & M, Attn: Retirement Plan Services 3rd Floor, 217 Essex
St., Salem, MA 01970-3728, 69.19%, record.
Moderate Strategy - Class D: Maltrust & Co., c/o Eastern Bank &
Trust AM & M, Attn: Retirement Plan Services 3rd Floor, 217 Essex
St., Salem, MA 01970-3728, 70.06%, record.
Balanced Strategy - Class D: Maltrust & Co., c/o Eastern Bank &
Trust AM & M, Attn: Retirement Plan Services 3rd Floor, 217 Essex
St., Salem, MA 01970-3728, 58.47%, record.
For information in this regard with respect to the Underlying Funds, refer to
the Statement of Additional Information for the Underlying Funds.
The Trustees and officers of FRIC, as a group, own less than 1% of any Class of
each Fund.
TRUSTEES AND OFFICERS. The Board of Trustees is responsible for overseeing
generally the operation of the Funds, including reviewing and approving the
Funds' contracts with Frank Russell Investment Management Company ("FRIMCo"),
Frank Russell Company ("Russell") and the money managers. A Trustee may be
removed at any time by, in substance, a vote of two-thirds of FRIC 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.
FRIC paid $100,000 in the aggregate for the year ended December 31, 1998 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. FRIC's officers and employees are paid by FRIMCo or
its affiliates.
The following lists contains the Trustees and officers and their positions
with FRIC, their ages, their present and principal occupations during the past
five years and the mailing addresses of Trustees who are not affiliated with
FRIC. The mailing address for all Trustees and officers affiliated with FRIC is
Frank Russell Investment Company, 909 A Street, Tacoma, WA 98402.
An asterisk (*) indicates that the Trustee or officer is an "interested
person" of FRIC 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.--Born 07/03/32--December 1998 to present, Trustee
Emeritus and Chairman of the Board. Trustee Emeritus and Chairman of the Board,
Russell Insurance Funds; Director, Chairman of the Board and Chief Executive
Officer, Russell Building Management Company, Inc.; Director and Chairman of the
Board, Frank Russell Company, Frank Russell Investments (Delaware), Inc.;
Trustee Emeritus, Frank Russell Trust Company; Chairman Emeritus, Frank Russell
Securities, Inc.; Director Emeritus, Frank Russell Investment Management
Company; Director, Chairman of the Board and President, Russell 20/20
Association. From 1984 to December 1998, Trustee of FRIC. From August 1996 to
December 1998, Trustee of Russell Insurance Funds.
*Lynn L. Anderson--Born 04/22/39--Trustee, President and Chief Executive Officer
since 1987. Trustee, President and Chief Executive Officer, Russell Insurance
Funds; Director, Chief Executive Officer and Chairman of the Board, Russell Fund
Distributors, Inc.; Trustee, Chairman of the Board 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 of the
Board, Frank Russell Investment Company PLC; Director, Frank Russell Investments
(Ireland) Limited, Frank Russell Investments (Cayman) Ltd. and Frank Russell
Investments (UK) Ltd.; March 1997 to December 1998, Director, Frank Russell
Company; June 1993 to November 1995, Director, Frank Russell Company. Until
September 1994, Director and President, The Laurel Funds, Inc.
(investment company).
Paul E. Anderson--Born 10/15/31--Trustee since 1984. 23 Forest Glen Lane,
Tacoma, Washington 98409. Trustee, Russell Insurance Funds; 1996 to Present,
President, Anderson Management Group LLC. 1984 to 1996, President, Vancouver
Door Company, Inc.
Paul Anton, Ph.D.--Born 12/01/19--Trustee since 1985. PO Box 212, 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--Born 06/08/25--Trustee since 1984. 800 North C Street,
Tacoma, Washington 98403. Trustee, Russell Insurance Funds, Retired.
Lee C. Gingrich--Born 10/06/30--Trustee since 1984. 1730 North Jackson, Tacoma,
Washington 98406. Trustee, Russell Insurance Funds. President, Gingrich
Enterprises, Inc. (Business and Property Management).
Eleanor W. Palmer--Born 05/05/26--Trustee since 1984. 2025 Narrows View Circle
#232-D, P.O. Box 1057, Gig Harbor, Washington 98335. Trustee, Russell Insurance
Funds; Director of Frank Russell Trust Company.
*Mark E. Swanson--Born 11/26/63--Treasurer and Chief Accounting Officer since
1998, Treasurer and Chief Accounting Officer, Russell Insurance Funds, Interim
Director, Finance and Operations, Frank Russell Trust Company; Senior Vice
President and Assistant Fund Treasurer, SSgA Funds (investment company); Interim
Director of Fund Administration and Accounting, Frank Russell Investment
Management Company; Manager, Funds Accounting and Taxes, Russell Fund
Distributors, Inc. April 1996 to August 1998, Assistant Treasurer, Frank Russell
Investment Company; August 1996 to August 1998, Assistant Treasurer, Russell
Insurance Funds, November 1995 to July 1998, Assistant Secretary, the SSgA
Funds, February 1997 to July 1998, Director, Funds Accounting and Taxes, Frank
Russell Investment Management Company.
*Randall P. Lert--Born 10/03/53--Director of Investments since 1991. 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. Director-Futures Trading,
Frank Russell Investments (Ireland) Limited and Frank Russell Investments
(Cayman) Ltd., Senior Vice President and Director of Portfolio Trading, Frank
Russell Canada Limited/Limitee. April 1990 to November 1995, Director of
Investments of Frank Russell Investment Management Company.
*Karl J. Ege--Born 10/08/41--Secretary and General Counsel since 1994. Secretary
and General Counsel of Russell Insurance Funds. Director, Secretary and General
Counsel, Russell Fiduciary Services Co., Frank Russell Capital, Inc.; 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 Inc.,
Russell MLC Management Co., Russell International Services Co., Inc. and Russell
20-20 Association; Director and Assistant Secretary of Frank Russell Company
Limited (London) and Russell Systems Ltd.; Director, Frank Russell Investment
Company LLC, Frank Russell Investments (Cayman) Ltd., Frank Russell Investment
Company PLC, Frank Russell Investments (Ireland) Limited, Frank Russell Company
S.A., Frank Russell Japan Co. Ltd., Frank Russell Company (NZ) Limited, Russell
Investment Nominee Co PTY Ltd and Frank Russell Investments (UK) Ltd.; From
November 1995 to February 1997, Director and Secretary, Frank Russell
Investments (Delaware), Inc.; July 1992 to June 1994, Director, President and
Secretary of Frank Russell Shelf Corporation; April 1992 to December, 1998,
Director, Frank Russell Company.
*Peter F. Apanovitch--Born 05/03/45--Manager of Short-Term Investment
Funds. Manager of Short-Term Investment Funds, Russell Insurance
Funds, Frank Russell Investment Management Company and Frank Russell
Trust Company.
<PAGE>
TRUSTEE COMPENSATION TABLE
TOTAL
AGGREGATE PENSION OR COMPENSATION
COMPENSATION RETIREMENT ESTIMATED FROM THE
FROM THE BENEFITS ANNUAL BENEFITS INVESTMENT
INVESTMENT ACCRUED AS UPON COMPANY PAID
TRUSTEE COMPANY PART OF RETIREMENT TO TRUSTEES*
THE INVESTMENT
COMPANY
EXPENSES
Lynn L. Anderson $0 $0 $0 $0
Paul E. Anderson $20,000 $0 $0 $28,062
Paul Anton, PhD $20,000 $0 $0 $28,062
William E. $20,000 $0 $0 $28,062
Baxter
Lee C. Gingrich $20,000 $0 $0 $28,062
Eleanor W. $20,000 $0 $0 $28,062
Palmer
* The Trustees received $8,062 for service on the Russell Insurance Funds' Board
of Trustees.
OPERATION OF THE TRUST
SERVICE PROVIDERS. Most of FRIC's necessary day-to-day operations
are performed by separate business organizations under contract to
FRIC. The principal service providers are:
Consultant Frank Russell Company
Advisor, Administrator, Transfer and Frank Russell
Investment Management Company
Dividend Disbursing Agent
Money Managers for the Multiple professional discretionary
Underlying Funds investment management
organizations
Custodian and Portfolio Accountant State Street Bank and Trust
Company
CONSULTANT. Frank Russell Company, the corporate parent of FRIMCo, was
responsible for organizing FRIC and provides ongoing consulting services,
described in the Prospectus, to FRIC 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 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
As affiliates, Frank Russell Company and FRIMCo may establish certain
intercompany cost allocations that reflect the consulting services supplied to
FRIMCo. George F. Russell, Jr., Trustee Emeritus and Chairman of FRIC, is the
Chairman of the Board of Russell. FRIMCo is a wholly owned subsidiary of
Russell.
Russell is a subsidiary of The Northwestern Mutual Life Insurance Company
("Northwestern Mutual"). Founded in 1857, Northwestern Mutual is a mutual
insurance corporation organized under the laws of Wisconsin. Northwestern
Mutual's products consist of a full range of permanent and term life insurance,
disability income insurance, long-term care insurance, mutual funds and
annuities for personal, estate, retirement, business, and benefits planning.
Northwestern Mutual provides its insurance products and services through an
exclusive network of approximately 7,200 agents associated with over 100 general
agencies nationwide. Northwestern Mutual leads the U.S. in both individual life
insurance sold annually and total individual life insurance in force.
ADVISOR AND ADMINISTRATOR. FRIMCo provides or oversees the provision of all
general management and administration, investment advisory and portfolio
management, and distribution services for the Funds. Prior to December 1, 1998,
FRIMCo provided advisory and administrative services to the Funds pursuant to
one Management Agreement for which Frank Russell Investment Company paid a
single fee. Effective December 1, 1998, FRIMCo's advisory and administrative
services are provided under separate agreements. 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
FRIC's transfer agent and dividend disbursing agent. FRIMCo, as agent for FRIC,
pays the money managers' fees for the Underlying Funds, as a fiduciary for the
Underlying Funds, out of the advisory fee paid by the Underlying Funds to
FRIMCo. The remainder of the advisory fee is retained by FRIMCo as compensation
for the services described above and to pay expenses.
Each of the Funds incurs an annual advisory fee and an annual administrative
fee payable 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.
Services which are administrative in nature are provided by FRIMCo pursuant to
an Administrative Agreement for a fee of 0.05% of each Fund's average daily net
asset value. (See the Prospectuses for the Underlying Funds' annual percentage
rates.)
The following LifePoints Funds paid FRIMCo the listed management (or
advisory) fees for the years ended December 31, 1998 and 1997, representing the
fee paid for both advisory and administrative services.
LifePoints Funds 12/31/98* 12/31/97**
Equity Aggressive Fund $151,953 $1,140
Aggressive Strategy Fund 96,256 1,727
Balanced Strategy Fund 277,200 1,187
Moderate Strategy Fund 30,361 151
Conservative Strategy Fund 6,465 8
* The LifePoints Tax-Managed Funds had not commenced operations prior to the
date of this Statement of Additional Information.
** The LifePoints Funds commenced operations during calendar year 1997 and
therefore incurred management fees due to FRIMCo for only a portion of the
year 1997. However, FRIMCo voluntarily agreed to waive its management fee
(including its advisory and administrative fees) during the years ended
December 31, 1998 and December 31, 1997.
While FRIMCo will perform investment advisory services for the Fund of Funds
(i.e., determining the percentages of the Underlying Funds which will be
purchased by each Fund of Funds, and periodically adjusting the percentages and
the Underlying Funds), FRIMCo has waived its management, advisory and
administrative fees since the LifePoints Funds' inception and has contractually
agreed to continue this waiver through April 30, 2000. FRIMCo has contractually
agreed to waive its aggregate 0.20% advisory fee for the LifePoints Tax-Managed
Funds through November 30, 2000 but may terminate its waiver at anytime
thereafter without notice to shareholders. Advisory fees do not vary among
classes of shares. For the fiscal years ended December 31, 1998 and 1997,
respectively, each LifePoints Fund waived the following amounts: Equity
Aggressive Strategy Fund: $151,953 and $1,140; Aggressive Strategy Fund: $96,256
and $1,727; Balanced Strategy Fund: $277,200 and $1,187; Moderate Strategy Fund:
$30,361 and $151; and Conservative Strategy Fund: $6,465 and $8. The LifePoints
Tax-Managed Funds had not commenced operations prior to the date of this
Statement of Additional Information. Each of the Fund of Funds will indirectly
bear their proportionate share of the combined advisory and administrative fees
paid by the Underlying Funds in which they invest. While a shareholder of a Fund
of Funds will also bear a proportionate part of the combined advisory and
administrative fees paid by an Underlying Fund, those fees paid are based upon
the services received by the respective Underlying Fund.
The Underlying Funds (other than the Tax-Managed Small Cap Fund which
commenced operations on December 1, 1999) in which the Fund of Funds currently
invest paid FRIMCo the listed management fees for the periods ended December 31,
1998, 1997, and 1996 (representing the fee paid for both advisory and
administrative purposes):
YEARS ENDED
12/31/98 12/31/97 12/31/96
Diversified Equity $9,580,094 $6,906,245 $4,728,098
Special Growth 5,901,577 4,556,999 3,307,757
Quantitative Equity 9,056,015 6,616,377 4,455,041
International 8,859,189 7,751,289 6,497,848
Securities
Diversified Bond 3,407,594 2,755,500 2,360,392
Short Term Bond* 1,216,062 1,184,588 988,312
Multistrategy Bond 3,241,445 2,351,480 1,673,473
Real Estate Securities 5,183,218 4,428,351 2,943,293
Emerging Markets* 4,020,121 4,167,163 2,773,817
Tax-Managed Large 1,463,604 420,723 21,443
Cap** (formerly
Equity T)
Tax-Managed Small
Cap*** -- -- --
Tax Exempt Bond 525,312 361,226 312,456
Tax Free Money Market 429,613 266,939 234,929
* Prior to April 1, 1995, the Emerging Markets and Short Term Bond
Funds paid no management fees to FRIMCo, as each shareholder of
the Fund had entered into a written Asset Management Services
Agreement with 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
the Fund. Beginning April 1, 1995, FRIC's Management Agreement
was amended to provide that the Emerging Markets and Short Term
Bond Funds 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 or the Short Term Bond 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.
** Tax-Managed Large Cap Fund commenced operations on October 7, 1996.
*** Tax-Managed Small Cap Fund had not commenced operations prior to
the date of this Statement of Additional Information
Effective May 1, 1996, FRIMCo has agreed to waive a portion of its
management fee for the Multistrategy Bond Fund, to the extent Fund level
expenses exceed 0.80% of average daily net assets on an annual basis. In 1996,
waivers and reimbursements for the Multistrategy Bond Fund amounted to $157,752.
As a result of the waivers and reimbursements, management and administrative
fees paid by the Multistrategy Bond Fund amounted to $1,515,721.
In 1997, waivers for Multistrategy Bond Fund amounted to $126,393. As a
result of the waivers, management and administrative fees paid by the
Multistrategy Bond Fund amounted to $2,225,087.
In 1998, waivers for Multistrategy Bond Fund amounted to $57,035. As a
result of the waivers, management and administrative fees paid by the
Multistrategy Bond Fund amounted to $3,184,410.
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. From May 1, 1996, FRIMCo has agreed to reimburse the Emerging
Markets Fund for all expenses exceeding 1.95% of average daily net assets on an
annual basis. FRIMCo made no reimbursements to the Emerging Markets Fund in
1996, 1997 or 1998.
Effective January 1, 1997, FRIMCo voluntarily agreed to waive 0.10% of its
0.25% combined advisory and administrative fees for the Tax Free Money Market
Fund. The amount of such waiver for the twelve months ended December 31, 1998
was $171,845.
FRIMCo has contractually agreed to waive a portion of its 0.75% combined
advisory and administrative fees for the Tax-Managed Large Cap Fund, up to the
full amount of those fees, 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, FRIMCo has contractually agreed to reimburse the Fund
for any remaining Fund operating expenses after any FRIMCo waiver which exceed
1.00% of the Fund's average daily net assets on an annual basis. There were no
waivers by FRIMCo for the twelve months ended December 31, 1998.
FRIMCo has contractually agreed to waive a portion of its 1.03% combined
advisory and administrative fees for the Tax-Managed Small Cap Fund, up to the
full amount of those fees, equal to the amount by which the Fund-level operating
expenses exceed 1.25% of the Fund's average daily net assets on an annual basis.
In addition, FRIMCo has contractually agreed to reimburse the Fund for any
remaining Fund-level operating expenses after any FRIMCo waiver which exceed
1.25% of average daily net assets on an annual basis.
FRIMCo is a wholly owned subsidiary of Frank Russell Company, a subsidiary
of The Northwestern Mutual Life Insurance 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 FRIC 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.
From its advisory fees received from the Underlying Funds, FRIMCo, as agent
for FRIC, 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, 1998, management fees paid
to the money managers of the Underlying Funds (other than Tax-Managed Small Cap
Fund which commenced operations on December 1, 1999) were:
Annual rate
Fund $ Amount Paid (as a % of average
daily net assets)
- ---- ------------- ------------------
Diversified Equity $2,556,100 0.21%
Special Growth 2,419,648 0.39%
Quantitative Equity 2,153,019 0.19%
International Securities 3,505,016 0.37%
Diversified Bond 529,842 0.07%
Short Term Bond 414,057 0.17%
Multistrategy Bond 990,456 0.19%
Real Estate Securities 1,757,612 0.29%
Emerging Markets 2,230,317 0.66%
Tax-Managed Large Cap
(formerly Equity T Fund) 606,948 0.31%
Tax Exempt Bond 252,321 0.23%
Tax Free Money Market 134,817 0.66%
Each money manager has agreed that it will look only to FRIMCo for the
payment of the money manager's fee, after FRIC has paid FRIMCo. 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 FRIC shares. The Distributor receives no compensation from
FRIC for its services other than 12b-1 compensation and shareholder services
compensation for certain classes of shares pursuant to FRIC's Rule 12b-1
Distribution Plan and its Shareholder Services Plan, respectively. 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 FRIC. 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 -0.0075%; over $10
billion -0.0065%; 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 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.
Additionally, the following fees will be assessed for the Fund of Funds: (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 is 1776 Heritage Drive,
North Quincy, MA 02171.
TRANSFER AND DIVIDEND DISBURSING AGENT. FRIMCo serves as Transfer Agent for
FRIC. For this service FRIMCo is paid a per-account fee for transfer agency and
dividend disbursing services provided to FRIC. From this fee FRIMCo compensates
unaffiliated agents who assist in providing these services. FRIMCo is also
reimbursed by FRIC for certain out-of-pocket expenses, including postage, taxes,
wires, stationery and telephone. The Fund of Funds' investments in the
Underlying Funds will not be charged a fee. FRIMCo's mailing address is 909 A
Street, Tacoma, WA 98402.
ORDER PLACEMENT DESIGNEES. FRIC has authorized certain Financial
Intermediaries to accept on its behalf purchase and redemption orders for FRIC
shares. Certain Financial Intermediaries are authorized, subject to approval of
FRIC's Distributor, to designate other intermediaries to accept purchase and
redemption orders on FRIC's behalf. FRIC 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 applicable Fund's net asset value next computed after they are
accepted by Financial Intermediary or an authorized designee, provided that the
Financial Intermediary or an authorized designee timely transmits the customer
order to FRIC.
INDEPENDENT ACCOUNTANTS. PricewaterhouseCoopers LLP serves as the
independent accountants of FRIC. PricewaterhouseCoopers LLP is responsible for
performing annual audits of the financial statements and financial highlights of
the Funds in accordance with generally accepted accounting practices and a
review of federal tax returns. The mailing address of PricewaterhouseCoopers LLP
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 to issue multiple classes of
shares in accordance with a written plan approved by the investment company's
board of trustees that is filed with the SEC. At a meeting held on April 22,
1996, the Board adopted and, on November 4, 1996, June 3, 1998, November 9, 1998
and August 9, 1999 amended, a plan pursuant to Rule 18f-3 (the "Rule 18f-3 Pan")
on behalf of each Fund that issues multiple classes of shares (each a "Multiple
Class Fund"). On November 9, 1998, the Board again amended the Rule 18f-3 Plan
to revise the previously authorized classes. 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 Rule 12b-1 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,
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 and Class D
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 FRIC
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 Distribution 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 (such as 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 12b-1 Fees may be used to compensate (a) Selling Agents (as defined
below) for sales support services provided, and related expenses incurred with
respect to Class C and 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 Trust makes no distribution payments to the Distributor which
respect to Class C and Class D Shares except as described above. Therefore, the
Trust does not pay for unreimbursed expenses of the Distributor, including
amounts expended by the Distributor in excess of amounts received by it from the
Trust, 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 Trust under the Distribution Plan.
The Distribution Plan provides that each Multiple Class Fund may spend
annually, directly or indirectly, up to 0.75% of the average daily net asset
value of its Class C and Class D Shares for any activities or expenses primarily
intended to result in the sale of Class C and Class D Shares of a Multiple Class
Fund. Such payments by FRIC will be calculated daily and paid periodically and
shall not be made less frequently than quarterly. Any amendment to increase
materially the costs that a Multiple Class Fund's Class C or Class D 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 Class C or Class D Shares of a Multiple Class Fund or (b)
sixty-seven percent (67%) or more of the Class C or Class D 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
Multiple Class Funds' Class C and Class D 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 Class C or Class
D Shares of a Multiple Class Fund or (b) sixty-seven percent (67%) or more of
the Class C or Class D 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.
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 Class C or Class D shares held by or for the
customers of the Financial Intermediaries.
Under the Distribution Plan, the following Multiple Class Funds' Class D
Shares accrued expenses in the following amounts, payable to the Distributor,
for the period ended December 31, 1998 (these amounts were for compensation to
dealers):
LifePoints Class D
Funds
Equity Aggressive Strategy Fund $5,319
Aggressive Strategy Fund 4,738
Balanced Strategy Fund 3,851
Moderate Strategy Fund 2,378
Conservative Strategy Fund 1,147
LifePoints Funds and LifePoints Tax-Managed Funds Class C Shares were not
issued during the period ended December 31, 1998.
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, Class D and Class E Shares (the "Service Plan"), effective April 22, 1996,
and such Service Plan was amended on August 9, 1999 to add Class C Shares of the
LifePoints Tax-Managed Funds.
Under the Service Plan, FRIC 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 Class C, Class D or Class E, 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 Class C, Class D or Class E. Such payments by FRIC 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 Class C,
Class D or Class E may exceed, on an annual basis, 0.25% of the average daily
net asset value of that Fund's Class C, Class D, or Class E Shares.
Among other things, the Service Plan provides that (1) the Distributor
shall provide to FRIC'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 Service Plan, the following LifePoints Funds' Class D and Class E
Shares accrued expenses in the following amounts payable to the Distributor, for
the period ended December 31, 1998:
LifePoints Funds Class D Class E
Equity Aggressive Strategy Fund $5,319 $146,635
Aggressive Strategy Fund 4,738 91,518
Balanced Strategy Fund 3,851 273,349
Moderate Strategy Fund 2,378 27,983
Conservative Strategy Fund 1,147 5,318
No Class C Shares were issued during the period ended December 31, 1998.
The Glass-Steagall Act prohibits a depository institution (such as a
commercial bank or 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.
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 advisory fee and annual administrative fee, each
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 FRIC 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 advisory and administrative fees with respect to certain
Underlying Funds. This waiver may be changed or rescinded at any time.
FUND OF FUNDS OPERATING EXPENSES. Each Fund of Funds is expected to have a
low operating expense ratio although, as a shareholder of the Underlying Funds,
each Fund of Funds indirectly bears its pro rata share of the advisory 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 0.20% advisory 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
Fund of Funds, its Underlying Funds and FRIMCo. Under the Servicing Agreement,
FRIMCo arranges for all services pertaining to the operations of the Fund of
Funds, including transfer agency services but not including any services covered
by the Fund of Funds' advisory 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 Fund of 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 Fund of Funds. In this case, the
Servicing Agreement provides that the officers of FRIC, at the direction of the
Trustees, may apply such savings to payment of the aggregate operating expenses
of Fund of 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 Fund of Funds, 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 Fund of Funds, the Servicing
Agreement provides that FRIMCo 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, administrative and miscellaneous
expenses.
VALUATION OF THE FUND OF FUNDS SHARES. The net asset value per share of
Class C, Class D and Class E Shares is calculated separately for each Fund of
Funds 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 Year's Day, Martin Luther King, Jr. Day, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
Net asset value per share is computed for each class of Shares of a Fund by
dividing the current value of the Fund's assets attributable to each class of
Shares, less liabilities attributable to that class of Shares, by the number of
each individual class of Shares of the Fund outstanding, and rounding to the
nearest cent.
PRICING OF SECURITIES. The Class S Shares of the Underlying Funds held by
each Fund of Funds are valued at their net asset value. 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 Fund of Funds) 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 FUND OF FUNDS. The portfolio turnover rate
for each Fund of Funds 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 of Funds during the year.
Each Fund of Funds portfolio turnover rate is expected not to exceed 25%. The
Fund of Funds will purchase or sell Underlying Fund shares to: (i) accommodate
purchases and sales of each Fund of Funds' shares; (ii) change the percentages
of each Fund of Funds' assets invested in each of the Underlying Funds in
response to market conditions; and (iii) maintain or modify the allocation of
each Fund of Funds' assets among the Underlying Funds generally within the
percentage limits described in the Prospectus.
The portfolio turnover rates for the last two years for each Fund were:
YEARS ENDED
LifePoints Funds 12/31/98 12/31/97
--------------------------------- -------- --------
Equity Aggressive Strategy Fund 73.95% 48.30%
Aggressive Strategy Fund 93.08% 56.88%
Balanced Strategy Fund 78.85% 29.58
Moderate Strategy Fund 175.58 9.66
Conservative Strategy Fund 169.79 --
The LifePoints Tax-Managed Funds had not commenced operations prior to the date
of this Statement of Additional Information.
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 FRIC) 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 Underlying 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 Tax-Managed
Large Cap and Tax-Managed Small Cap Funds' investment objective and policies,
such Funds' ability to change money managers may be constrained. The annual
portfolio turnover rates for each of the Underlying Funds for the periods ended
December 31, 1998 and 1997, respectively, were as follows: Diversified Equity
Fund, 100.31% and 114.11%%; Special Growth Fund, 129.19% and 97.19%;
Quantitative Equity Fund, 77.23% and 87.67%; International Securities Fund,
68.46% and 73.54%; Diversified Bond Fund, 216.88% and 172.43%; Short Term Bond
Fund, 129.85% and 213.14%; Multistrategy Bond Fund, 334.86% and 263.75%; Real
Estate Securities Fund, 42.58% and 49.40%; and Emerging Markets Fund, 59.35% and
50.60%; Tax-Managed Large Cap Fund, 51% and 39% and Tax Exempt Bond Fund, 74%
and 41%. The Tax-Managed Small Cap Fund did not commence operations until
December 1, 1999.
The Underlying Funds, except the Tax Exempt Bond, Tax-Managed Large Cap and
Tax-Managed Small Cap Funds, do not give significant weight to attempting to
realize long-term, rather than short-term capital gains when making portfolio
management decisions.
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. FRIC's advisory agreements with FRIMCo and
the money managers provide, in substance and subject to specific directions from
officers of FRIC 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 advisory 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 FRIC's procedures adopted in accordance
with Rule 17e-1 of the 1940 Act.
FRIMCo does not expect FRIC ordinarily to effect a significant portion of
FRIC'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.
FRIMCo arranges for the purchase and sale of FRIC'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 FRIC 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.
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,
Inc. 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 Diversified Equity, Special Growth,
Quantitative Equity, International Securities, Emerging Markets, Real Estate
Securities, Tax-Managed Large Cap and Tax-Managed Small Cap 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, Short Term Bond Multistrategy Bond and Tax Exempt 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.
Conversely, the Tax-Managed Large Cap and Tax-Managed Small Cap Funds which seek
to minimize the impact of taxes on their 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 Tax-Managed Large Cap and Tax-Managed Small Cap Funds.
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 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.
For information regarding brokerage commissions paid by the Underlying Funds
and the Underlying Funds' holdings of securities issued by the top ten broker
dealers used by those Funds, refer to the Statement of Additional Information
for the Underlying Funds.
YIELD AND TOTAL RETURN QUOTATIONS. The Fund of 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 C and Class D Shares are subject to Rule 12b-1
fees and the Class C, Class D and Class E Shares are subject to shareholder
servicing fees, the average annual total return performance of each class will
vary.
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 Fund of 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
Where: P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; and
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of the one, five or ten year
period at the end of the one, five or ten year period (or
fractional portion thereof).
The calculation assumes that all dividends and distributions of each Fund of
Funds are reinvested at the price stated in the Prospectus 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 one or more classes
of Shares will be reported in the applicable Prospectus.
Yields are computed by using standardized methods of calculation required by
the SEC. Similar to average annual total return calculations, a Fund of Funds
calculates yields for each class of shares which it offers. Yields for the Fund
of Funds, which do not invest primarily in money market instruments, are
calculated by dividing the net investment income per share earned during a
30-day (or one month) period by the maximum offering price per share on the last
day of the period, according to the following formula:
YIELD = 2[(a-b+1)6 -1]
cd
Where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of
reimbursements)
c = average daily number of shares outstanding during the period
that were entitled to receive dividends
d = the maximum offering price per share on the last day of the
period.
The yields for the Fund of Funds investing primarily in fixed-income
instruments are reported in the Prospectus.
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.
Tax-equivalent yields for the Tax Exempt Bond 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 Tax Exempt Bond and
Tax Free Money Market Funds are reported in the Funds' respective Prospectuses.
Each Fund of Funds may, from time to time, advertise non-standard
performances, including average annual total return.
Each Fund of Funds 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 FUND OF FUNDS
Each Fund of Funds' 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.
Other policies may be changed by a Fund without shareholder approval. The Fund
of Funds' investment objectives are set forth in the respective Prospectus.
INVESTMENT RESTRICTIONS. Each Fund of Funds 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 of Funds 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 Fund of Funds.
2. Invest 25% or more of the value of the Fund of Funds' 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 FRIC
Funds.
4. Invest in companies for the purpose of exercising control or management.
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 money, except that the Fund may borrow as a temporary measure for
extraordinary or emergency purposes, and not in excess of five percent of its
net assets; provided, that the Fund may borrow to facilitate redemptions (not
for leveraging or investment), provided that borrowings do not exceed an amount
equal to 33 1/3% of the current value of the Fund's assets taken at market
value, less liabilities other than borrowings. If at any time the Fund's
borrowings exceed this limitation due to a decline in net assets, such
borrowings will be reduced to the extent necessary to comply with this
limitation within three days. Reverse repurchase agreements will not be
considered borrowings for purposes of the foregoing restrictions, provided that
the Fund will not purchase investments when borrowed funds (including reverse
repurchase agreements) exceed 5% of its total assets.
8.Purchase securities on margin or effect short sales (except that a Fund of
Funds 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. 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 each of the Fund of Funds' Prospectuses in
the section titled "Investment Policies, Restrictions and Risks of the
LifePoints Funds and LifePoints Tax-Managed Funds -- Lending Portfolio
Securities."
12. Purchase or sell options.
13. 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. 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 Fund of Funds will
concentrate more than 25% of their assets in the mutual fund industry. In
accordance with the Fund of Funds' investment policies set forth in the
Prospectus, each of the Fund of Funds may invest more than 25% of its assets in
the Underlying Funds. However, each of the Underlying Funds in which each Fund
of Funds 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 FUND OF FUNDS
REPURCHASE AGREEMENTS. Each Fund of Funds 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 Fund of Funds have a
total value in excess of the value of the repurchase agreement and are held by
Fund of Funds' Custodian until repurchased. Repurchase agreements assist a Fund
of Funds in being invested fully while retaining "overnight" flexibility in
pursuit of investments of a longer-term nature. The Fund of 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 Fund of Funds may invest in securities
maturing within 397 days or less at the time from the trade date or such other
date upon which a Fund of Funds' interest in a security is subject to market
action. Each Fund of Funds 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 Fund of 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 Fund of Funds
pursuant to Rule 144A, as explained in the Prospectuses) may be negotiated at
the time such securities are purchased by a Fund of Funds. When registration is
required, a considerable period may elapse between a decision to sell the
securities and the time the sale would be permitted. Thus, the Fund of Funds may
not be able to obtain as favorable a price as that prevailing at the time of the
decision to sell. A Fund of Funds 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.
INVESTMENT POLICIES OF THE UNDERLYING FUNDS
The investment objective and principal investment strategy for each of the
Underlying Funds is provided in the Prospectuses. The following table
illustrates the investments that the Underlying Funds primarily invest in or are
permitted to invest in.
<TABLE>
<CAPTION>
Short
Diversified Special Quantitative International Diversified Term
Equity Growth Equity Securities Bond Bond
Type of Practice Fund Fund Fund Fund Fund Fund
<S> <C> <C> <C> <C> <C> <C>
Common stocks X X X X
Common stock
equivalents (warrants) X X X X
common stock
equivalents (options) X X X X
Common stock
equivalents (convert-
ible debt securities) X X X X X
Common stocks
equivalents
(depository receipts) X X
Preferred stocks X X X X X
Equity derivative
securities X X X X
Debt securities
(below investment
grade or junk bonds)
US government
securities X X X X X X
Municipal obli-
gations X
Investment company
securities X X X X X X
Foreign securities X X X X X X
</TABLE>
<TABLE>
<CAPTION>
MultiStrategy Real Estate Emerging
Bond Securities Markets
Type of Practice Fund Fund Fund
<S> <C> <C> <C>
Common stocks X X
Common stock
equivalents (warrants) X X
common stock
equivalents (options) X X
Common stock
equivalents (convert-
ible debt securities)
Common stocks
equivalents
(depository receipts) X
Preferred stocks X X
Equity derivative
securities X X
Debt securities
(below investment
grade or junk bonds) X
US government
securities X X X
Municipal obli-
gations X
Investment company
securities X X X
Foreign securities X X X
</TABLE>
<TABLE>
<CAPTION>
Tax-Managed Tax-Managed Tax Tax Free
Large Cap Small Cap Exempt Money Market
Type of Practice Fund Fund Fund Fund
<S> <C> <C> <C> <C>
Common stocks X
Common stock
equivalents (warrants) X
Common stock
equivalents (options) X
Common stock
equivalents (convert-
ible debt securities) X
Common stocks
equivalents
(depository receipts)
Preferred stocks X
Equity derivative
securities X
Debt securities
(below investment
grade or junk bonds) X
US government
securities X X X
Municipal obli-
gations X
Investment company
securities X X X
Foreign securities X
</TABLE>
Other Investment Practices of the Underlying Funds. The Underlying Funds use
investment techniques commonly used by other mutual funds. The table below
summarizes the principal investment practices of the Underlying Funds, each of
which may involve certain special risks. The Glossary located at the back of the
SAI describes each of the investment techniques identified below.
<TABLE>
<CAPTION>
Short
Diversified Special Quantitative International Diversified Term
Equity Growth Equity Securities Bond Bond
Type of Practice Fund Fund Fund Fund Fund Fund
<S> <C> <C> <C> <C> <C> <C>
Cash reserves X X X X X X
Repurchase agree-
ments(1) X X X
When-issued and
forward commitment
securities X
Reverse repurchase
agreements X X X
Lending portfolio
securities, not to
exceed 33 1/3% of
total Fund assets X X X
Illiquid securities
(limited to 15% of
Fund's net assets) X X X
Forward currency
contracts(2) X X X
Write (sell) call
and put options on
securities,
securities indexes
and foreign
currencies(3) X X X
Purchase options
on securities,
securities
indexes, and
currencies(3) X X X
Interest rate
futures contracts,
stock index
futures contracts,
foreign currency
contracts and
options
on futures(4) X X X
Liquidity portfolio X X X X
</TABLE>
<TABLE>
<CAPTION>
MultiStrategy Real Estate Emerging
Bond Securities Markets
Type of Practice Fund Fund Fund
<S> <C> <C> <C>
Cash reserves X X X
Repurchase agree-
ments(1) X X X
When-issued and
forward commitment
securities X
Reverse repurchase
agreements X X X
Lending portfolio
securities, not to
exceed 33 1/3% of
total Fund assets X X X
Illiquid securities
(limited to 15% of
Fund's net assets) X X X
Forward currency
contracts(2) X X
Write (sell) call
and put options on
securities,
securities indexes
and foreign
currencies(3) X X X
Purchase options
on securities,
securities
indexes, and
currencies(3) X X X
Interest rate
futures contracts,
stock index
futures contracts,
foreign currency
contracts and
options
on futures(4) X X X
Liquidity portfolio X X
</TABLE>
Tax
Exempt Tax Free
Equity T Bond Money Market
Type of Practice Fund Fund Fund
Cash reserves X X
Repurchase agree-
ments(1) X
When-issued and
forward commitment
securities X X
Reverse repurchase
agreements X X
Lending portfolio
securities, not to
exceed 33 1/3% of
total Fund assets X X X
Illiquid securities
(limited to 15% of
Fund's net assets) X X X
Forward currency
contracts(2) X
Write (sell) call
and put options on
securities,
securities indexes
and foreign
currencies(3) X X
Purchase options
on securities,
securities
indexes, and
currencies(3) X
Interest rate
futures contracts,
stock index
futures contracts,
foreign currency
contracts and
options
on futures(4) X X
Liquidity portfolio X
Credit and liquidity
enhancements X X
- --------------
(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 Securities, Diversified Bond, Multistrategy Bond, Short Term
Bond and Emerging Markets and Short Term Bond Funds 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.
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. 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.
FRIC may incur costs or possible losses in excess of the interest and fees
received in connection with securities lending transactions. Some securities
purchased with cash collateral are subject to market fluctuations while a loan
is outstanding. To the extent that the value of the cash collateral as invested
is insufficient to return the full amount of the collateral plus rebate interest
to the borrower upon termination of the loan, a Fund must immediately pay the
amount of the shortfall to the borrower.
ILLIQUID SECURITIES. The 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, except the Tax Free Money Market Fund
and its managers, 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 FRIC'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 FRIC'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 FRIC'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 FRIC in the same proportion as the shares of
the Money Market Fund which are held by shareholders which are not Underlying
Funds. Underlying Funds investing in the Money Market Fund currently do not pay
a management fee to the Money Market Fund.
LIQUIDITY PORTFOLIO. 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, International Securities, Tax-Managed Large
Cap and Tax-Managed Small Cap 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 Fund of Funds, and as described
earlier in this Statement, the Underlying Funds, except for the Tax Free Money
Market Fund, may invest in money market instruments.
The Tax Free Money Market Fund expects to maintain, but does not guarantee,
a net asset value of $1.00 per share for purposes of purchases and redemptions
by valuing the Fund shares at "amortized cost." The Tax Free Money Market Fund
will maintain a dollar-weighted average maturity of 90 days or less. The Fund
will invest in securities maturing within 397 days or less at the time from the
trade date or such other date upon which the Fund's interest in a security is
subject to market action. The 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 Fund purchases, and were designed to
ensure compliance by the Fund with the requirements of Rule 2a-7 of the 1940
Act. For additional information concerning this Fund, refer to the Prospectus.
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.
Frank Russell Company chooses the stocks to be included in the Index solely
on a statistical basis and it is not an indication that Frank Russell Company or
FRIMCo believes that the particular security is an attractive investment.
REPURCHASE AGREEMENTS. A 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 a 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. A 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 a Fund equal in value to the repurchase price, including any
accrued interest, will be segregated on the Fund's records while a reverse
repurchase agreement is in effect.
HIGH RISK BONDS. The 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.
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. An 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 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, other than the Tax Free Money
Market Fund, 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 FRIC'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.
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 (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.
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 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 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.
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.
HEDGING STRATEGIES. Stock index futures contracts may be used by the
Diversified Equity, Special Growth, Quantitative Equity, International
Securities, Emerging Markets, Tax-Managed Large Cap and Tax-Managed Small Cap
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, Short Term Bond, Multistrategy Bond, Emerging Markets and Tax
Exempt Bond 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. The risk increases for the Tax Exempt Bond Fund since financial futures
contracts that may be engaged in involve 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 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, Short Term 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 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.
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.
BANK INSTRUMENTS. The Diversified Bond, Short Term Bond and Multistrategy
Bond Funds 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 US and foreign
banks; ETDs are US dollar denominated time deposits in a foreign branch of a US
bank or a foreign bank; and Yankee CDs are certificates of deposit issued by a
US branch of a foreign bank denominated in US dollars and held in the United
States. 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 managers
when evaluating credit risk in the selection of investments.
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 Multistrategy Bond Fund intends 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.
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.
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.
LOAN PARTICIPATIONS. The Multistrategy Bond Fund 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.
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 Tax Exempt
Bond and Tax Free Money Market Funds to maintain liquidity. The Funds'
money managers will continually monitor the pricing, quality and liquidity
of the floating and variable rate demand instruments held by the Funds,
including the participation certificates.
A participation certificate gives a Fund an undivided interest in the
municipal obligation in the proportion that the Fund's participation
interest bears to the total principal amount of the municipal obligation
and provides the demand feature described below. Each participation is
backed by: an irrevocable letter of credit or guaranty of a bank which may
be the bank issuing the participation certificate, a bank issuing a
confirming letter of credit to that of the issuing bank, or a bank serving
as agent of the issuing bank with respect to the possible repurchase of
the certificate of participation; or insurance policy of an insurance
company that the money manager has determined meets the prescribed quality
standards for the Fund. The Fund has the right to sell the participation
certificate back to the institution and draw on the letter of credit or
insurance on demand after thirty days' notice for all or any part of the
full principal amount of the Fund's participation interest in the security
plus accrued interest. The Funds' money managers intend to exercise the
demand feature only (1) upon a default under the terms of the bond
documents, (2) as needed to provide liquidity to the Funds in order to
make redemptions of Fund shares, or (3) to maintain the required quality
of its investment portfolios.
The institutions issuing the participation certificates will retain a
service and letter of credit fee and a fee for providing the demand
feature, in an amount equal to the excess of the interest paid on the
instruments over the negotiated yield at which the participations were
purchased by a Fund. The total fees generally range from 5% to 15% of the
applicable prime rate or other interest rate index. The Fund will attempt
to have the issuer of the participation certificate bear the cost of the
insurance. The Fund retains the option to purchase insurance if necessary,
in which case the cost of insurance will be a capitalized expense of the
Fund.
DEMAND NOTES. The Tax Exempt Bond 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 Tax Exempt Bond 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 Short Term 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. 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 their
portfolios or to protect against any increase in the price of securities they
anticipate purchasing at a later date. 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 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.
INVESTMENT IN EMERGING MARKETS. Foreign investment may include emerging
market debt. 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 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 other fixed-income securities issued or
guaranteed by banks or other companies in emerging markets which the money
managers believe are suitable investments for the Funds. The risks associated
with investing in foreign securities are often heightened for investments in
developing or emerging markets. Investments in emerging or developing markets
involve exposure to economic structures that are generally less diverse and
mature, and to political systems which can be expected to have less stability,
than those of more developed countries. Moreover, the economies of individual
emerging market countries may differ favorably or unfavorably from the US
economy in such respects as the rate of growth in gross domestic product, the
rate of inflation, capital reinvestment, resource self-sufficiency and balance
of payments position. Because the Funds' foreign securities will generally be
denominated in foreign currencies, the value of such securities to the Funds
will be affected by changes in currency exchange rates and in exchange control
regulations. A change in the value of a foreign currency against the US dollar
will result in a corresponding change in the US dollar value of the Funds'
foreign securities. In addition, some emerging market countries may have fixed
or managed currencies which are not free-floating against the US dollar.
Further, certain emerging market countries' currencies may not be
internationally traded. Certain of these currencies have experienced a steady
devaluation relative to the US dollar. Many emerging 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.
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.
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 Economic Community. The Counsel of Ministers of the
European Economic Community 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.
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
Distributions
Distributions of Net Investment Income. The Fund of Funds receive income
generally in the form of dividends and interest on their investments. This
income, less expenses incurred in the operation of a Fund of Funds, constitutes
its net investment income from which dividends may be paid to you. Any
distributions by a Fund of Funds from such income will be taxable to you as
ordinary income, whether you take them in cash or in additional shares.
Distributions of Capital Gains. The Fund of Funds may derive capital gains
and losses in connection with sales or other dispositions of their portfolio
securities. Distributions derived from the excess of net short-term capital gain
over net long-term capital loss will be taxable to you as ordinary income.
Distributions paid from long-term capital gains realized by a Fund of Funds will
be taxable to you as long-term capital gain, regardless of how long you have
held your shares in the Fund of Funds. Any net short-term or long-term capital
gains realized by a Fund of Funds (net of any capital loss carryovers) generally
will be distributed once each year, and may be distributed more frequently, if
necessary, in order to reduce or eliminate federal excise or income taxes on a
Fund of Funds.
Information on the Tax Character of Distributions. Each Fund of Funds will
inform you of the amount and character of your distributions at the time they
are paid, and will advise you of the tax status for federal income tax purposes
of such distributions shortly after the close of each calendar year. If you have
not held a Fund of Funds' shares for a full year, you may have designated and
distributed to you as ordinary income or capital gain a percentage of income
that is not equal to the actual amount of such income earned during the period
of your investment in a Fund of Funds.
Taxes
Election to be Taxed as a Regulated Investment Company. Each Fund of Funds
has elected to be treated as a regulated investment company under Subchapter M
of the Internal Revenue Code (the "Code"), has qualified as such for its most
recent fiscal year, and intends to so qualify during the current fiscal year. As
a regulated investment company, a Fund of Funds generally pays no federal income
tax on the income and gains it distributes to you. The Board reserves the right
not to maintain the qualification of a Fund of Funds as a regulated investment
company if it determines such course of action to be beneficial to you. In such
case, a Fund of Funds will be subject to federal, and possibly state, corporate
taxes on its taxable income and gains, and distributions to you will be taxed as
ordinary dividend income to the extent of a Fund of Funds's available earnings
and profits.
Excise Tax Distribution Requirements. The Code requires a Fund of Funds to
distribute at least 98% of its taxable ordinary income earned during the
calendar year and 98% of its capital gain net income earned during the twelve
month period ending October 31 (in addition to undistributed amounts from the
prior year) to you by December 31 of each year in order to avoid federal excise
taxes. Each Fund of Funds intends to declare and pay sufficient dividends in
December (or in January that are treated by you as received in December) but
does not guarantee and can give no assurances that its distributions will be
sufficient to eliminate all such taxes.
Redemption of Fund Shares. Redemptions and exchanges of a Fund of Funds'
shares are taxable transactions for federal and state income tax purposes that
cause you to recognize a gain or loss. If you hold your shares as a capital
asset, the gain or loss that you realize will be capital gain or loss. Any loss
incurred on the redemption or exchange of shares held for six months or less
will be treated as a long-term capital loss to the extent of any long-term
capital gains distributed to you by a Fund of Funds on those shares.
All or a portion of any loss that you realize upon the redemption of your
Fund of Funds shares will be disallowed to the extent that you purchase other
shares in such Fund of Funds (through reinvestment of dividends or otherwise)
within 30 days before or after your share redemption. Any loss disallowed under
these rules will be added to your tax basis in the new shares you purchase.
MONEY MANAGER INFORMATION
FOR THE UNDERLYING FUNDS
DIVERSIFIED EQUITY FUND
Alliance Capital Management L.P. 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. is an indirect, wholly-owned subsidiary
of Barclays Bank PLC.
Equinox Capital Management, Inc. is a registered investment adviser with
majority ownership held by Ron Ulrich.
Jacobs Levy Equity Management, Inc. is 100% owned by Bruce Jacobs and
Kenneth Levy.
Lincoln Capital Management Company is a division of Lincoln Capital
Management Company, and is a registered investment adviser with majority
ownership held by Dave Flower, Jay Freedman, Parker Hall, Richard Knee, Ken
Meyer and Ray Zemon.
Marsico Capital Management, LLC is owned 50% by Marsico Management Holdings,
LLC and 50% by TFM Holdings, LLLP. Marsico Management Holdings is a wholly-owned
subsidiary of NationsBank, N.A. which turn is a wholly-owned subsidiary of Bank
of America. TFM Holdings, LLLP is a Colorado limited liability limited
partnership whose sole general partner is TFM Managers, Inc. which is
wholly-owned by Thomas F. Marsico.
Peachtree Asset Management is division of SSBC Fund Management Inc. SSBC
Fund Management is owned 100% by Salomon Smith Barney Inc. which is a
wholly-owned subsidiary of Citigroup Inc.
Sanford C. Bernstein & Co., Inc. is a registered investment adviser.
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.
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 is a corporation with seven
shareholders, with Stanford M. Calderwood holding majority ownership.
SPECIAL GROWTH FUND
Delphi Management, Inc. is 100% owned by Scott Black.
Fiduciary International, Inc., 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. is a California limited partnership and an SEC
registered investment adviser. Its general partners are Robert J. Anslow, Jr.
and Marina L. Marrelli.
Jacobs Levy Equity Management, Inc. See: Diversified Equity Fund.
Sirach Capital Management, Inc. is a wholly-owned subsidiary of United
Asset Management Company, a publicly traded corporation.
Wellington Management Company LLP 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.
Westpeak Investment Advisors, L.P. See: Equity Income Fund.
QUANTITATIVE EQUITY FUND
Barclays Global Fund Advisors. See: Diversified Equity Fund.
Franklin Portfolio Associates LLC is a Massachusetts business trust owned
by Mellon Financial Services Corporation, a holding company of Mellon Bank
Corporation.
J.P. Morgan Investment Management, Inc. is a wholly-owned subsidiary of
J.P. Morgan & Co., Inc., a publicly held bank holding company.
Jacobs Levy Equity Management, Inc. See: Diversified Equity Fund.
INTERNATIONAL SECURITIES FUND
Delaware International Advisers Limited is an investment adviser whose
ultimate parent is Lincoln National Corporation, a publicly traded company.
Fidelity Management Trust Company is a bank, as defined in the Investment
Advisors Act of 1940, and is a wholly-owned subsidiary of FMR Corp. Members of
the Edward C. Johnson 3rd family are predominant owners of a class of shares of
common stock representing approximately 49% of the voting power of FMR Corp.
J.P. Morgan Investment Management, Inc. See: Quantitative Equity Fund.
Mastholm Asset Management, LLC is a Washington limited liability company
that is controlled by the following founding members: Thomas M. Garr, Robert L.
Gernstetter, Joseph P. Jordan, Arthur M. Tyson and Theordore J. Tyson.
Montgomery Asset Management LLC is a Delaware limited liability company
with majority ownership held by Commerzbank AG, a foreign banking organization.
Oechsle International Advisors, LLC is a Delaware limited liability company
that is controlled by its member manager, Oechsle Group, LLC, a Delaware limited
liability company. Oechsle Group, LLC is controlled by the following members: S.
Dewey Keesler, Stephen P. Langer, L. Sean Roche and Warren R. Walker.
Sanford C. Bernstein & Co., Inc. See: Diversified Equity Fund.
The Boston Company Asset Management, Inc. is 100% owned by Mellon Bank
Corporation, a publicly held corporation.
DIVERSIFIED BOND FUND
Lincoln Capital Management Company. See: Diversified Equity Fund.
Pacific Investment Management Company 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.'s ownership is divided among seventeen directors,
with no director having more than a 25% ownership interest.
SHORT TERM BOND FUND
BlackRock Financial Management is a wholly-owned indirect subsidiary of PNC
Bank.
Standish, Ayer & Wood, Inc. See: Diversified Bond Fund.
STW Fixed Income Management Ltd. is a Bermuda exempted company. William H.
Williams III is the sole shareholder.
MULTISTRATEGY BOND FUND
Credit Suisse Asset Management 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.
REAL ESTATE SECURITIES FUND
Cohen & Steers Capital Management 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. is a wholly-owned affiliate of New England
Investment Companies, L.P. ("NEIC"). NEIC is a publicly-held limited
partnership. Metropolitan Life Insurance Company, a publicly held corporation,
owns approximately 53% of NEIC. AEW Capital Management, Inc., a wholly-owned
subsidiary of NEIC, is the general partner, and NEIC is the sole limited
partner, of AEW Capital Management, L.P.
EMERGING MARKETS FUND
Foreign & Colonial Emerging Markets Limited, an investment adviser registered
with the United Kingdom Investment Management Regulatory Organisation, is a
wholly-owned subsidiary of Hypo Foreign & Colonial Management (Holding) Limited
("HFCM"), the holding company of the Foreign & Colonial Group of Fund managers
which manages $40 billion worldwide. HFCM is controlled by Bayerische Hypo-und
Vereinsbank AG, the second largest commercial bank in Germany.
Genesis Asset Managers, Ltd. 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. See: International Securities Fund.
Nicholas-Applegate Capital Management is a California limited partnership
whose general partner is Nicholas-Applegate Capital Management Holdings, L.P.,
a California limited partnership controlled by Nicholas-Applegate Capital
Management Holdings, Inc., a California corporation controlled by Arthur E.
Nicholas.
Sanford C. Bernstein & Co. Inc. See: Diversified Equity Fund.
Schroders Capital Management International Limited is 100% owned by Schroders
plc, which is publicly traded on the London Stock Exchange.
TAX-MANAGED LARGE CAP
J.P. Morgan Investment Management Inc. See: Quantitative Equity
Fund.
TAX-MANAGED SMALL CAP
Geewax, Terker & Company is a general partnership with its general partners,
John J. Geewax and Bruce E. Terker, each owning 50% of the firm. Money
management is the principal occupation of both.
TAX EXEMPT BOND FUND
MFS Institutional Advisors, Inc. is a wholly-owned, indirect subsidiary of
Sun Life Assurance Company of Canada (US), a mutual insurance company.
Standish, Ayer & Wood, Inc. See: Diversified Bond Fund.
TAX FREE MONEY MARKET FUND
Weiss, Peck & Greer, L.L.C. is a registered investment adviser which is a
wholly owned subsidiary of Robeco Groep N.V.
RATINGS OF DEBT INSTRUMENTS
CORPORATE AND MUNICIPAL BOND RATINGS.
MOODY'S INVESTORS SERVICE, INC. (MOODY'S):
Aaa -- Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to
as "gilt-edge." Interest payments are protected by a large or exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there may
be other elements present which make the long-term risks appear somewhat
larger than in Aaa securities.
A -- Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may
be present which suggest a susceptibility to impairment sometime in the
future.
Baa -- Bonds which are rated Baa are considered as medium-grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable
over any great period of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba -- Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during other good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or maintenance of
other terms of the contract over any long period of time may be small.
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.
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).
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.
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.
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.
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 1998 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 Fund's Annual Report dated December 31, 1998
accompanies this Statement of Additional Information and is incorporated herein
by reference.
GLOSSARY
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"). ECDs are dollar denominated certificates of deposit issued by foreign
branches of US and foreign banks; ETDs are US dollar denominated time deposits
in a foreign branch of a US bank or a foreign bank; and Yankee CDs are
certificates of deposit issued by a US branch of a foreign bank demonimated is
US dollars and held in the United States.
Brady Bonds -- Product of the "Brady Plan," under which bonds are issued in
exchange for cash and certain of the country's outstanding commercial bank
loans.
Board -- The Board of Trustees of FRIC.
Cash reserves -- The Underlying Funds are 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 of
comparable quality to the Fund's permitted investments. As an alternative to an
Underlying Fund directly investing in money market instruments, the Funds and
their money managers may elect to invest the Fund's cash reserves in FRIC's
Money Market Fund. To prevent duplication of fees, FRIMCo waives its management
fee on that portion of a Fund's assets invested in FRIC'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, FRIC's custodian and
portfolio accountant.
Depository receipts -- These include American Depository Receipts ("ADRs"),
European Depository Receipts, Global Depository Receipts, 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 US 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 US government and foreign government
securities and currencies.
Distributor -- Russell Fund Distributors, Inc., the organization that sells
the shares of the Funds under a contract with FRIC.
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 been selected by FRIMCo or by FRIC's Distributor, and
institutions or individuals who have acquired Fund shares through such
institutions or Financial Intermediaries, and trustees, officers, employees and
certain third-party contractors of FRIC and its affiliates and their spouses and
children.
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 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 -- A bank trust department, registered investment
adviser, broker-dealer or other financial services organization that has been
selected by FRIMCo or by FRIC's Distributor.
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. The 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 a 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 US 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 US
dollar, the Fund 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. A 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
a Fund from adverse currency movements, they involve the risk that currency
movements will not be accurately predicted.
FRIC -- Frank Russell Investment Company, an open-end management investment
company which is registered with the SEC
FRIMCo -- Frank Russell Investment Management Company, FRIC's administrator,
manager and transfer and dividend paying agent.
Funds -- The 32 investment series of FRIC. 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.
Futures and options on futures -- An interest rate futures contract is an
agreement to purchase or sell debt securities, usually US 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 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 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 Underlying 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 Underlying 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), US government or US government agency
obligations as collateral in an amount equal to at least 102% (for loans of US
securities) or 105% (for non-US 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, Quantitative Equity, International Securities, Real Estate
Securities and Emerging Markets 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, US Government Money Market and Tax-Free
Money Market Funds, each a Fund of FRIC. 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
US government or fully collateralized by US government obligations; industrial
development bonds; and variable rate obligations.
NASD -- National Association of Securities Dealers, Inc.
Net asset value (NAV) -- The value of a 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 US
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 US banks on loans to their
most creditworthy customers
REITs -- Real estate investment trusts
Repurchase agreements -- An Underlying 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 -- A 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-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 FRIC and to the Funds
S&P -- Standard & Poor's Ratings Group, an NRSRO
S&P 500 -- Standard & Poor's 500 Composite Price Index
SAI -- FRIC's Statement of Additional Information.
SEC -- US Securities and Exchange Commission
Shares -- The Class Shares in the Funds described in the Prospectuses. Each
Class Share of a Fund represents a share of beneficial interest in the Fund.
Transfer Agent -- FRIMCo, in its capacity as FRIC's transfer and
dividend paying agent
Underlying Funds -- The FRIC Funds in which the LifePoints Funds invest in.
US -- United States
US government obligations -- These include US Treasury bills, notes, bonds
and other obligations issued or guaranteed by the US government, its agencies or
instrumentalities. US Treasury bills, notes and bonds, and GNMA participation
certificates, are issued or guaranteed by the US government. Other securities
issued by US 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 US Treasury.
Variable amount demands master notes -- These notes represent borrowing
arrangements between commercial paper issuers and institutional lenders, such as
the Funds.
Variable rate obligation -- 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 FRIC and the Funds.
1933 Act -- The Securities Act of 1933, as amended.
FRANK RUSSELL INVESTMENT
COMPANY
File No. 2-71299 and 811-3153
1933 Act Post-Effective
Amendment. No. 44
1940 Act Amendment No. 44
PART C
OTHER INFORMATION
Item 23. Exhibits
1(a) Master Trust Agreement (incorporated by reference to Item
24(b)(1)(a) filed under Post-Effective Amendment No. 32).
1(b) 11/29/84 Amendment to Master Trust Agreement (incorporated
by reference to Item 24(b)(1)(b) filed under Post-Effective
Amendment No. 32).
1(c) 5/29/85 Amendment to Master Trust Agreement (incorporated
by reference to Item 24(b)(1)(c) filed under Post-Effective
Amendment No. 32).
1(d) 1/26/87 Amendment to Master Trust Agreement (incorporated
by reference to Item 24(b)(1)(d) filed under Post-Effective
Amendment No. 32).
1(e) 2/23/89 Amendment to Master Trust Agreement (incorporated
by reference to Item 24(b)(1)(e) filed under Post-Effective
Amendment No. 32).
1(f) 5/11/92 Amendment to Master Trust Agreement (incorporated
by reference to Item 24(b)(1)(f) filed under Post-Effective
Amendment No. 32).
1(g) 3/22/96 Amendment to Master Trust Agreement (incorporated
by reference to Item 24(b)(1)(g) filed under Post-Effective
Amendment No. 32).
1(h) 4/22/96 Amendment to Master Trust Agreement (incorporated
by reference to Item 24(b)(1)(h) filed under Post-Effective
Amendment No. 33).
1(i) 11/4/96 Amendment to Master Trust Agreement (incorporated
by reference to Item 24(b)(1)(i) filed under Post-Effective
Amendment No. 36).
1(j) 4/27/98 Amendment to Master Trust Agreement (incorporated
by reference to Item 24(b)(1)(j) filed under Post-Effective
Amendment No. 40).
1(k) 4/27/98 Amendment to Master Trust Agreement (incorporated
by reference to Item 24(b)(1)(k) filed under Post-Effective
Amendment No. 40).
1(l) 6/3/98 Amendment to Master Trust Agreement (incorporated by
reference to Item 24(b)(1)(l) filed under Post-Effective
Amendment No. 40).
1(m) 10/5/98 Amendment to Master Trust Agreement (incorporated
by reference to Item 24(b)(1)(m) filed under Post-Effective
Amendment No. 41).
1(n) 11/9/98 Amendment to Master Trust Agreement (incorporated
by reference to Item 24(b)(1)(n) filed under Post-Effective
Amendment No. 41).
1(o) 4/26/99 Amendment to Master Trust Agreement.
1(p) 6/28/99 Amendment to Master Trust Agreement.
1(q) 8/9/99 Form of Amendment to Master Trust Agreement.
1(r) 8/9/99 Form of Amendment to Master Trust Agreement.
2 Bylaws (incorporated by reference to Post-Effective
Amendment No. 38).
3 Specimen Certificates of the shares of the Registrant.
3(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 Item
24(b)(4)(a) filed under Post-Effective Amendment No. 39).
3(b) Diversified Equity Fund, Special Growth Fund, Equity
Income Fund, Diversified Bond 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 Item 24(b)(4)(b)
filed under Post-Effective Amendment No. 39).
3(c) Quantitative Equity, Equity Q and Tax Free Money Market
Funds (incorporated by reference to Item 24(b)(4)(c) filed
under Post-Effective Amendment No. 39).
3(d) Real Estate Securities Fund (incorporated by
reference to Item 24(b)(4)(d) filed under Post-Effective
Amendment No. 39).
4(a) Advisory Agreement with Frank Russell Investment Management
Company (incorporated by reference to Item 24(b)(5)(a)
filed under Post-Effective Amendment No. 40).
4(a)(1) Advisory Agreement with Frank Russell Investment
Management Company dated January 1, 1999 (incorporated
by reference to Post-Effective Amendment No. 42).
4(a)(2) Form of Letter Agreement adding Tax-Managed Equity
Aggressive Strategy, Tax-Managed Aggressive Strategy,
Tax-Managed Balanced Strategy, Tax-Managed Moderate
Strategy, Tax-Managed Conservative Strategy and Tax-
Managed Small Cap Funds to the Advisory Agreement.
4(b)(1) Service Agreement with Frank Russell Company and
Frank Russell Investment Management Company
(incorporated by reference to Item 24(b)(5)(b)(1)
filed under Post-Effective Amendment No. 38).
4(b)(2) Letter Agreement adding Real Estate Securities
Fund to the Service Agreement (incorporated by
reference to Item 24(b)(5)(b)(2) filed under
Post-Effective Amendment No. 38).
4(b)(3) Amendment 1 to Service Agreement with Frank Russell
Company and Frank Russell Investment Management Company
changing services and fees (incorporated by reference
to Item 24(b)(5)(b)(3) filed under Post-Effective
Amendment No. 38).
4(b)(4) Letter Agreement adding Fixed Income III,
Multistrategy Bond and Emerging Markets Funds to
the Service Agreement (incorporated by reference
to Item 24(b)(5)(b)(4) filed under Post-Effective
Amendment No. 38).
4(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 Item
24(b)(5)(b)(5) filed under Post-Effective Amendment
No. 32).
4(b)(6) Letter Agreement adding Equity T Fund to the
Service Agreement (incorporated by reference
to Item 24(b)(5)(b)(6) filed under Post-Effective
Amendment No. 32).
4(b)(7) Letter Agreement with State Street Bank and Trust
Company for development of a Tax Accounting System
(incorporated by reference to Item 24(b)(5)(b)(7)
filed under Post-Effective Amendment No. 32).
4(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 Item 24(b)(5)(b)(8) filed under
Post-Effective Amendment No. 36).
4(b)(9) Letter Agreement to the Yield Calculation Services
Agreement redesignating Class C Shares as Class E Shares
and the existing shares of Institutional Funds to Class I
Shares (incorporated by reference to Post-Effective
Amendment No. 42).
4(b)(10)Letter Agreement to the Yield Calculation Services
Agreement redesignating Premier Adviser Class Shares as
Premier Class Shares and Premier Institutional Class
Shares as Class E Shares (incorporated by reference
to Post-Effective Amendment No. 42).
4(b)(11) Form of Letter Agreement adding Tax-Managed Equity
Aggressive Strategy, Tax-Managed Aggressive
Strategy, Tax-Managed Balanced Strategy,
Tax-Managed Moderate Strategy, Tax-Managed
Conservative Strategy and Tax-Managed Small Cap
Funds to the Yield Calculation Services
Agreement.
4(c)(1) Form of Portfolio Management Contract, as
amended, with Money Managers and Frank Russell
Investment Management Company (incorporated by
reference to Item 24(b)(5)(c)(1) filed under
Post-Effective Amendment No. 32).
4(c)(2) Form of Portfolio Management Contract, as
amended, with Money Managers and Frank Russell
Investment Management Company (incorporated by
reference to Post-Effective Amendment No. 43).
4(c)(3) Form of Portfolio Management Contract, as
amended, with Money Managers and Frank Russell
Investment Management Company.
4(d) Administrative Agreement with Frank Russell
Investment Management Company (incorporated by
reference to Item 24(b)(5)(d) filed under
Post-Effective Amendment No. 40).
4(d)(1) Administrative Agreement with Frank Russell
Investment Management Company dated January 1,
1999 due to change in control (incorporated by
reference to Post-Effective Amendment
No. 42).
4(d)(2) Form of Letter Agreement adding Tax-Managed Equity
Aggressive Strategy, Tax-Managed Aggressive Strategy,
Tax-Managed Balanced Strategy, Tax-Managed Moderate
Strategy, Tax-Managed Conservative Strategy and
Tax-Managed Small Cap Funds to the Administrative
Agreement.
5(a)(1) Distribution Agreement with Russell Fund
Distributors, Inc. (incorporated by reference
to Item 24(b)(6)(a)(1) filed under Post-Effective
Amendment No. 38).
5(a)(2) Letter Agreement adding Real Estate Securities
Fund to the Distribution Agreement (incorporated by
reference to Item 24(b)(6)(a)(2) filed under
Post-Effective Amendment No. 38).
5(a)(3) Letter Agreement adding Fixed Income III, Multistrategy
Bond and Emerging Markets Funds to the Distribution
Agreement (incorporated by reference
to Item 24(b)(6)(a)(3) filed under Post-Effective
Amendment No. 38).
5(a)(4) Letter Agreement adding Equity T Fund to the
Distribution Agreement (incorporated by reference
to Item 24(b)(6)(a)(4) filed under Post-Effective
Amendment No. 32).
5(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 Item 24(b)(6)(a)(5) filed under
Post-Effective Amendment No. 36).
5(a)(6) Distribution Agreement with Russell Fund
Distributors, Inc. dated January 1, 1999 due to
change in control (incorporated by reference
to Post-Effective Amendment No. 42).
5(a)(7) Letter Agreement to the Distribution Agreement
with Russell Fund Distributors adding Class
C Shares of Short Term Bond and Class C and E
Shares of Tax Exempt Bond Fund (incorporated by
reference to Post-Effective Amendment No. 42).
5(a)(8) Form of Letter Agreement adding Tax-Managed Equity
Aggressive Strategy, Tax-Managed Aggressive Strategy,
Tax-Managed Balanced Strategy, Tax-Managed Moderate
Strategy, Tax-Managed Conservative Strategy and
Tax-Managed Small Cap Funds to the Distribution Agreement.
6 Bonus or Profit Sharing Plans (none).
7(a) Custodian Agreement with State Street Bank and Trust
Company (incorporated by reference to Item 24(b)(8)(a)
filed under Post-Effective Amendment No. 38).
7(b) Letter Agreement adding Real Estate Securities
Fund to the Custodian Agreement (incorporated by
reference to Item 24(b)(8)(b) filed under
Post-Effective Amendment No. 38).
7(c) Letter Agreement adding Fixed Income III and Multistrategy
Bond Funds to the Custodian Agreement (incorporated by
reference to Item 24(b)(8)(c) filed under Post-Effective
Amendment No. 38).
7(d) Letter Agreement adding Emerging Markets Fund to the
Custodian Agreement (incorporated by reference to Item
24(b)(8)(d) filed under Post-Effective Amendment No. 38).
7(e) Amendment No. 1 to Custodian Agreement with
State Street Bank and Trust Company amending
Section 3.5 of the Agreement (incorporated by
reference to Item 24(b)(8)(e) filed under
Post-Effective Amendment No. 38).
7(f) Form of Amendment to Custodian Agreement with
State Street Bank and Trust Company amending
Sections 2.2 and 2.7 of the Agreement (incorporated
by reference to Item 24(b)(8)(f) filed
under Post-Effective Amendment No. 38).
7(g) Amendment to the Custodian Agreement with State
Street Bank and 2.7 of the Agreement
(incorporated by reference to Item 24(b)(8)(g) filed
under Post-Effective Amendment No. 38).
7(h) Amendment to the Fee Schedule of the Custodian
Agreement with State Street Bank and Trust
Company (incorporated by reference to Item
24(b)(8)(h) filed under Post-Effective Amendment
No. 38).
7(i) Amendment to the Custodian Agreement with State
Street Bank and Trust Company for addition of
Omnibus accounts (incorporated by reference
to Item 24(b)(8)(i) filed under Post-Effective
Amendment No. 32).
7(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 Item 24(b)(8)(j) filed under Post-Effective
Amendment No. 32).
7(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 Item 24(b)(8)(k) filed under Post-Effective
Amendment No. 32).
7(l) Amendment to the Custodian Agreement with State
Street Bank and Trust Company adding Equity T
Fund (incorporated by reference to Item
24(b)(8)(l) filed under Post-Effective Amendment
No. 32).
7(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 Item 24(b)(8)(m) filed
under Post-Effective Amendment No. 36).
7(n) Form of Letter Agreement adding Tax-Managed Equity
Aggressive Strategy, Tax-Managed Aggressive
Strategy, Tax-Managed Balanced Strategy,
Tax-Managed Moderate Strategy, Tax-Managed
Conservative Strategy and Tax-Managed Small Cap
Funds to the Custodian Agreement.
8(a)(1) Agency Agreement with Frank Russell Investment
Management Company (incorporated by reference
to Item 24(b)(9)(a)(1) filed under Post-Effective
Amendment No. 38).
8(a)(2) Letter Agreement adding Real Estate Securities
Fund to the (Transfer) Agency Agreement
(incorporated by reference to Item 24(b)(9)(a)(2)
filed under Post-Effective Amendment No. 38).
8(a)(3) Letter Agreement adding Fixed III Income,
Multistrategy Bond and Emerging Markets Funds to
the (Transfer) Agency Agreement (incorporated by
reference to Item 24(b)(9)(a)(3) filed under
Post-Effective Amendment No. 38).
8(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 Item 24(b)(9)(a)(4)
filed under Post-Effective Amendment No. 32).
8(a)(5) Letter Agreement adding Equity T Fund to the
Transfer and Dividend Agency Agreement (incorporated by
reference to Item 24(b)(9)(a)(5) filed under
Post-Effective Amendment No. 32).
8(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 Item 24(b)(9)(a)(6) filed under
Post-Effective Amendment No. 36).
8(a)(7) Letter Agreement to Transfer and Dividend Disbursing
Agreement redesignating Class C Shares as Class E Shares
and the existing shares of the Institutional Funds as
Class I Shares (incorporated by reference to
Post-Effective Amendment No. 42)
8(a)(8) Letter Agreement to Transfer and Dividend Disbursing
Agreement redesignating Premier Adviser Class Shares
as Premier Class Shares and Premier Institutional
Class Shares as Class E Shares (incorporated by
reference to Post-Effective Amendment No. 42).
8(a)(9) Form of Letter Agreement to Transfer and Dividend
Disbursing Agency Agreement for reimbursement for
shareholder search expenses (incorporated by
reference to Post-Effective Amendment No. 43).
8(a)(10) Form of Letter Agreement adding Tax-Managed Equity
Aggressive Strategy, Tax-Managed Aggressive Strategy,
Tax-Managed Balanced Strategy, Tax-Managed
Moderate Strategy, Tax-Managed Conservative Strategy
and Tax-Managed Small Cap Funds to Transfer and
Dividend Disbursing Agency Agreement.
8(b) General forms of Frank Russell Investment Management
Company's Asset Management Services Agreements with Bank
Trust Departments and with other clients (incorporated by
reference to Item 24(b)(9)(b) filed under Post-Effective
Amendment No. 38).
8(c) General forms of Frank Russell Investment
Management Company's Asset Management Services
Agreement with its clients (incorporated by reference
to Item 24(b)(9)(c) filed under Post-Effective
Amendment No. 38).
8(d) General form of Frank Russell Investment
Management Company's Asset Management Services
Agreement with Private Investment Consulting
clients of Frank Russell Company (incorporated by
reference to Item 24(b)(9)(d) filed under
Post-Effective Amendment No. 38).
8(e) Form of Shareholder Servicing Plan including
forms of related agreements (incorporated
by reference to Item 24(b)(9)(e) filed under
Post-Effective Amendment No. 41)
8(e)(1)Form of Revised Shareholder Servicing Plan
8(f) General Form of Frank Russell Investment
Management Company Asset Management Services
Agreement with non-compete clause customers
(incorporated by reference to Item 24(b)(9)(f) filed
under Post-Effective Amendment No. 38).
8(g) Letter Agreements regarding fee waivers & reimbursements
(incorporated by reference to Post-Effective Amendment No.
43).
9 Opinion and Consent of Counsel
(incorporated by reference to Item filed under
Post-Effective Amendment No. 39).
10(a) Other Opinions - Consent of Independent Accountants.
10(b) Limited Power of Attorney with respect to
Amendments to the SEC Registration Statements of
Frank Russell Investment Company of Frank Russell
Investment Company Trustees (incorporated by
reference to Item 24(b)(11)(b) filed under
Post Effective Amendment No. 38).
11 Financial Statements omitted from Item 22
(none).
12 Agreement related to Initial Capital provided
by Frank Russell Company (incorporated by reference
to Item 24(b)(13) filed under Post-Effective
Amendment No. 38).
12 Form of Rule 12b-1 Distribution Financing Plan including
forms of related agreements (incorporated by reference
to Item 24(b)(15) filed under Post-Effective
Amendment No. 41)
13(a) Form of revised Rule 12b-1 Distribution
Financing Plan.
15(a) Form of Multiple Class Plan Pursuant to Rule
18f-3 (incorporated by referenced to Item
24(b)(18) filed under Post-Effective Amendment
No. 41).
15(b) Multiple Class Plan pursuant to Rule 18f-3.
Item 24. Persons Controlled by or Under Common Control with Registrant
None.
Item 25. Indemnification
Incorporated by reference to Item 27 filed under Post-Effective
Amendment No. 6.
Item 26. 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",
"Money Manager Profiles," and "Management of the Funds",
the Statement of Additional Information sections "Structure and
Governance--Trustees and Officers," and "Operation of Investment
Company--Consultant."
Item 27. Principal Underwriters.
(a) SSgA Funds.
(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:
<PAGE>
Name and Positions and Position and
Principal Officers with Offices with
Business Registrant Underwriter
Address
George F. Trustee Emeritus, None
Russell, Jr. Chairman of the
Board
Lynn L. Anderson Trustee, Director, Chairman
President, Chief of the Board and
Executive Officer Chief Executive
Officer
Mark E. Swanson Treasurer and None
Chief Accounting
Officer
Karl J. Ege Secretary and Secretary and
General Counsel General Counsel
Randall P. Lert Director of Director
Investments
J. David Griswold None Assistant Secretary
and Associate
General Counsel
Gregory J. Lyons Assistant Assistant Secretary
Secretary and
Associate General
Counsel
Deedra S. Walkey Assistant Secretary None
Amy Osler Assistant Secretary None
Rick J. Chase Assistant Treasurer None
Kimbery A. Stoll Assistant Treasurer None
Eric A. Russell None Director and
President
B. James None Director of
Rohrbacher Compliance and
Internal Audit,
Chief Compliance
Officer
Linda L. Gutmann None Treasurer and
Controller
Mary E. Hughs None Assistant Secretary
Carla L. Anderson None Assistant Secretary
John James None Assistant Secretary
Mary Beth Rhoden Assistant Secretary None
(c) Inapplicable.
<PAGE>
Item 28. 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:
FRIC FRIMCo
Frank Russell Investment Frank Russell Investment
Company Management Company
909 A Street 909 A Street
Tacoma, Washington 98402 Tacoma, Washington 98402
SS MM
State Street Bank & Trust Money Managers
Company
1776 Heritage Drive JA4N See, Prospectus Section
North Quincy, Massachusetts "Money Manager Profiles"
02171 for Names and Addresses
Rule 31a-1
(a) Records forming basis for financial statements - at principal
offices of SS, FRIC, FRIMCo, and MM for each entity.
(b) FRIC Records:
(1) SS - Journals, etc.
(2) SS - Ledgers, etc.
(3) Inapplicable.
(4) FRIC - Corporate charter, etc.
(5) MM - Brokerage orders.
(6) MM - Other portfolio purchase orders.
(7) SS - Contractual commitments.
(8) SS and FRIC - Trial balances.
(9) MM - Reasons for brokerage allocations.
(10) MM - Persons authorizing purchases and sales.
(11) FRIC and MM - Files of advisory material.
(12) ---
(c) Inapplicable.
(d) FRIMCo - Broker-dealer records, to the extent applicable.
(e) Inapplicable.
(f) FRIMCo and MM - Investment adviser records.
Item 29. Management Services.
None except as described in Parts A and B.
Item 30. Undertakings.
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, Frank Russell Investment Company has duly
caused this Post Effective Amendment No. 44 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 this 9th day of August, 1999.
FRANK RUSSELL INVESTMENT COMPANY
Registrant
By: /c/ 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 August 9th, 1999.
Signatures Title
/s/ Lynn L. Anderson Trustee and President,
Lynn L. Anderson in his capacity as
Chief Executive Officer
/s/ Mark E. Swanson Treasurer, in his capacity
Mark E. Swanson as Chief Accounting Officer
Paul E. Anderson* Trustee
Paul Anton, PhD* Trustee
William E. Baxter* Trustee
Lee C. Gingrich* Trustee
Eleanor W. Palmer* Trustee
By: /c/ Gregory J. Lyons Assistant Secretary
Gregory J. Lyons
* Original Powers of Attorney authorizing the President, the Treasurer, any
Assistant Treasurer, the Secretary or any Assistant Secretary, and each of
them singly to sign this Amendment 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.
EXHIBIT INDEX
Name of Exhibit Exhibit Number
4/26/99 Amendment to Master Trust Agreement 1(o)
EX-99.B1.a.
6/28/99 Amendment to Master Trust Agreement 1(p)
EX-99.B1.b.
8/9/99 Form of Amendment to Master Trust
Agreement 1(q)
EX-99.B1.c.
8/9/99 Form of Amendment to Master Trust
Agreement 1(r)
EX-99.B1.d.
Form of Letter Agreement adding Tax-Managed
Equity, Aggressive Strategy,
Tax-Managed Aggressive
Strategy, Tax-Managed Balanced
Strategy, Tax-Managed Moderate Strategy
Tax-Managed Small Cap Funds
to the Advisory Agreement 4(a)(2)
EX-99.B5.a.
Form of Letter Agreement adding Tax-Managed
Equity, Aggressive Strategy,
Tax-Managed Aggressive
Strategy,
Tax-Managed Balanced
Strategy, Tax-Managed Moderate Strategy)
Tax-Managed Small Cap Funds
to the Yield Calculation Services Agreement 4(b)(11)
EX-99.B9.b.
Form of Portfolio Management Contract, as
amended, with Money Managers and Frank Russell Investment
Management Company 4(c)(3)
EX-99.B5.b.
Form of Letter Agreement adding Tax-Managed
Equity, Aggressive Strategy,
Tax-Managed Aggressive
Strategy,
Tax-Managed Balanced
Strategy, Tax-Managed Moderate Strategy
Tax-Managed Small Cap Funds
to the Administrative Agreement 4(d)(2)
EX-99.B9.a.
Form of Letter Agreement adding Tax-Managed
Equity, Aggressive Strategy,
Tax-Managed Aggressive
Strategy, Tax-Managed Balanced
Strategy, Tax-Managed Moderate Strategy
Tax-Managed Small Cap Funds
to the Distribution Agreement 5(a)(8)
EX-99.B6.
Form of Letter Agreement adding Tax-Managed
Equity, Aggressive Strategy,
Tax-Managed Aggressive
Strategy, Tax-Managed Balanced
Strategy, Tax-Managed Moderate Strategy
Tax-Managed Small Cap Funds to the Custodian
Agreement 7(n)
EX-99.B8.
Form of Letter Agreement adding Tax-Managed
Equity, Aggressive Strategy,
Tax-Managed Aggressive
Strategy, Tax-Managed Balanced
Strategy, Tax-Managed Moderate Strategy
Tax-Managed Small Cap Funds
to the Transfer and Dividend Disbursing Agency
Agreement 8(a)(10)
EX-99.B9.c.
Form of Revised Shareholder Servicing Plan 8(e)(1)
EX-99.B15.b.
Consent of Independent Accountants 10(a)
EX-99.B11
Form of revised Rule 12b-1 Distribution 13(a)
Financing Plan EX-99.B15.a.
Multiple Class Plan Pursuant to Rule 18f-3 15(b)
EX-99.B9.d.
Special Servicing Agreement EX-99.B9.e.
FRANK RUSSELL INVESTMENT COMPANY
FILE NO. 2-71299
FILE NO. 811-3153
EXHIBITS
Listed in Part C, Item 23
To Post-Effective Amendment No. 44
and Amendment No. 44
to
Registration Statement on Form N-1A
Under
Securities Act of 1933
and
Investment Company Act of 1940
Exhibit 1(o)
FRANK RUSSELL INVESTMENT COMPANY
AMENDMENT TO MASTER TRUST AGREEMENT
Regarding designations of Sub-Trust
AMENDMENT NO. 14 to the Amended Master Trust Agreement dated July 26, 1984
(referred to herein as the "Agreement"), done this 26th day of April, 1999,
by the Trustees under such Agreement.
WITNESSETH:
WHEREAS, Section 4.1 of the Agreement authorizes the Trustees to
establish and designate sub-trusts and classes thereof; and
WHEREAS, The trustees wish to provide for the redesignation of the name of
Equity Balanced Strategy Fund Sub-Trust, and have determined that such
renaming of the Sub-Trust will not adversely impact the Shareholders of
such Sub-Trust; and
WHEREAS, the Trustees propose that such redesignation shall be effective
at a date to be set by the officers of the Trust in consideration of the
revision of disclosure and other materials relating to such Sub-Trust; and
NOW, THEREFORE, the Trustees hereby amend the Agreement as set forth below
to redesignate the name of such Sub-Trust and to provide for such further
actions as necessary and appropriate in furtherance thereof.
Redesignation of Sub-Trusts
Without limiting the authority of the Trustees set forth in Section 4.1 of the
Agreement to establish and designate any further sub-trust, and without
effecting rights and preferences of the twenty-seven existing sub-trusts, the
trustees hereby redesignate the sub-trust named "Equity Balanced Strategy Fund
as the "Equity Aggressive Strategy Fund."
The undersigned hereby certify that the Amendment set forth above has been duly
adopted in accordance with the provisions of the Master Trust Agreement.
IN WITNESS WHEREOF, the undersigned have hereunto set their hands and seals for
themselves and their assigns, as of the day and year first above written. This
instrument may be executed in one or more counterparts, all of which shall
together constitute a single instrument.
/s/ Lynn L. Anderson /s/Eleanor Palmer
Lynn L. Anderson Eleanor W. Palmer
/s/Paul E. Anderson /s/Lee C. Gingrich
Paul E. Anderson Lee C. Gingrich
/s/Paul Anton /s/ William E. Baxter
Paul Anton William E. Baxter.
Exhibit 1(p)
FRANK RUSSELL INVESTMENT COMPANY
AMENDMENT TO MASTER TRUST AGREEMENT
Regarding Designation of Resident Agent
AMENDMENT NO. 15 to the Amended Master Trust Agreement dated July 26, 1984
(referred to herein as the "Agreement"), done this 28th day of June, 1999, by
the Trustees under such Agreement.
WITNESSETH:
WHEREAS, Section 3.2 of the Agreement authorizes the Trustees to appoint
and terminate agents; and
WHEREAS, The trustees wish to provide for the designation of CT
Corporation System, located at 2 Oliver Street, Boston, Massachusetts
02109, as Frank Russell Investment Company's Resident Agent in the
Commonwealth of Massachusetts; and
WHEREAS, the Trustees propose that such designation shall be effective
upon the filing of this Amendment with The Commonwealth of Massachusetts;
and
NOW, THEREFORE, the Trustees hereby amend the Agreement to designate CT
Corporation System, located at the address listed above, as Frank Russell
Investment Company's Resident Agent in the Commonwealth of Massachusetts;
and to provide for such further actions as necessary and
appropriate in furtherance thereof.
The undersigned hereby certify that the Amendment set forth above has been duly
adopted in accordance with the provisions of the Master Trust Agreement.
IN WITNESS WHEREOF, the undersigned have hereunto set their hands and seals for
themselves and their assigns, as of the day and year first above written. This
instrument may be executed in one or more counterparts, all of which shall
together constitute a single instrument.
/s/ Lynn L. Anderson /s/ Eleanor W. Palmer
Lynn L. Anderson Eleanor W. Palmer
/s/ Paul E. Anderson /s/ Lee C. Gingrich
Paul E. Anderson Lee C. Gingrich
/s/ Paul Anton /s/ William E.Baxter
Paul Anton William E. Baxter
Exhibit 1(q)
FRANK RUSSELL INVESTMENT COMPANY
AMENDMENT TO MASTER TRUST AGREEMENT
Regarding Designations of Sub-Trusts
and Classes of Shares
AMENDMENT NO. 16 to the Amended Master Trust Agreement dated July 26, 1984
(referred to herein as the "Agreement"), done this 9th day of August, 1999,
by the Trustees under such Agreement.
WITNESSETH:
WHEREAS, Section 4.1 of the Agreement authorizes the Trustees to
establish and designate sub-trusts and classes thereof; and
WHEREAS, Section 4.2 of the Agreement provides that the Trustees may fix
and determine certain relative rights and preferences of the shares of the
sub-trusts in accordance with the provisions of such Section 4.2; and
WHEREAS, the Trustees wish to establish and designate additional
sub-trusts and classes of shares of interest in such sub-trusts, and fix
and determine certain relative rights and obligations of the shares of
said classes of such sub-trusts; and
WHEREAS, Section 4.1 of the Agreement provides that a Trustee may act for
such purpose without shareholder approval;
NOW, THEREFORE, the Trustees hereby establish and designate the following
sub-trusts, authorize the designation of classes of shares and fix the
rights and preferences of the shares thereof as set forth herein.
Establishment and Designation of Sub-Trusts and Classes.
Without limiting the authority of the Trustees set forth in Section 4.1 of the
Agreement to establish and designate any further sub-trusts, and without
affecting the rights and preferences of any existing sub-trust or class of any
existing sub-trust, the Trustees hereby establish and designate five additional
sub-trusts which are designated the "Tax-Managed Equity Aggressive Strategy
Fund," "Tax-Managed Aggressive Strategy Fund," "Tax-Managed Moderate Strategy
Fund," "Tax-Managed Conservative Strategy Fund" and "Tax-Managed Small Cap
Fund." The shares of each such sub-trust shall be divided into Class S Shares
and Class C Shares. Each sub sub-trust shall have all the relative rights and
preferences granted by the Agreement to the existing sub-trusts including those
listed in Section 4.2 of the Agreement.
Without limiting the authority of the Trustees set forth in Section 4.1 of the
Agreement to establish and designate any further classes of any sub-trusts, and
without affecting the rights and performances of any existing sub-trust or class
of any existing sub-trust, the Trustees hereby establish and designate a new
Class C for the Equity T Fund.
In furtherance thereof, the Trustees direct that new Class C Shares and Class S
Shares of each Sub-Trust and the new Class C Shares of the Tax-Managed Large Cap
Fund shall have all the relative rights and preferences set forth in Section 4.2
of the Agreement, shall represent an equal proportionate interest in the
underlying assets and liabilities of that Sub-Trust, and shall generally have
identical voting, dividend, liquidation and other rights, preferences, powers,
restrictions, limitations, obligations, qualifications and terms and conditions
as all other Shares of such Sub-Trust, except that:
- each Class C Share offered in connection with a distribution plan
pursuant to Rule 12b-1 of the Investment Company Act of 1940, as
amended ("Distribution Plan") will bear, as a charge against
distributable income or gains or as a reduction in interest, certain
fees under its Distribution Plan and will have exclusive voting
rights on matters pertaining to the Distribution Plan of the Class
and any related agreements;
- each Class C Share offered in connection with a shareholder services
("Shareholder Services Plan") will bear, as a charge against
distributable income or gains or as a reduction in interest, certain
fees under its respective Shareholder Services Plan and will have
exclusive voting rights on matters pertaining to the Shareholder
Services Plan of the Class and any related agreements;
- each Class C and Class S Share of a Sub-Trust shall contain such
conversion feature as may be required to comply with regulations
applicable to the Sub-Trust or to the issuance of Shares of the
Sub-Trust;
- each Class C and Class S Share of a Sub-Trust will bear, as a charge
against distributable income or gains or as a reduction in interest,
differing amounts of certain expenses attributable to the Class;
- the Board shall provide for differing payments of dividends from
income or distributions of gains on a Class C and Class S Share of a
Sub-Trust to reflect different charges against such income or gains
or otherwise to equalize the net asset values of the Classes or, in
the absence of such policies, the net asset value per share of
different Classes of a Sub-Trust may differ at certain times;
- each Class C and Class S Share of a Sub-Trust may be accorded such
different exchange privileges from Shares of another Class as the
Board may deem proper from time to time;
- each Class C and Class S Share of a Sub-Trust shall be subject to
such different conditions of redemption, as shall be set forth in the
Trust's registration statement from time to time;
- each Share of any Class of a Sub-Trust will vote exclusively on
matters solely affecting Shares of that Class, and shall not vote
upon matters which do not affect such Class;
- each Class C and Class S Share of a Sub-Trust will have a different
class designation from any other Class of that Sub-Trust; and
- each Class C and Class S Share of a Sub-Trust may have such
additional rights and preferences, or be subject to such restrictions
and qualifications, as the Trustees by resolution may determine,
consistent with the provisions of the 1940 Act and the Internal
Revenue Code, as amended, and not otherwise identified above.
The undersigned hereby certify that the Amendment set forth above has been duly
adopted in accordance with the provisions of the Master Trust Agreement.
IN WITNESS WHEREOF, the undersigned have hereunto set their hands and seals for
themselves and their assigns, as of the day and year first above written. This
instrument may be executed in one or more counterparts, all of which shall
together constitute a single instrument.
Lynn L. Anderson Eleanor W. Palmer
Paul E. Anderson Lee C. Gingrich
Paul Anton William E. Baxter
Exhibit 1(r)
FRANK RUSSELL INVESTMENT COMPANY
AMENDMENT TO MASTER TRUST AGREEMENT
Regarding Renaming the Equity T Fund
AMENDMENT NO. 17 to the Amended Master Trust Agreement dated July 26, 1984
(referred to herein as the "Agreement"), done this 9th day of August, 1999,
by the Trustees under such Agreement.
WITNESSETH:
WHEREAS, Section 4.1 of the Agreement authorizes the Trustees to
establish and designate sub-trusts and classes thereof; and
WHEREAS, Section 4.1 of the Agreement provides that a Trustee may act for
such purpose without shareholder approval;
NOW, THEREFORE, the Trustees hereby redesignate the following sub-trust as
set forth herein.
Redesignation of Sub-Trusts.
Without limiting the authority of the Trustees set forth in Section 4.1 of the
Agreement to establish and designate any further sub-trusts, and without
affecting rights and preferences of the twenty-eight correctly sub-trusts, the
Trustees hereby redesignate the sub trust-named "Equity T" to be named
"Tax-Managed Large Cap" effective ______________.
The undersigned hereby certify that the Amendment set forth above has been duly
adopted in accordance with the provisions of the Master Trust Agreement.
IN WITNESS WHEREOF, the undersigned have hereunto set their hands and seals for
themselves and their assigns, as of the day and year first above written. This
instrument may be executed in one or more counterparts, all of which shall
together constitute a single instrument.
Lynn L. Anderson William E. Baxter
Paul E. Anderson Lee C. Gingrich
Paul Anton Eleanor W. Palmer
Exhibit 4(a)(2)
LETTER AGREEMENT
Frank Russell Investment Management Company
P.O. Box 1591
Tacoma, WA 98401-1591
Dear Sirs:
This Letter Agreement relates to the Advisory Agreement between Frank Russell
Investment Company and Frank Russell Investment Management Company dated January
1, 1999 ("Advisory Agreement"). Frank Russell Investment Company advises you
that it is creating five new funds to be named Tax-Managed Equity Aggressive
Strategy Fund, Tax-Managed Aggressive Strategy Fund, Tax-Managed Moderate
Strategy Fund, Tax-Managed Conservative Strategy Fund (each, a "Tax-Managed
LifePoints Fund") and Tax-Managed Small Cap Fund (each, a "Fund") and that each
Fund desires Frank Russell Investment Management Company to provide advisory
services to the Fund pursuant to the terms and conditions of the Advisory
Agreement. Section 6A of the Advisory Agreement hereby to includes each Fund,
with an annual advisory fee of .20% for each Tax-Managed LifePoints Fund and
.98% for Tax-Managed Small Cap Fund of average daily net assets, payable as set
forth in that Section.
Please indicate your acceptance of the amendment to the Advisory Agreement by
executing the acceptance copy of this letter agreement and returning it to the
undersigned.
Sincerely,
FRANK RUSSELL INVESTMENT COMPANY
By:
Lynn L. Anderson
President
Accepted this day of , 1999.
FRANK RUSSELL INVESTMENT MANAGEMENT COMPANY
By:
Eric A. Russell
President
Frank Russell Company agrees to provide consulting services without charge to
FRIC upon the request of the Board of Trustees or Officers of the Trust, or upon
the request of Advisor pursuant to Section 2(c).
FRANK RUSSELL COMPANY
By:
Michael J.A. Phillips, President
Exhibit 4(c)(3)
Contract Mailed:
Effective Date:
Termination Date: April 30,
Fund(s):
Re: Frank Russell Investment Company Portfolio Management Contract
Dear
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, 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 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 Investment 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, 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 FRIMCo for payment of amounts payable to Money Manager hereunder. Money
Manager hereby agrees to contact the Secretary of the Investment Company if
payment is not received from FRIMCo.
10.Other Investment Activities of Money Manager. Investment Company
acknowledges that Money Manager, or one or more of its affiliates, may have
investment responsibilities or render investment advice to, or perform other
investment advisory services for, other individuals or entities ("Affiliated
Accounts"). Subject to the provisions of paragraph 2 hereof, Investment Company
agrees that Money Manager or its affiliates may give advice or exercise
investment responsibility and take such other action with respect to other
Affiliated Accounts which may differ from advice given or the timing or nature
of action taken with respect to the Fund Account, provided that Money Manager
acts in good faith, and provided, further, that it is Money Manager's policy to
allocate, within its reasonable discretion, investment opportunities to the Fund
Account over a period of time on a fair and equitable basis relative to the
Affiliated Accounts, taking into account the investment objectives and policies
of the Fund Account and any specific investment restrictions applicable thereto.
Investment Company acknowledges that one or more of the Affiliated Accounts may
at any time hold, acquire, increase, decrease, dispose of or otherwise deal with
positions in investments in which the Fund Account may have an interest from
time to time, whether in transactions which may involve the Fund Account or
otherwise. Money Manager shall have no obligation to acquire for the Fund
Account a position in any investment which any Affiliated Account may acquire,
and the Investment Company shall have no first refusal, coinvestment or other
rights in respect of any such investment, either for the Fund Account or
otherwise.
11.Certificate of Authority. Investment Company, FRIMCo and Money Manager
shall furnish to each other from time to time certified copies of the
resolutions of their Board of Directors, Board of Trustees or executive
committee evidencing the authority of officers and employees who are authorized
to act on behalf of Investment Company, Fund Account, FRIMCo and/or Money
Manager.
12.Limitation of Liability. Money Manager shall not be liable for any
action taken, omitted or suffered to be taken by it in its reasonable judgment,
in good faith and believed by it to be authorized or within the discretion or
rights or powers conferred upon it by this Contract, or in accordance with (or
in the absence of) specific directions or instructions from Investment Company;
provided, however, that such acts or omissions shall not have resulted from
Money Manager's willful misfeasance, bad faith or gross negligence, violation of
the standard of care established by and applicable to Money Manager in its
actions under this Contract, or breach of its duty or of its obligations
hereunder. Notwithstanding the forgoing, federal and state securities laws (and
ERISA if applicable) impose liability under certain circumstances on persons who
act in good faith, and therefore nothing herein shall in any way constitute a
waiver or limitation of any rights which Investment Company and FRIMCo may have
under federal or state securities laws of the United States of America or the
rights which may not be waived; under any other applicable law (including ERISA
if applicable).
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.
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 non-compete 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.
F. The Money Manager confirms that it has developed and is implementing
a plan reasonably designed to help verify that its computer systems, as the same
relate to services provided hereunder, will not be affected by Year 2000
problems or, if such problems do occur, that the Money Manager will have in
place contingency plans reasonably designed to enable the Money Manager to
continue to provide the requisite services hereunder. The Money Manager will
provide the FRIMCo with an update regarding the foregoing promptly upon the
FRIMCo's written request.
17.Amendment. This Contract may be amended at any time, but only by
written agreement between Money Manager and Investment Company, which amendment,
other than amendments to Exhibits A and B, must be approved by the Board of
Trustees of the Investment Company in the manner required by the Act.
18. Effective Date; Term. This Contract shall become effective for the
Fund(s) on the effective date set forth on page 1 of this Contract, and shall
continue in effect until the termination date set forth on page 1 of this
Contract. Thereafter, the Contract shall continue in effect for successive
annual periods only so long as its continuance has been specifically approved at
least annually by the Board of Trustees of the Investment Company in the manner
required by the Act.
19.Termination. This Contract may be terminated without the payment of any
penalty (a) at any time by the Investment Company upon written notice to the
Money Manager, and (b) by Money Manager upon thirty days written notice to the
Investment Company.
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 Contract 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.
(Money Manager) Frank Russell Investment Company
Frank Russell Investment Management Company,
as a fiduciary for Frank Russell Investment
Company
BY: BY:
Sharon L. Hammel, CFA
Director of Portfolio Implementation
DATE: DATE:
EXHIBITS: A. Operational Procedures (including Schedules 1, 2 and 3).
B. Recordkeeping Requirements.
C. Fee Schedule.
D. Notice of Liability Letter.
E. Description of Portfolio Manager's Non-Compete Agreement.
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:
|X| 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.
|X| 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.
|X| 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.
|X| 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.
|X| 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:
|X| Purchase or Sale
|X| Security name
|X| Number of shares or principal amount
|X| Price per share or bond
|X| Commission rate per share or bond, or if a net trade
|X| Executing broker
|X| Trade date
|X| Settlement date
|X| If security is not eligible for DTC
|X| This information can be reported using your forms, if applicable
When opening accounts with brokers for Investment Company, the account should be
a cash account. No margin accounts are to be maintained. The broker should be
advised to use SSB IDC's ID system number (No. 20997) to facilitate the receipt
of information by SSB. If this procedure is followed, DK problems will be held
down to a minimum and additional costs of security trades will not become an
important factor in doing business. Delivery and receipt instructions are
attached as Schedule 2. MM will be required to submit to SSB a daily trade
authorization report, either through a System or, if a facsimile transmission is
used, on a form signed by two authorized individuals prior to settlement date
and a list of authorized persons with specimen signatures must have previously
been sent to SSB (see Schedule 3). The daily trade authorization report will
contain information on which SSB can rely to either accept delivery or deliver
out of the account, securities as per MM trades. If facsimile transmission is
used, a preprinted form will be supplied to MM by Investment Company, or MM can
use an equivalent form acceptable to SSB and Investment Company.
<PAGE>
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) FRIMCo, (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 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 Investment 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
INVESTMENT MANAGER COMPANY NAME
FUND NAME
For investment management services provided to the Fund Account under this
Contract, 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 and the last business day of the
month ended immediately prior to 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 Contract.
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 NAME
Portfolio Management Contract
EFFECTIVE DATE
<PAGE>
Exhibit D
Ladies and Gentlemen:
Our firm has been hired by Frank Russell Investment Company ("FRIC") to act on
its behalf as an investment manager. FRIC is an SEC-registered investment
company, also known as a mutual fund. Like many other mutual funds, FRIC is
organized as a Massachusetts business trust rather than as a corporation. In
connection with hiring our firm, FRIC has requested that we provide you with the
following information concerning purchases and/or sales of securities and other
portfolio instruments that our firm will make, on FRIC's behalf, with your
organization.
Under FRIC's master trust agreement, FRIC is required to inform anyone with
which it does business, either directly or through an agent, such as our firm,
(a) that FRIC is organized as a Massachusetts business trust (as opposed to
being organized as a corporation); (b) that, notwithstanding its form of
organization, its shareholders, officers and trustees are not personally liable
for FRIC's acts or its obligations; and (c) that all obligations of FRIC can be
satisfied only out of FRIC's own assets. A copy of FRIC's master trust agreement
is on file with the Secretary of The Commonwealth of Massachusetts.
This notice is merely for your information. It does not change FRIC's
responsibility for its transactions with you whether directed by our firm or
otherwise. You do not need to take any action in response to this notice.
If you have any questions concerning the information in this notice, please
contact Gregory J. Lyons, Associate General Counsel of FRIC, at (253) 596-2406.
Sincerely yours,
<PAGE>
Exhibit E
Description of Portfolio Manager's Non-Compete Agreement, if any.
Exhibit 4(d)(2)
LETTER AGREEMENT
Frank Russell Investment Management Company
P.O. Box 1591
Tacoma, WA 98401-1591
Dear Sirs:
This Letter Agreement relates to the Administrative Agreement between Frank
Russell Investment Company and Frank Russell Investment Management Company dated
December 1, 1998 ("Administrative Agreement"). Frank Russell Investment Company
advises you that it is creating five new funds to be named Tax-Managed Equity
Aggressive Strategy Fund, Tax-Managed Aggressive Strategy Fund, Tax-Managed
Moderate Strategy Fund, Tax-Managed Conservative Strategy Fund and Tax-Managed
Small Cap Fund (each, a "Fund") and that each Fund desires Frank Russell
Investment Management Company to provide administrative services to the Fund
pursuant to the terms and conditions of the Administrative Agreement. Section 6A
of the Administrative Agreement hereby to includes each Fund, with an annual
administrative fee of 0.05% of average daily net assets, payable as set forth in
that Section.
Please indicate your acceptance of the amendment to the Administrative Agreement
by executing the acceptance copy of this letter agreement and returning it to
the undersigned.
Sincerely,
FRANK RUSSELL INVESTMENT COMPANY
By:
Lynn L. Anderson
President
Accepted this day of , 1999.
FRANK RUSSELL INVESTMENT MANAGEMENT COMPANY
By:
Eric A. Russell
President
Exhibit 5(a)(8)
LETTER AGREEMENT
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 ("FRIC") and Russell Fund Distributors, Inc., dated
March 7, 1988, FRIC advises you that it is creating five new Funds, each
consisting of Class S Shares and Class C Shares (each, a "Class"), with the
following names Tax-Managed Equity Aggressive Strategy Fund, Tax-Managed
Aggressive Strategy Fund, Tax-Managed Moderate Strategy Fund, Tax-Managed
Conservative Strategy Fund and Tax-Managed Small Cap Fund (the "New Funds") and
is creating a new Class C Equity T Fund (of the Tax-Managed Large Cap Fund).
FRIC desires Russell Fund Distributors, Inc. to serve as Distributor with
respect to the Shares of each Class of each of the New Funds and of Class C of
the Tax-Managed Large Cap Fund pursuant to the terms and conditions of the
Distribution Agreement. The fees to be charged the Fund in return for the
Distributor's services are the same as in the Distribution Agreement.
Please indicate your acceptance to act as Distributor with respect to each Class
of the New Funds and of Class C of the Tax-Managed Large Cap Fund by executing
the acceptance copy of this letter agreement and returning it to the
undersigned.
Sincerely,
FRANK RUSSELL INVESTMENT COMPANY
By:
Lynn L. Anderson
President
Accepted this day of , 1999
RUSSELL FUND DISTRIBUTORS, INC.
By:
Eric A. Russell
President
Exhibit 7(n)
LETTER AGREEMENT
State Street Bank and Trust Company
P.O. Box 1713
Boston, MA 02105
Dear Sirs:
Pursuant to Section 14 of the Custodian Agreement between Frank Russell
Investment Company ("FRIC") and State Street Bank and Trust Company, dated
October 31, 1988, FRIC advises you that it is creating five new funds to be
named Tax-Managed Equity Aggressive Strategy Fund, Tax-Managed Aggressive
Strategy Fund, Tax-Managed Moderate Strategy Fund, Tax-Managed Conservative
Strategy Fund and Tax-Managed Small Cap Fund (each, a "Fund"). FRIC desires for
State Street Bank and Trust Company to serve as Custodian with respect to each
Fund pursuant to the terms and conditions of the Custodian Agreement. The first
four Funds set forth above are to be "fund of funds." The fees to be charged by
the Custodian to each Fund in return for its services are contained in the
current fee schedule to the Custodian Agreement.
Please indicate your acceptance to act as Custodian to each Fund by executing
the acceptance copy of this letter agreement and returning it to the
undersigned.
Sincerely,
FRANK RUSSELL INVESTMENT COMPANY
By:
Lynn L. Anderson
President
Accepted this day of , 1999.
STATE STREET BANK AND TRUST COMPANY
By:
Its:
Exhibit 4(b)(11)
LETTER AGREEMENT
State Street Bank and Trust Company
P.O. Box 1713
Boston, MA 02105
Dear Sirs:
Pursuant to Section 14 of the Yield Calculation Services Agreement of Frank
Russell Investment Company ("FRIC"), dated January 2, 1985, FRIC advises you
that it is creating five new funds to be named Tax-Managed Equity Aggressive
Strategy Fund, Tax-Managed Aggressive Strategy Fund, Tax-Managed Moderate
Strategy Fund, Tax-Managed Conservative Strategy Fund and Tax-Managed Small Cap
Fund (each, a "Fund"), each of which will consist of Class S Shares and Class C
Shares (each, a "Class") and is creating a new Class C Equity T Fund (to be
renamed Tax-Managed Large Cap Fund). FRIC desires for State Street Bank and
Trust Company to compute the performance results of each Class of each Fund and
Class C of Tax-Managed Large Cap Fund pursuant to the terms and conditions of
the Yield Calculation Service Agreement.
Please indicate your acceptance to amend the Yield Calculation Service Agreement
by executing the acceptance copy of this letter agreement and returning it to
the undersigned.
Sincerely,
FRANK RUSSELL INVESTMENT COMPANY
By:
Lynn L. Anderson
President
Accepted this day of , 1999.
STATE STREET BANK AND TRUST COMPANY
By:
Its:
Exhibit 8(a)(10)
LETTER AGREEMENT
and
AMENDED SCHEDULE A
Frank Russell Investment Management Company
909 A Street
Tacoma, WA 98402
Dear Sirs:
Pursuant to Sections 25 and 26 of the Transfer and Dividend Disbursing Agency
Agreement between Frank Russell Investment Company (the "Investment Company")
and Frank Russell Investment Management Company, dated April 1, 1988, FRIC
advises you that it is creating five new Investment Company Funds named
Tax-Managed Equity Aggressive Strategy Fund, Tax-Managed Aggressive Strategy
Fund, Tax-Managed Moderate Strategy Fund, Tax-Managed Conservative Strategy Fund
and Tax-Managed Small Cap Fund ("New Funds"), each of which will comprise two
Classes of Shares, Class S and Class C (each, a "Class") and is creating a new
Class C of Equity T Fund (to be renamed Tax-Managed Large Cap Fund) (also a,
"Class"). FRIC desires Frank Russell Investment Management Company to serve as
the Transfer and Dividend Disbursing Agent with respect to each Class pursuant
to the terms and conditions of the Transfer and Dividend Disbursing Agency
Agreement. FRIC also desires to amend Schedule A of the Transfer and Dividend
Disbursing Agency Agreement to add each Class. The fees to be charged by the
Transfer and Dividend Disbursing Agent in return for its services are the same
as those set forth in the current fee schedule to the Transfer and Dividend
Disbursing Agency Agreement.
Please indicate your acceptance to act as Transfer and Dividend Disbursing Agent
with respect to each Class 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:
Lynn L. Anderson
President
Accepted this day of , 1999.
FRANK RUSSELL INVESTMENT MANAGEMENT COMPANY
By:
Eric A. Russell
President
<PAGE>
AMENDED
SCHEDULE A
FRANK RUSSELL INVESTMENT COMPANY
FUND CLASS(ES)
Equity I E; I: Premier; Y
Equity II E; I: Premier; Y
Equity III E; I: Premier; Y
Equity Q E; I: Premier; Y
Fixed Income I E; I: Premier; Y
Short Term Bond
(formerly Fixed Income II) C; S; E; I: Premier; Y
Fixed Income III E; I: Premier; Y
International E; I: Premier; Y
Emerging Markets C; E; S
Diversified Equity C; E; S
Special Growth C; E; S
Equity Income C; E; S
Quantitative Equity C; E; S
International Securities C; E; S
Real Estate Securities C; E; S
Diversified Bond C; E; S
Multistrategy Bond C; E; S
Money Market S
Tax Exempt Bond
(formerly Limited Volatility Tax Free) C; E; S
U.S. Government Money Market S
Tax Free Money Market S
Aggressive Strategy C; S; D; E
Balanced Strategy C; S; D; E
Moderate Strategy C; S; D; E
Conservative Strategy C; S; D; E
Equity Aggressive Strategy (formerly
Equity Balanced Strategy) C; S; D; E
Tax-Managed Equity Aggressive Strategy C; S
Tax-Managed Aggressive Strategy C; S
Tax-Managed Moderate Strategy C; S
Tax-Managed Conservative Strategy C; S
Tax-Managed Large Cap
(formerly Equity T) C; S
Tax-Managed Small Cap C; S
Exhibit 10(a)
To the Board of Trustees of
Frank Russell Investment Company
We consent to the incorporation by reference in Post-Effective Amendment
No. 44 to the Registration Statement of Frank Russell Investment Company on Form
N-1A of our reports dated February 15, 1999, on our audits of the financial
statements and financial highlights of the Fund (comprised of Equity I Fund,
Equity II Fund, Equity III Fund, Equity Q Fund, International Fund, Emerging
Markets Fund, Fixed Income I Fund, Short Term Bond Fund (formerly Fixed Income
II Fund), Fixed Income III Fund, Money Market Fund, Diversified Equity Fund,
Special Growth Fund, Equity Income Fund, Quantitative Equity Fund, International
Securities Fund, Real Estate Securities Fund, Diversified Bond Fund, Tax Exempt
Bond Fund (formerly Limited Volatility Tax Free Fund), Multistrategy Bond Fund,
Volatility Constrained Bond Fund U.S. Government Money Market Fund, Tax Free
Money Market Fund, Equity T Fund, LifePoints Equity Balanced Strategy Fund,
LifePoints Aggressive Strategy Fund, LifePoints Balanced Strategy Fund,
LifePoints Moderate Strategy Fund and LifePoints Conservative Strategy Fund)
which reports are included in the Annual Reports to the shareholders for the
year ended December 31, 1998, which are incorporated by reference in the
Registration Statement. We also consent to the references to our Firm under the
captions "Financial Highlights" and "Additional Information" in the Prospectus,
and "Independent Accountants" in the Statement of Additional Information.
/S/ PRICEWATERHOUSECOOPERS LLP
PRICEWATERHOUSECOOPERS LLP
Seattle, Washington
August 27, 1999
Exhibit 13(a)
FRANK RUSSELL INVESTMENT COMPANY
DISTRIBUTION PLAN
CLASS C SHARES
CLASS D SHARES
This Distribution Plan (the "Plan") has been adopted with respect to Class
C Shares and Class D Shares (each, respectively, the "Shares") issued by certain
Funds, as defined below, of Frank Russell Investment Company (the "Company"), an
open-end management investment company registered under the Investment Company
Act of 1940, as amended, (the "1940 Act"), consisting of distinct portfolios of
shares of common stock (each a "Fund" or, collectively, the "Funds") by the
Board of Trustees of the Company (the "Board"), in conformance with Rule 12b-1
under the 1940 Act.
This Plan will pertain to the Class C Shares of each of the following
Funds: Diversified Equity Fund, Special Growth Fund, Equity Income Fund,
Quantitative Equity Fund, Diversified Bond Fund, Short Term bond Fund (formerly
known as Fixed Income II Fund), Tax Exempt Bond Fund (formerly known as Limited
Volatility Tax Free Fund), Multistrategy Bond Fund, International Securities
Fund, Real Estate Securities Fund, Tax-Managed Large Cap Fund (formerly Equity T
Fund), Emerging Markets Fund, Tax-Managed Equity Aggressive Strategy Fund,
Tax-Managed Aggressive Strategy Fund, Tax-Managed Moderate Strategy Fund,
Tax-Managed Conservative Strategy Fund and Tax-Managed Small Cap Fund. This Plan
will also pertain to the Class C shares and the Class D Shares of each of the
following Funds: Equity Aggressive Strategy Fund (formerly known as Equity
Balanced Strategy Fund), Aggressive Strategy Fund, Balanced Strategy Fund,
Moderate Strategy Fund and Conservative Strategy Fund.
This Plan shall also apply to Shares of any other Fund as shall be
designated from time to time by the Board in any supplement to the Plan
("Supplement").
Section 1. Payment of Distribution-Related Services. The Company may
compensate its principal underwriter (the "Distributor") or any investment
advisers, banks, broker-dealers or other financial institutions that have
entered into Sales Support Agreements ("Selling Agents") for any activities
or expenses primarily intended to result in the sale of Shares of the
Company's Funds, as set forth in a Selling Agent Sales Support Agreement,
forms of which are set forth as Appendix A and Appendix B hereto (each, a
"Support Agreement"), provided that any material modifications of services
listed in the Support Agreement shall be presented for approval or
ratification by the Board at the next regularly scheduled Board meeting.
Payments by the Company under this Section 1 of the Plan will be calculated
daily and paid quarterly at a rate or rates set from time to time by the
Board, provided that no rate set by the Board for Shares of any Fund may
exceed, on an annual basis, .75% of the average daily net asset value of a
Fund's Shares.
Section 2. Distribution-Related Expenses Covered by the Plan. The fees
payable under Section 1 of this Plan may be used to compensate (a) Selling
Agents for sales support services provided, and related expenses incurred,
with respect to Shares by such Selling Agents and (b) the Distributor for
distribution services provided, and related expenses incurred by it with
respect to Shares, including for payments made by the Distributor to
compensate Selling Agents for providing such support services and incurring
such related expenses.
Section 3. Sales Support Agreements. Any officer of the Company is
authorized to execute and deliver, in the name and on behalf of the
Company, (a) written agreements with Selling Agents and (b) a written
agreement with the Distributor, each in a form duly approved from time to
time by the Company's Board. Any such agreement with Selling Agents and any
such agreement with the Distributor shall be in substantially the forms
attached hereto as Appendix A and Appendix B, respectively, until modified
by the Board.
Section 4. Limitations on Payments. Payment made by a Fund under
Section 1 must be for distribution services rendered for or on behalf of
such Fund. All expenses incurred by a Fund in connection with the Support
Agreement and the implementation of this Plan shall be borne entirely by
the beneficial owners or holders of the Shares of the Fund involved. If
more than one Fund is involved and these expenses are not directly
attributable to the Shares of a particular Fund, then the expenses may be
allocated between or among the Shares of all relevant Funds in a fair and
equitable manner.
Notwithstanding anything herein to the contrary, no Fund shall be
obligated to make any payments under this Plan that exceed the maximum
amounts payable under Article III, Section 26 of the Rules of Fair Practice
of the National Association of Securities Dealers, Inc.
Section 5. Reports of Distributor. So long as this Plan is in effect,
the Distributor shall provide to the Company's officers and Board, and the
Board shall review at least quarterly, a written report of the amounts
expended by it pursuant to this Plan, or by Selling Agents pursuant to
Support Agreements, and the purposes for which such expenditures were made.
Section 6. Definition of Majority Vote. As used herein, the term
"Majority Vote" of the Shares of a Fund means a vote of the holders of the
lesser of (a) more than fifty percent (50%) of the outstanding Shares of a
Fund or (b) sixty-seven percent (67%) or more of the Shares of a 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.
Section 7. Approval of Plan. This Plan will become effective at such
time as it is specified by the Board, as to the Shares of a Fund, provided,
however, that the Plan is approved by (a) a Majority Vote of the Shares of
a Fund, and (b) a majority of the Board, including a majority of the
trustees who are not "interested persons" (as defined in the 1940 Act) of
the Company and who have no direct or indirect financial interest in the
operation of this Plan or in any agreements entered into in connection with
this Plan (the "Disinterested Trustees"), pursuant to a vote cast in person
at a meeting called for the purpose of voting on the approval of this Plan.
Section 8. Continuance of Plan. This Plan may continue in effect for
so long as its continuance is specifically approved at least annually by
the Company's Board in the manner described in Section 7.
Section 9. Amendments. This Plan may be amended at any time with
respect to any Fund by the Board provided that (a) any amendment to
increase materially the costs that a Fund's Shares may bear for
distribution pursuant to this Plan shall be effective upon only the
Majority Vote of the outstanding Shares of the Fund, and (b) any material
amendments of the terms of this Plan shall become effective only upon
approval as provided in Section 7(b) hereof.
Section 10. Termination. This Plan is terminable, as to a Fund's
Shares, without penalty at any time by (a) a vote of a majority of the
Disinterested Trustees, or (b) a Majority Vote of the outstanding Shares of
the Fund.
Section 11. Selection/Nomination of Trustees. While this Plan is in
effect, the selection and nomination of the Disinterested Trustees shall be
committed to the discretion of such Disinterested Trustees.
Section 12. Records. The Company will preserve copies of this Plan,
and any agreements and written reports regarding this Plan presented to the
Board for a period of not less than six years.
Section 13. Miscellaneous. The captions in this Plan are included for
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect.
IN WITNESS WHEREOF, Frank Russell Investment Company has adopted this
revised Distribution Plan as of August 9, 1999.
FRANK RUSSELL INVESTMENT COMPANY
By:
Title:
<PAGE> Appendix A
SALES SUPPORT AGREEMENT
WITH SELLING AGENT
______________________ SHARES
("Class Shares")
Ladies and Gentlemen:
We wish to enter into this Sales Support Agreement ("Agreement") with you
concerning the provision of sales support assistance relating to Class Shares of
the investment portfolios (the "Funds") of Frank Russell Investment Company
("Investment Company") for which we are the principal underwriter as defined in
the Investment Company Act of 1940 (the "1940 Act") for the continuous
distribution of said Class Shares.
The terms and conditions of this Agreement are as follows:
Section 1. You agree to provide reasonable sales support assistance in
connection with the sale of Class Shares to your customers ("Customers"). Your
assistance may include, but neither is required to include nor is limited to,
the following: (1) providing facilities to answer questions from prospective
investors about the Investment Company; (2) receiving and answering
correspondence, including requests for prospectuses and statements of additional
information; (3) preparing, printing and delivering prospectuses and shareholder
reports to prospective investors; (4) complying with federal and state
securities laws pertaining to the sale of Class Shares; (5) preparing
advertising and promotional materials; (6) assisting investors in Class Shares
in completing application forms and selecting dividend and other account
options; and (7) forwarding sales literature and advertising provided by or on
behalf of the Investment Company to Customers and providing such other sales
support assistance as may be requested by us or the Investment Company from time
to time. In addition, you may provide your endorsement of the Class Shares to
your Customers as an inducement to invest in the Class Shares. All services
rendered hereunder by you shall be performed in a professional, competent and
timely manner.
Section 2. We recognize that you may be subject to the provisions of the
Investment Advisers Act of 1940, the Glass-Steagall Act, and other laws
governing, among other things, the conduct of activities by investment advisers,
federally chartered and supervised banks, and other banking organizations. As
such, you may be restricted in the activities you may undertake and for which
you may be paid. You will perform only those activities which are consistent
with statutes and regulations applicable to you. You will act solely for the
account of your Customers.
Section 3. You will provide such office space and equipment, telephone
facilities and personnel (which may be any part of the space, equipment and
facilities currently used in your business, or any personnel employed by you) as
may be reasonably necessary or beneficial in order to provide the sales support
services contemplated hereby.
Section 4. Neither you nor any of your officers, employees or agents are
authorized to make any representations concerning us, the Investment Company or
the Class Shares, except those contained in the Investment Company's applicable
then current prospectuses and statements of additional information, as amended
or supplemented from time to time, a copy of each of which will be supplied by
us or the Investment Company or on its behalf to you, or in such supplemental
literature or advertising as may be authorized by us on behalf of the Investment
Company in writing.
Section 5. For all purposes of this Agreement you will be deemed to be an
independent contractor, and will have no authority to act as agent for us or the
Investment Company in any matter or in any respect, except as expressly
authorized. By your written acceptance of this Agreement, you agree to and do
release, indemnify and hold us and the Investment Company harmless from and
against any and all direct or indirect liabilities or losses resulting from
requests, directions, actions or inactions of or by you or your officers,
employees or agents regarding your responsibilities hereunder or the purchase,
redemption, transfer or registration of Class Shares (or orders relating to the
same) by or on behalf of Customers. You and your employees will, upon request,
be available during normal business hours to consult with us or the Investment
Company or our respective designees concerning the performance of your
responsibilities under this Agreement.
Section 6. In consideration of the services and facilities provided by you
hereunder, we, acting on behalf of the Investment Company, will pay to you, and
you will accept as full payment therefor, a quarterly fee as set forth in
Appendix A hereto. The fee rate payable to you may be prospectively increased or
decreased by us or the Investment Company or our respective designees, in our or
its sole discretion, at any time upon notice to you. Further, we, the Investment
Company or our respective designees may, in our or its discretion and without
notice, suspend or withdraw the sale of Class Shares of any or all Funds,
including the sale of Class Shares for the account of any Customer or Customers
and require that Class Shares be redeemed if any condition of investment in
Class Shares, as described in the applicable then-current prospectuses, are not
met.
The fees payable under this Section 6 shall be used for sales support services
provided, and related expenses incurred, by you. Payments may be applied to
commissions, incentive compensation or other compensation to, and expenses of,
your account executives or other employees; overhead and other office expenses
attributable to sales support activities; preparation, printing and distribution
of sales literature and advertising materials attributable to sales support
activities; and opportunity costs relating to the foregoing (which may be
calculated as a carrying charge on your unreimbursed expenses incurred in
connection with your sales support services). The overhead and other office
expenses referenced in this Section 6 may include, without limitation, (i) the
expenses of operating your offices in connection with the sale of Class Shares,
including lease costs, the salaries and employee benefits of administrative,
operations and support personnel, utility costs, communication costs and the
costs of stationery and supplies, (ii) the costs of client sales seminars and
travel related to the provision of sales support services and (iii) other
expenses relating to the provision of sales support services. By your acceptance
of this Agreement, you agree to and do waive such portion of any fee payable to
you hereunder to the extent necessary to assure that such fee and other expenses
required to be accrued hereunder with respect to the Class Shares owned by or on
behalf of Customers on any day does not exceed the income to be accrued by the
Investment Company to such shares on that day.
Section 7. You agree to furnish us or the Investment Company or our
respective designees with such information as we, it or they may reasonably
request (including, without limitation, periodic certifications confirming the
provision to Customers of the services described herein), and will otherwise
cooperate with us, the Investment Company and our respective designees
(including, without limitation, any auditors or legal counsel designated by the
Investment Company or its agents), in connection with the preparation of reports
to the Investment Company's Board of Trustees concerning this Agreement and the
monies paid or payable pursuant hereto, as well as any other reports or filings
that may be required by law.
Section 8. We may enter into other similar Agreements with any other
person or persons without your consent.
Section 9. By your written acceptance of this Agreement, you represent,
warrant and agree that the compensation payable to you hereunder, together with
any other compensation you receive in connection with the investment of your
Customers' assets in Class Shares of the Funds, will be disclosed by you to your
Customers to the extent required by applicable laws or regulations, will be
authorized by your Customers and will not be excessive or unreasonable under the
laws and instruments governing your relationships with Customers. By your
written acceptance of this Agreement, you represent and warrant that: (i) in the
event an issue pertaining to this Agreement or the Class Shares Distribution
Plan related hereto is submitted for shareholder approval, and you have the
authority to do so, you will vote any Class Shares held for your own account in
the same proportion as the vote of the Class Shares held for your Customers'
benefit; and (ii) you will not engage in activities pursuant to this Agreement
which constitute acting as a broker or dealer under state law unless you have
obtained any licenses required by such law. In addition, you understand that
this Agreement has been entered into pursuant to Rule 12b-1 under the 1940 Act,
and is subject to the provisions of said Rule, as well as any other applicable
rules or regulations promulgated by the Securities and Exchange Commission.
Section 10. You agree to conform to any compliance standards adopted by us
or the Investment Company as to when a Class Shares in a Fund may be
appropriately sold to or retained by particular investors.
Section 11. This Agreement will become effective on the date a fully
executed copy of this Agreement is received by us or our designees and continue
in effect until terminated. This Agreement is terminable with respect to any
Fund's Class Shares, without penalty, at any time by the Investment Company
(which termination may be by a vote of a majority of the disinterested Trustees
of the Investment Company or by vote of the holders of a majority of the
outstanding Class Shares of such Fund) or by us or you upon notice to the other
party hereto.
Section 12. All notices and other communications to either you or us will
be duly given if mailed, telegraphed, telexed or transmitted by similar
telecommunications device to the appropriate address or number stated herein
(with a conforming copy by mail), or to such other address as either party shall
so provide in writing to the other.
Section 13. This Agreement will be construed in accordance with the laws
of the state of Washington without giving effect to principles of conflict of
laws, and is nonassignable by the parties hereto.
If you agree to be legally bound by the provisions of this Agreement,
please sign a copy of this letter where indicated below and promptly return it
to us, at 909 A Street, Tacoma, Washington 98402; Fax No. 253-594-1880;
Attention: President.
Very truly yours,
RUSSELL FUND DISTRIBUTORS, INC.
Dated as of _______________ By: ________________________________
Name: _____________________________
Title: ______________________________
ACCEPTED AND AGREED TO:
(Firm Name)
(Address)
(City) (State) (County)
Fax #
Attention:
Dated as of _____________ By:
Name:
Title:
<PAGE>
APPENDIX A
Fee Schedule
Class Shares Fees 1
<PAGE>
Appendix B
SALES SUPPORT AGREEMENT
WITH DISTRIBUTOR
CLASS C SHARES
CLASS D SHARES
Ladies and Gentlemen:
We wish to enter into this Sales Support Agreement ("Agreement") with you
concerning the provision of sales support assistance relating to Class C and
Class D Shares ("Class Shares") of the investment portfolios (the "Funds") of
Frank Russell Investment Company ("Investment Company") for which you are the
principal underwriter as defined in the Investment Company Act of 1940 (the
"1940 Act") for the continuous distribution of said Class Shares.
The terms and conditions of this Agreement are as follows:
Section 1. You agree to provide or cause to be provided reasonable sales
support assistance in connection with the sale of Class Shares. Your assistance
may include, but neither is required to include nor is limited to, arranging for
the following services and materials: (1) providing facilities to answer
questions from prospective investors about the Investment Company; (2) receiving
and answering correspondence, including requests for prospectuses and statements
of additional information; (3) preparing, printing and delivering prospectuses
and shareholder reports to prospective investors; (4) complying with federal and
state securities laws pertaining to the sale of Class Shares; (5) preparing
advertising and promotional materials; (6) assisting investors in Class Shares
in completing application forms and selecting dividend and other account
options; and (7) forwarding sales literature and advertising provided by or on
behalf of the Investment Company to Customers and providing such other sales
support assistance as may be requested by the Investment Company from time to
time. In addition, you may provide your endorsement of the Class Shares as an
inducement for others to invest in the Class Shares. All services rendered
hereunder by you or caused to be rendered hereunder shall be performed in a
professional, competent and timely manner.
Section 2. We recognize that those who you retain to provide services or
materials described in this Agreement may be subject to the provisions of the
Investment Advisers Act of 1940, the Glass-Steagall Act, and other laws
governing, among other things, the conduct of activities by investment advisers,
federally chartered and supervised banks, and other banking organizations. As
such, such persons may be restricted in the activities they may undertake and
for which they may be paid. You will cause such persons to perform only those
activities which are consistent with statutes and regulations applicable to
them. You will cause such persons to act solely for the account of their
Customers.
Section 3. You will provide or cause to be provided such office space and
equipment, telephone facilities and personnel (which may be any part of the
space, equipment and facilities currently used in your business, or by any
personnel employed by you or by persons retained by you to provide services or
materials described herein) as may be reasonably necessary or beneficial in
order to provide the sales support services contemplated hereby.
Section 4. Neither you nor any of your officers, employees or agents are
authorized to make or cause to be made any representations concerning, the
Investment Company or the Class Shares, except those contained in the Investment
Company's applicable then current prospectuses and statements of additional
information, as amended or supplemented from time to time, or in such
supplemental literature or advertising as may be authorized on behalf of the
Investment Company in writing.
Section 5. For all purposes of this Agreement you will be deemed to be an
independent contractor, and will have no authority to act as agent for the
Investment Company in any matter or in any respect, except as expressly
authorized. By your written acceptance of this Agreement, you agree to and do
release, indemnify and hold the Investment Company harmless from and against any
and all direct or indirect liabilities or losses resulting from requests,
directions, actions or inactions of or by you or your officers, employees or
agents regarding your responsibilities hereunder or the purchase, redemption,
transfer or registration of Class Shares (or orders relating to the same). You
and your employees will, upon request, be available during normal business hours
to consult with us or our designees concerning the performance of your
responsibilities under this Agreement.
Section 6. In consideration of the services and facilities provided or
caused to be provided by you hereunder, the Investment Company, will pay to you,
and you will accept as full payment therefore, a quarterly fee as set forth in
Appendix A hereto. From this fee, you, acting as agent of the Investment
Company, shall compensate persons retained by you to provide services and
materials described in this Agreement. The fee rate payable to you may be
prospectively increased or decreased by the Investment Company or its designees,
in its sole discretion, at any time upon notice to you. Further, the Investment
Company or its designees may, in its discretion and without notice, suspend or
withdraw the sale of Class Shares of any or all Funds, including the sale of
Class Shares of any or all Funds, including the sale of Class Shares for the
account of any person.
The fees payable under this Section 6 shall be used for sales support services
provided or caused to be provided, and related expenses incurred, by you or be
any person retained by you to provide services or materials described in this
Agreements. Payments may be paid to such persons or applied to commissions,
incentive compensation or other compensation to, and expenses of, your account
executives or other employees; overhead and other office expenses attributable
to sales support activities; preparation, printing and distribution of sales
literature and advertising materials attributable to sales support activities;
and opportunity costs relating to the foregoing (which may be calculated as a
carrying charge on your unreimbursed expenses incurred in connection with your
sales support services). The overhead and other office expenses referenced in
this Section 6 may include, without limitation, (i) the expenses of operating
offices in connection with the sale of Class Shares, including lease costs, the
salaries and employee benefits of administrative, operations and support
personnel, utility costs, communication costs and the costs of stationery and
supplies, (ii) the costs of client sales seminars and travel related to the
provision of sales support services and (iii) other expenses relating to the
provision of sales support services. By your acceptance of this Agreement, you
agree to and do waive and will cause any persons retained by you to provide
services or materials described in this Agreement to agree to waive such portion
of any fee payable to or by you hereunder to the extent necessary to assure that
such fee and other expenses required to be accrued hereunder with respect to the
Class Shares on any day does not exceed the income to be accrued by the
Investment Company to such shares on that day.
Section 7. You agree to furnish or cause to be furnished the Investment
Company or its designees with such information as it or they may reasonably
request (including, without limitation, periodic certifications confirming the
provision of the services described herein), and will otherwise cooperate with
the Investment Company and its designees (including, without limitation, any
auditors or legal counsel designated by the Investment Company or its agents),
in connection with the preparation of reports to the Investment Company's Board
of Trustees concerning this Agreement and the monies paid or payable pursuant
hereto, as well as any other reports or filings that may be required by law.
Section 8. We may enter into other similar Agreements with any other
person or persons without your consent.
Section 9. By your written acceptance of this Agreement, you represent,
warrant and agree that you will cause each person retained by you to provide
services or materials under this Agreement to disclose the compensation payable
to such persons, hereunder, together with any other compensation they receive in
connection with the investment of their customers' assets in Class Shares of the
Funds, will be disclosed by them to their customers to the extent required by
applicable laws or regulations, will be authorized by their customers and will
not be excessive or unreasonable under the laws and instruments governing their
relationships with customers. By your written acceptance of this Agreement, you
represent and warrant that: (i) in the event an issue pertaining to this
Agreement or the Class Shares Distribution Plan related hereto is submitted for
shareholder approval, and you have the authority to do so, you will vote any
Class Shares held for your own account in the same proportion as the vote of the
Class Shares held for your customers' benefit; and (ii) you will not engage in
activities pursuant to this Agreement which constitute acting as a broker or
dealer under state law unless you have obtained any licenses required by such
law. In addition, you understand that this Agreement has been entered into
pursuant to Rule 12b-1 under the 1940 Act, and is subject to the provisions of
said Rule, as well as any other applicable rules or regulations promulgated by
the Securities and Exchange Commission.
Section 10. You agree to, and agree to cause others retained by you
pursuant to this Agreement to conform to any compliance standards adopted by the
Investment Company as to when a Class Shares in a Fund may be appropriately sold
to or retained by particular investors.
Section 11. This Agreement will become effective on the date a fully
executed copy of this Agreement is received by us or our designees and continue
in effect until terminated. This Agreement is terminable with respect to any
Fund's Class Shares, without penalty, at any time by the Investment Company
(which termination may be by a vote of a majority of the disinterested Trustees
of the Investment Company or by vote of the holders of a majority of the
outstanding Class Shares of such Fund) or by you upon notice to the other party
hereto.
Section 12. All notices and other communications to either you or us will
be duly given if mailed, telegraphed, telexed or transmitted by similar
telecommunications device to the appropriate address or number stated herein
(with a conforming copy by mail), or to such other address as either party shall
so provide in writing to the other.
Section 13. This Agreement will be construed in accordance with the laws
of the state of Washington without giving effect to principles of conflict of
laws, and is nonassignable by the parties hereto.
If you agree to be legally bound by the provisions of this Agreement,
please sign a copy of this letter where indicated below and promptly return it
to us, at 909 A Street, Tacoma, Washington 98402; Fax No. 253-594-1880;
Attention: President.
Very truly yours,
FRANK RUSSELL INVESTMENT COMPANY
Dated as of _______________ By: ________________________________
Name: _____________________________
Title: ______________________________
ACCEPTED AND AGREED TO:
RUSSELL FUND DISTRIBUTORS, INC.
909 A Street Tacoma, WA 98402 Fax # 253-596-2497
Attention:
Dated as of _____________ By:
-------------
Name:
-------------------------
Title:
------------------------
<PAGE>
APPENDIX A
Fee Schedule
Class Shares Fees2
Class C 0.75%
Class D 0.25%
Exhibit 8(e)(1)
SHAREHOLDER SERVICES PLAN
CLASS C SHARES
CLASS D SHARES
CLASS E SHARES
This Shareholder Services Plan (the "Plan") has been adopted with respect
to Class C, Class D and Class E Shares (each, respectively, the "Shares") issued
by certain Funds, as defined below, of Frank Russell Investment Company (the
"Company"), an open-end management investment company registered under the
Investment Company Act of 1940, as amended, (the "1940 Act"), consisting of
distinct portfolios of shares of common stock (each a "Fund" or, collectively,
the "Funds") by the Board of Trustees of the Company (the "Board").
This Plan will pertain to the Class E Shares of the Equity I Fund, Equity
II Fund, Equity III Fund, Equity Q Fund, International Fund, Fixed Income I
Fund, and Fixed Income III Fund.
This Plan will also pertain to the Class C and Class E Shares of each of
the Diversified Equity Fund, Special Growth Fund, Equity Income Fund,
Quantitative Equity Fund, Diversified Bond Fund, Short Term Bond Fund (formerly
known as Fixed Income II Fund), Tax Exempt Bond Fund (formerly known as Limited
Volatility Tax Free Fund), Multistrategy Bond Fund, International Securities
Fund, Real Estate Securities Fund and Emerging Markets Fund.
This Plan will also pertain to the Class C, Class D, and Class E Shares of
each of the Equity Aggressive Strategy Fund (formerly known as Equity Balanced
Strategy Fund), Aggressive Strategy Fund, Balanced Strategy Fund, Moderate
Strategy Fund and Conservative Strategy Fund.
This Plan will also apply to the Class C Shares of each of the Tax-Managed
Large Cap Fund (formerly Equity T Fund), Tax-Managed Equity Aggressive Strategy
Fund, Tax-Managed Aggressive Strategy Fund, Tax-Managed Moderate Strategy Fund,
Tax-Managed Conservative Strategy Fund and Tax-Managed Small Cap Fund.
This Plan shall also apply to Shares of any other Fund as shall be
designated from time to time by the Board in any supplement to the Plan
("Supplement").
Section 1. Payment for Shareholder Services. The Company may compensate the
Distributor or any broker-dealers, banks, investment advisers, financial
planners and 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 Company's 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 Company's Funds, as set forth in a
Shareholder Services Agreement, forms of which are set forth as Appendix A and
Appendix B hereto (each, a "Service Agreement"), provided that any material
modifications of services listed in the Service Agreement shall be presented for
approval or ratification by the Board at the next regularly scheduled Board
meeting. Payments by the Company under this Section 1 of the Plan will be
calculated daily and paid quarterly at a rate or rates set from time to time by
the Company's Board, provided that no rate set by the Board for Shares of any
Fund may exceed, on an annual basis, .25% of the average net asset value of that
Fund's Shares.
Section 2. Shareholder Servicing Expenses Covered by the Plan. The fees
payable under Section 1 of this Plan may be used to compensate (a) Servicing
Agents for shareholder services provided, and related expenses incurred, with
respect to Shares, by such Servicing Agents and (b) the Distributor for
shareholder services provided, and related expenses incurred by it with respect
to Shares, including for payments made by the Distributor to compensate
Servicing Agents for providing such shareholder services and incurring such
related expenses.
Section 3. Shareholder Services Agreements. Any officer of the Investment
Company is authorized to execute and deliver, in the name and on behalf of the
Investment Company, (a) written Service Agreements with Servicing Agents and (b)
a written Service Agreement with the Distributor, each in a form duly approved
from time to time by the Company's Board. Any such Service Agreement with
Servicing Agents and any such Service Agreement with the Distributor shall be in
substantially the forms attached hereto as Appendix A and Appendix B,
respectively, until modified by the Board.
Section 4. Limitations on Payments. Payment made by a Fund under Section 1
must be for shareholder services rendered for or on behalf of such Fund. All
expenses incurred by a Fund in connection with the Service Agreement and the
implementation of this Plan shall be borne entirely by the beneficial owners or
holders of the Shares of the Fund involved. If more than one Fund is involved
and these expenses are not directly attributable to the Shares of a particular
Fund, then the expenses may be allocated between or among the Shares of all
relevant Funds in a fair and equitable manner.
Notwithstanding anything herein to the contrary, no Fund shall be
obligated to make any payments under this Plan that exceed the maximum amounts
payable under Article III, Section 26 of the Rules of Fair Practice of the
National Association of Securities Dealers, Inc.
Section 5. Reports of Distributor. So long as this Plan is in effect, the
Distributor shall provide to the Company's officers and Board, and the Board
shall review at least quarterly, a written report of the amounts expended by it
pursuant to this Plan, or by Servicing Agents pursuant to Service Agreements,
and the purposes for which such expenditures were made.
Section 6. Continuance of Plan. Unless sooner terminated, this Plan may
continue in effect for a period of one year from its date of approval and shall
continue thereafter for successive annual periods, provided that such
continuance is specifically approved by a majority of the Board, including a
majority of the Trustees who are not "interested persons," as defined in the
1940 Act, of the Company and have no direct or indirect financial interest in
the operation of this Plan or in any Agreement related to this Plan (the
"Disinterested Trustees") cast in person at a meeting called for the purpose of
voting on this Plan.
Section 7. Amendments. This Plan may be amended at any time with respect
to any Fund by the Board provided that any material amendment of the terms of
this Plan (including a material increase of the fee payable hereunder)
shall become effective only upon the approvals set forth in Section 6 hereof.
Section 8. Termination. This Plan is terminable, as to a Fund's Shares, by
vote of a majority of the Disinterested Trustees.
Section 9. Selection/Nomination of Trustees. While this Plan is in effect,
the selection and nomination of the Disinterested Trustees shall be committed to
the discretion of such Disinterested Trustees.
Section 10. Records. The Company will preserve copies of this Plan, and
any agreements and written reports regarding this Plan presented to the Board
for a period of not less than six years.
Section 11. Miscellaneous. The captions in this Plan are included
for convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect.
IN WITNESS WHEREOF, Frank Russell Investment Company has adopted this
revised Shareholder Services Plan as of August 9, 1999.
FRANK RUSSELL INVESTMENT
COMPANY
By:
Title:
<PAGE>
Appendix A
SHAREHOLDER SERVICES AGREEMENT
WITH SERVICING AGENT
FRANK RUSSELL INVESTMENT COMPANY
_______________________ SHARES
("Class Shares")
Ladies and Gentlemen:
We wish to enter into this Shareholder Services Agreement ("Agreement")
with you concerning the provision of shareholder assistance, support, and
administrative services to your clients ("Customers") who may from time to time
hold or beneficially own or hold as shareholders of record of Class Shares in
one or more of the portfolios (the "Funds") of Frank Russell Investment Company
(the "Investment Company") for which we are the principal underwriter as defined
in the Investment Company Act of 1940 (the "1940 Act").
The terms and conditions of this Agreement are as follows:
Section 1. You agree to provide administrative support services to your
Customers who may from time to time beneficially own Class Shares. Such services
may include, but neither are required to include nor are limited to the
following (1) acting as the sole shareholder of record and nominee for Class
Shareholders; (2) maintaining account records for Class Shareholders; (3)
receiving, aggregating and processing Class Shareholder purchase, exchange, and
redemption orders from Class Shareholders and placing net purchase, exchange,
and redemption requests with us; (4) issuing confirmations to Class
Shareholders; (5) providing and maintaining elective services for Class
Shareholders such as check writing and wire transfer services; (6) providing
Class Shareholder sub-accounting; (7) communicating periodically with Class
Shareholders; (8) answering questions and handling correspondence from Class
Shareholders about their accounts; (9) providing sweep program servicing;
selecting, providing, and maintaining pre-authorized investment allocation
plans; and (10) providing such other similar services as we or the Investment
Company may reasonably require to the extent you are permitted to do so under
applicable statutes, rules or regulations. All services rendered hereunder by
you shall be performed in a professional, competent and timely manner.
Section 2. You will perform only those activities which are consistent
with statutes and regulations applicable to you.
Section 3. You will provide such office space and equipment, telephone
facilities and personnel (which may be any part of the space, equipment and
facilities currently used in your business, or any personnel employed by you) as
may be reasonably necessary or beneficial in order to provide the shareholder
investment support services contemplated hereby.
Section 4. Neither you nor any of your officers, employees or agents are
authorized to make any representations concerning us, the Investment Company or
the Class Shares except those contained in our then current prospectuses and
statements of additional information, as amended or supplemented from time to
time, a copy of each of which will be supplied by us to you, or in such
supplemental literature or advertising as may be authorized by us or the
Investment Company in writing.
Section 5. For all purposes of this Agreement you will be deemed to be an
independent contractor, and will have no authority to act as agent for us or the
Investment Company in any matter or in any respect, except as expressly
authorized. By your written acceptance of this Agreement, you agree to and do
release, indemnify and hold us and the Investment Company harmless from and
against any and all direct or indirect liabilities or losses resulting from
requests, directions, actions or inactions of or by you or your officers,
employees or agents regarding your responsibilities hereunder or the purchase,
redemption, transfer or registration of Class Shares (or orders relating to the
same) by or on behalf of Customers. You and your employees will, upon request,
be available during normal business hours to consult with us and the Investment
Company and our respective designees concerning the performance of your
responsibilities under this Agreement.
Section 6. In consideration of the services and facilities provided by you
hereunder, we, acting on behalf of the Investment Company, will pay to you
quarterly, and you will accept as full payment therefor, a fee equal to the
percentage of the average net asset value of Class Shares held by your Customers
as set forth on Appendix A hereto. The fee rate payable to you may be
prospectively increased or decreased by us or the Investment Company, in our or
its sole discretion, at any time upon notice to you. Further, we or the
Investment Company may, in our discretion and without notice, suspend or
withdraw the sale of Class Shares of any and all Funds, including the sale of
Class Shares to you for the account of any Customer or Customers and require
that Class Shares be redeemed if any conditions of investment in Class Shares,
as described in the applicable then current prospectuses, are not met.
Compensation payable under this Agreement is subject to, among other things,
Article III, Section 26 of the National Association of Securities Dealers, Inc.
("NASD") Rules of Fair Practice governing receipt by NASD members of shareholder
investment services plan fees from registered investment companies (the "NASD
Rules"). Such compensation shall only be paid for services determined to be
permissible under the NASD Rules, and you agree that any compensation paid under
this Agreement is not for activities designed primarily to result in sales of
Class Shares.
Section 7. You agree to furnish us, the Investment Company or our
respective designees with such information as we or they may reasonably request
(including, without limitation, periodic certifications confirming the provision
to Customers of the services described herein), and will otherwise cooperate
with us, the Investment Company and our respective designees (including, without
limitation, any auditors or legal counsel designated by us or the Investment
Company), in connection with the preparation of reports to the Investment
Company's Board of Trustees concerning this Agreement and the monies paid or
payable by us pursuant hereto, as well as any other reports or filings that may
be required by law.
Section 8. We may enter into other similar Agreements with any other
person or persons without your consent.
Section 9. By your written acceptance of this Agreement, you represent,
warrant and agree that: (i) in no event will any of the services provided by you
hereunder be primarily intended to result in the sale of any shares issued by
the Investment Company; (ii) the compensation payable to you hereunder, together
with any other compensation you receive in connection with the investment of
your Customers' assets in Class Shares of the Funds, will be disclosed by you to
your Customers to the extent required by applicable laws or regulations, will be
authorized by your Customers and will not result in an excessive or unreasonable
fee to you, and (iii) in the event an issue pertaining to this Agreement is
submitted for shareholder approval, and you have the authority for your Customer
to do so, you will vote any Class Shares held for your own account in the same
proportion as the vote of the Class Shares held for your Customers' benefit.
Section 10. You agree to conform to compliance standards adopted by us or
the Investment Company as to when a Class Shares in a Fund may be appropriately
sold to or retained by particular investors.
Section 11. This Agreement will become effective on the date a fully
executed copy of this Agreement is received by us or our designee and continues
in effect until terminated. This Agreement is terminable with respect to Class
Shares of any Fund, without penalty, at any time by us (which termination may be
by a vote of a majority of our Disinterested Trustees) or by you upon written
notice to the other party hereto.
Section 12. All notices and other communications to either you or us will
be duly given if mailed, telegraphed, telexed or transmitted by similar
telecommunications device to the appropriate address or number stated herein
(with a confirming copy by mail), or to such other address as either party shall
so provide in writing to the other.
<PAGE>
If you agree to be legally bound by the provisions of this Agreement,
please sign a copy of this letter where indicated below and promptly return
it to us, at the following address: 909 A Street, Tacoma, Washington 98402;
Fax No. 253-594-1880; Attention: President.
Very truly yours,
RUSSELL FUND DISTRIBUTORS, INC.,
on behalf of Frank Russell Investment Company
Dated as of _______________ By: ________________________________
Name: _____________________________
Title: ______________________________
ACCEPTED AND AGREED TO:
(Firm Name)
(Address)
(City) (State) (County)
Fax #
Attention:
Dated as of _____________ By:
Name:
Title:
<PAGE>
APPENDIX A
Fee Schedule
Class Fee3
<PAGE>
Appendix B
SHAREHOLDER SERVICES AGREEMENT
WITH DISTRIBUTOR
FRANK RUSSELL INVESTMENT COMPANY
CLASS C SHARES
CLASS D SHARES
CLASS E SHARES
Ladies and Gentlemen:
We wish to enter into this Shareholder Services Agreement ("Agreement") with you
concerning the provision of direct or indirect shareholder assistance, support,
and administrative services to persons who may from time to time hold or
beneficially own or hold as shareholders of record Class C, Class D or Class E
Shares (each, respectively, "Class Shares") in one or more of the portfolios
(the "Funds") of Frank Russell Investment Company (the "Investment Company")
("Shareholders") for which you are the principal underwriter as defined in the
Investment Company Act of 1940 (the "1940 Act").
The terms and conditions of this Agreement are as follows:
Section 1. You agree to provide or cause to be provided administrative
support services to Shareholders who may from time to time beneficially own
Class Shares. Such services may include, but neither are required to include nor
are limited to the following: (1) acting as the sole shareholder of record and
nominee for Class Shareholders; (2) maintaining account records for Class
Shareholders; (3) receiving, aggregating and processing Class Shareholder
purchase, exchange, and redemption orders from Class Shareholders and placing
net purchase, exchange, and redemption requests with us; (4) issuing
confirmations to Class Shareholders; (5) providing and maintaining elective
services for Class Shareholders such as check writing and wire transfer
services; (6) providing Class Shareholder sub-accounting; (7) communicating
periodically with Class Shareholders; (8) answering questions and handling
correspondence from Class Shareholders about their accounts; (9) providing sweep
program servicing; selecting, providing, and maintaining pre-authorized
investment allocation plans; and (10) providing such other similar services as
we may reasonably require to the extent you are permitted to do so under
applicable statutes, rules or regulations. All services rendered or caused to be
rendered hereunder by you shall be performed in a professional, competent and
timely manner.
Section 2. You will perform or cause to be performed only those activities
which are consistent with applicable statutes and regulations.
Section 3. You will provide or cause to be provided such office space and
equipment, telephone facilities and personnel (which may be any part of the
space, equipment and facilities currently used in your business, or by any
personnel employed by you or by any person you retain to provide services
described in this Agreement) as may be reasonably necessary or beneficial in
order to provide the shareholder investment support services contemplated
hereby.
Section 4. Neither you nor any of your officers, employees or agents are
authorized to make any representations concerning us or the Class Shares except
those contained in our then current prospectuses and statements of additional
information, as amended or supplemented from time to time, a copy of each of
which will be supplied by us to you, or in such supplemental literature or
advertising as may be authorized by us in writing.
Section 5. For all purposes of this Agreement you will be deemed to be an
independent contractor, and will have no authority to act as agent for us in any
matter or in any respect, except as expressly authorized. By your written
acceptance of this Agreement, you agree to and do release, indemnify and hold us
harmless from and against any and all direct or indirect liabilities or losses
resulting from requests, directions, actions or inactions of or by you or your
officers, employees or agents regarding your responsibilities hereunder or the
purchase, redemption, transfer or registration of Class Shares (or orders
relating to the same) by or on behalf of Shareholders. You and your employees
will, upon request, be available during normal business hours to consult with us
and our respective designees concerning the performance of your responsibilities
under this Agreement.
Section 6. In consideration of the services and facilities provided or
caused to be provided by you hereunder, we will pay to you, and you will accept
as full payment therefor, a fee equal to the percentage of the average net asset
value of Class Shares held by Shareholders as set forth on Appendix A hereto.
The fee rate payable to you may be prospectively increased or decreased by us in
our sole discretion, at any time upon notice to you. Further, we may, in our
discretion and without notice, suspend or withdraw the sale of Class Shares of
any and all Funds, including the sale of Class Shares to you for the account of
any Shareholder or Shareholders and require that Class Shares be redeemed if any
conditions of investment in Class Shares, as described in the applicable then
current prospectuses, are not met. Compensation payable under this Agreement is
subject to, among other things, Article III, Section 26 of the National
Association of Securities Dealers, Inc. ("NASD") Rules of Fair Practice
governing receipt by NASD members of shareholder investment services plan fees
from registered investment companies (the "NASD Rules"). Such compensation shall
only be paid for services determined to be permissible under the NASD Rules, and
you agree that any compensation paid under this Agreement is not for activities
designed primarily to result in sales of Class Shares.
Section 7. You agree to furnish us or our respective designees with such
information as we or they may reasonably request (including, without limitation,
periodic certifications confirming the provision to Shareholders of the services
described herein), and will otherwise cooperate with us and our respective
designees (including, without limitation, any auditors or legal counsel
designated by us), in connection with the preparation of reports to our Board of
Trustees concerning this Agreement and the monies paid or payable by us pursuant
hereto, as well as any other reports or filings that may be required by law.
Section 8. We may enter into other similar Agreements with any other
person or persons without your consent.
Section 9. By your written acceptance of this Agreement, you represent,
warrant and agree that: (i) in no event will any of the services provided or
caused to be provided by you hereunder be primarily intended to result in the
sale of any shares issued by the Investment Company; (ii) the compensation
payable to you hereunder, together with any other compensation you receive in
connection with the investment of Shareholders' assets in Class Shares of the
Funds, will be disclosed by you to Shareholders to the extent required by
applicable laws or regulations, will be authorized by Shareholders and will not
result in an excessive or unreasonable fee to you, and (iii) in the event an
issue pertaining to this Agreement is submitted for shareholder approval, and
you have the authority for Shareholders to do so, you will vote any Class Shares
held for your own account in the same proportion as the vote of the Class Shares
held for Shareholders' benefit.
Section 10. You agree to conform to compliance standards adopted by us as
to when Class Shares in a Fund may be appropriately sold to or retained by
particular investors.
Section 11. This Agreement will become effective on the date a fully
executed copy of this Agreement is received by us or our designee and continues
in effect until terminated. This Agreement is terminable with respect to Class
Shares of any Fund, without penalty, at any time by us (which termination may be
by a vote of a majority of our Disinterested Trustees) or by you upon written
notice to the other party hereto.
Section 12. All notices and other communications to either you or us will
be duly given if mailed, telegraphed, telexed or transmitted by similar
telecommunications device to the appropriate address or number stated herein
(with a confirming copy by mail), or to such other address as either party shall
so provide in writing to the other.
<PAGE>
If you agree to be legally bound by the provisions of this Agreement,
please sign a copy of this letter where indicated below and promptly return
it to us, at the following address: 909 A Street, Tacoma, Washington 98402;
Fax No. 253-594-1880; Attention: President.
Very truly yours,
FRANK RUSSELL INVESTMENT COMPANY
Dated as of _______________ By: ________________________________
Name: _____________________________
Title: ______________________________
ACCEPTED AND AGREED TO:
RUSSELL FUND DISTRIBUTORS, INC.
909 A Street
Tacoma, WA 98402
Fax # (253) 596-2497
Attention:
Dated as of _____________ By:
Name:
Title:
<PAGE>
APPENDIX A
Fee Schedule
Class Fee4
Class C 0.25%
Class D 0.25%
Class E 0.25%
SPECIAL SERVICING AGREEMENT
THIS SPECIAL SERVICING AGREEMENT ("Agreement"), made as of this _____ day
of ________________, 199__, by and among the ________ Fund (the "Top Fund") of
Frank Russell Investment Company ("FRIC"), each fund of FRIC listed on Appendix
A (as such Appendix may be amended from time to time) and which evidences its
agreement to be bound hereby by executing a copy of this Agreement (such funds
hereinafter called the "Underlying Funds"), and Frank Russell Investment
Management Company ("FRIMCo").
W I T N E S S E T H:
WHEREAS, the Top Fund and each of the Underlying Funds are registered as
series of FRIC, an open-end, diversified management investment company under the
Investment Company Act of 1940, as amended.
WHEREAS, the Top Fund and the Underlying Funds have each entered into
agreements with FRIMCo ("Service Agreements") under which FRIMCo provides the
Top Fund and the Underlying Funds transfer agent services and various
shareholder accounting, recordkeeping, shareholder tax accounting, and
shareholder services in return for such compensation as is set forth therein;
WHEREAS, the Top Fund has entered into an underwriting agreement with
Russell Fund Distributors, Inc. ("RFD") ("Underwriting Agreement") for the
provision of distribution services in connection with the Top Fund's shares;
WHEREAS, the Top Fund has entered into an Investment Advisory Agreement
with FRIMCo for the provision of investment management services;
WHEREAS, the Top Fund has entered into an Administrative Agreement with
FRIMCo for the provision of administrative services;
WHEREAS, the Top Fund has entered into an agreement with State Street Bank
and Trust Company ("State Street"), and each of the Underlying Funds has entered
into an agreement with State Street ("Custodian Agreement") under which State
Street is to furnish the Top Fund and the Underlying Funds various custodial and
accounting services in return for such compensation as is set forth in the fee
schedule to the Custodian Agreement;
WHEREAS, the Top Fund will provide a means by which the Underlying Funds
can eliminate shareholder accounts which are or would be invested directly in
the Underlying Funds;
WHEREAS, such shareholder account elimination can reduce the fees of the
Underlying Funds due FRIMCo under the Service Agreements and various other fees
and expenses that would otherwise be incurred by the Underlying Funds (such
expenses are referred to herein as "expenses," and any such reduction in
expenses is hereinafter referred to as "Savings");
WHEREAS, the Top Fund will invest its assets exclusively in the Underlying
Funds, except for temporary defensive purposes and cash or cash items necessary
to meet current expenses and redemptions;
WHEREAS, the Board of Trustees of each Underlying Fund, including a
majority of the Trustees who are not interested persons of the Underlying Funds,
has determined that it is reasonable to expect the aggregate expenses, as
described below, of the Top Fund generally to be less than the estimated Savings
to each of the Underlying Funds and each of their classes of shareholders from
the operation of the Top Fund; and such determination by the Board of Trustees
is based on some or all of the following factors, among others as they apply to
each Underlying Fund:
1. The amount of the LifePoints Funds' or Tax-Managed LifePoints Funds'
expenses to be absorbed by each Underlying Fund;
2. The amount of assets invested in each Underlying Fund and each of its
classes of shares by the LifePoints Funds or Tax-Managed LifePoints
Funds;
3. The average and median account sizes for the Underlying Funds, their
classes, and LifePoints Funds or Tax-Managed LifePoints Funds;
4. The rate at which variable expenses are incurred by the LifePoints
Funds or Tax-Managed LifePoints Funds;
5. The rate at which variable expenses are incurred by the Underlying
Funds or Tax-Managed LifePoints Funds and each of their classes;
6. The rate at which fixed expenses are incurred by the LifePoints Funds
or Tax-Managed LifePoints Funds;
7. The rate at which fixed expenses are incurred by the Underlying Funds
and each of their classes;
8. The relationship between variable expenses in the Underlying Funds (and
each of their classes) and variable expenses in the LifePoints Funds or
Tax-Managed LifePoints Funds;
9. The relationship between fixed expenses in the Underlying Funds (and
each of their classes) and fixed expenses in the LifePoints Funds or
Tax-Managed LifePoints Funds;
10. The projected cost of creating and servicing new shareholder accounts
to the LifePoints Funds or Tax-Managed LifePoints Funds and the
Underlying Funds, and each of their classes, and
11. The amount of aggregate expenses and Savings actually experienced by
each class of shareholders of the Underlying Funds and by the
Underlying Fund as a whole during the preceding year, and
WHEREAS, the Board of Trustees of each Underlying Fund, including a
majority of the Trustees who are not interested persons of the Underlying Funds,
has determined that this Agreement will result in an excess of Savings over
aggregate expenses for each class of shareholders of each Underlying Fund, and
for each Underlying Fund as a whole, and that the premises supporting the data
provided to the Board in this regard are reasonable and appropriate.
NOW, THEREFORE, in consideration of the promises and mutual covenants made
herein, it is agreed between and among the parties hereto as follows:
1. THE TOP FUND EXPENSES
FRIMCo will calculate the amounts of the Top Fund's fees and expenses
due itself and State Street and any other person under the Custodian,
Service, Administration and Underwriting Agreements referred to
above, agreements or arrangements with third parties for
recordkeeping and other administrative services, as well as any other
amounts due persons as a result of the Top Fund operations under any
other agreement or otherwise ("Expenses"), excluding non-recurring
and extraordinary expenses. Such non-recurring and extraordinary
expenses include: the fees and costs of actions, suits or proceedings
and any penalties, damages or payments in settlement in connection
therewith, to which the Top Fund may incur directly, or may incur as
a result of its legal obligation to provide indemnification to its
officers, directors and agents; the fees and costs of any
governmental investigation and any fines or penalties in connection
therewith; and any federal, state and local tax, or related interest
penalties or additions to tax, incurred, for example, as a result of
the Top Fund's failure to qualify under Subchapter M of the Internal
Revenue Code, or failure to timely file any required tax returns or
other filings. Under unusual circumstances, the parties may agree to
exclude certain other amounts from Expenses. In addition, FRIMCo will
calculate the estimated Savings to each Underlying Fund and each of
its classes of shareholders.
2. UNDERLYING FUNDS' PAYMENT OF EXPENSES
Subject to paragraph 3, each of the Underlying Funds agrees to pay
the Expenses in proportion to the average daily value of their shares
owned by the Top Fund, provided that no Underlying Fund will pay such
Expenses in excess of the estimated Savings to it ("Excess Expense"),
and provided further that no Underlying Fund shall pay any Expenses
until such time as the Underlying Funds receive a private letter
ruling (the "Ruling") from the Internal Revenue Service ("IRS") to
the effect that such payments shall not result in the payment by any
Underlying Fund of preferential dividends and therefore jeopardize
the Underlying Funds' tax status as a regulated investment company.
The Underlying Funds shall pay such expenses in accordance with
instructions from FRIMCo. Pending receipt of the Ruling, all Expenses
shall be paid pursuant to Paragraph 3 of this Agreement.
3. PAYMENT BY FRIMCo
Pending receipt of the Ruling, all Expenses shall be paid by FRIMCo.
As soon as reasonably practicable after the Ruling is issued, but in
no event more than six months after the IRS issues the Ruling, each
Underlying Fund shall reimburse FRIMCo for the Expenses so paid in an
amount equal to the amount of Expenses such Underlying Fund would
have paid under Paragraph 2 of this Agreement if the provision of
that paragraph requiring the Ruling were not in effect. Regardless of
whether the Ruling is issued, the Top Fund agrees that, at all times,
it will bear any Excess Expense described in Paragraph 2.
4. OPINION OF COUNSEL
At any time any of the parties hereto may consult legal counsel in
respect of any matter arising in connection with this Agreement, and
no such party shall be liable for any action taken or omitted by it
in good faith in accordance with such instructions or with the advice
or opinion of such legal counsel.
5. LIABILITIES
Noparty hereto shall be liable to any other party hereto for any
action taken or thing done by it or its agents or contractors in
carrying out the terms and provisions of this Agreement provided such
party has acted in good faith and without negligence or willful
misconduct and selected its agents and contractors with reasonable
care.
6. TERM OF AGREEMENT: AMENDMENT; RENEWAL
The term of this Agreement shall begin on _________________, and
unless sooner terminated as herein provided, the Agreement shall
remain in effect for one year from that date. Thereafter, this
Agreement shall continue from year to year if such continuation is
specifically approved at least annually by the Board of Trustees of
each Underlying Fund and the Top Fund, including a majority of the
independent Trustees of each such Fund. In determining whether to
renew this Agreement, the Trustees of the Underlying Funds may
request, and FRIMCo will furnish, such information relevant to
determining the past and expected future relationship between the
Savings and Expenses, including information on the amount of Savings
and Expenses actually experienced by each class of shareholders of
each Underlying Fund and each Underlying Fund as a whole during the
preceding year. The Agreement may be modified or amended from time to
time by mutual written agreement between the parties hereto. Upon
termination hereof, outstanding obligations hereunder shall survive.
This Agreement may be amended in the future to include as additional
parties to the Agreement other investment companies for which FRIMCo
serves as investment adviser.
7. ASSIGNMENT
This Agreement shall not be assigned or transferred, either
voluntarily or involuntarily, by operation of law or otherwise,
without the prior written consent of FRIMCo, the Underlying Funds and
the Top Fund. The Agreement shall automatically and immediately
terminate in the event of its assignment without prior written
consent of such Funds and FRIMCo.
8. NOTICE
Any notice under this Agreement shall be in writing, addressed and
delivered or sent by registered or certified mail, postage prepaid,
to the other party at such address as such other party may designate
for the receipt of such notices. Until further notice to the other
parties, it is agreed that for this purpose the address of all
parties to this Agreement is 909 A Street, Tacoma, Washington 98402
-- Attention: President.
9. INTERPRETIVE PROVISIONS
In connection with the operation of this Agreement, the parties may
agree from time to time on such provisions interpretive of or in
addition to the provisions of this Agreement as may in their joint
opinion be consistent with the general tenor of this Agreement. Any
such interpretive or additional provisions are to be signed by all
parties and annexed hereto, but no such provisions shall contravene
any applicable Federal or State Law or regulation. Also, no existing
provision of this Agreement, or interpretive or additional provision
described above, shall be effective if, as a result, FRIC, any Top
Fund or any Underlying Fund would lose its status as a regulated
investment company under Subchapter M of the Internal Revenue Code.
10. STATE LAW
This Agreement shall be construed and enforced in accordance with and
governed by the laws of the Commonwealth of Massachusetts.
11. CAPTIONS
The captions in the Agreement are included for convenience of
reference only and in no way define or limit any of the provisions
hereof or otherwise affect their construction or effect.
With respect to any party which is organized as a Massachusetts business
trust, references in this Agreement to the party mean and refer to the Trustees
from time to time serving under its Declaration of Trust on file with the
Secretary of the Commonwealth of Massachusetts, as the same may be amended from
time to time, pursuant to which the party conducts its business. The obligations
of the party hereunder shall not be binding upon any of the Trustees,
shareholders, nominees, officers, agents or employees of the party personally,
but bind only the trust property of the party, as provided in said Declaration
of Trust.
With respect to any party which is organized as a Massachusetts business
trust, if the party has more than one series, no series of the party other than
the series on whose behalf an obligation shall have been undertaken shall be
responsible for the obligations of the series, and third parties shall look only
to the assets of that series to satisfy those obligations.
IN WITNESS WHEREOF, the parties have caused the Agreement to be executed
as of the day and year first above written.
FRANK RUSSELL INVESTMENT COMPANY
for the Underlying Funds
*By:
FRANK RUSSELL INVESTMENT COMPANY
for the Top Fund
*By:
FRANK RUSSELL INVESTMENT
MANAGEMENT COMPANY
By:
* This Agreement has been signed by each party which is a Massachusetts
business trust by its President only in that capacity and not
individually.
<PAGE>
APPENDIX A
The following Funds of FRIC are parties to this Agreement, and have so
indicated their intention to be bound by such Agreement as "Underlying Funds" by
FRIC's execution of the Agreement on the dates indicated thereon:
- --------
1 Fees are expressed as a percentage of the average net asset value of Class
Shares held by your Customers during the preceding calendar quarter.
2 Fees are expressed as a percentage of the average net asset value of
Class Shares outstanding during the prior calendar quarter.
3 Fees are expressed as a percentage of the average net asset value of Class
Shares held by your Customers during the preceding calendar quarter.
4 Fees are expressed as a percentage of the average net asset value of Class
Shares outstanding during the preceding calendar quarter.
Exhibit 15(b)
FRANK RUSSELL INVESTMENT COMPANY
MULTIPLE CLASS
PLAN PURSUANT TO RULE 18F-3
UNDER THE
INVESTMENT COMPANY ACT OF 1940
April 22, 1996
as Revised November 4, 1996,
June 3, 1998, November 9, 1998 and August 9, 1999
I. INTRODUCTION
In accordance with Rule 18f-3 under the Investment Company Act of 1940, as
amended (the "1940 Act"), this Plan describes the multi-class structure that
will apply to certain portfolios of shares (each, a "Fund" and collectively, the
"Funds") of beneficial interest, $.01 par value per share ("Shares") of Frank
Russell Investment Company ("FRIC"), including the separate class arrangements
for the service and distribution of Shares, the method for allocating the
expenses, income, gain and loss of each Fund among its classes, and any related
exchange privileges and conversion features that apply to the different classes.
II. THE MULTI-CLASS STRUCTURE
Each of the following Funds is authorized to issue three classes of Shares,
identified as Class C, Class E, and Class S, respectively: Diversified Equity
Fund, Special Growth Fund, Equity Income Fund, Quantitative Equity Fund,
Diversified Bond Fund, Short Term Bond Fund (formerly known as Fixed Income II
Fund), Multistrategy Bond Fund, Tax Exempt Bond Fund (formerly known as Limited
Volatility Tax Free Fund), Tax-Managed Small Cap Fund, International Securities
Fund, Real Estate Securities Fund and Emerging Markets Fund (each, a "Russell
Fund").
Each of the following Funds is authorized to issue four classes of Shares,
identified as Class C, Class D, Class E and Class S, respectively: Equity
Aggressive Strategy Fund (formerly known as Equity Balanced Strategy Fund),
Aggressive Strategy Fund, Balanced Strategy Fund, Moderate Strategy Fund and
Conservative Strategy Fund (each, a "LifePoints Fund").
Each of the following Funds is authorized to issue four classes of Shares,
identified as Class E, Class I, Class Y, and Premier Class, respectively: Equity
I Fund, Equity II Fund, Equity III Fund, Equity Q Fund, International Fund,
Fixed Income I Fund and Fixed Income III Fund (each, an "Institutional Fund").
Each of the following Funds is authorized to issue two classes of Shares,
identified as Class C and Class S, respectively: Tax-Managed Equity Aggressive
Strategy Fund, Tax-Managed Aggressive Strategy Fund, Tax-Managed Moderate
Strategy Fund, Tax-Managed Conservative Strategy Fund, Tax-Managed Large Cap
Fund (formerly Equity T Fund) and Tax-Managed Small Cap Fund (each, a
"Tax-Managed Fund").
Shares of each class of a 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 or shareholder services 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 different conversion feature; (3) each class of
Shares may bear differing amounts of certain Class Expenses (as defined below);
(4) different policies may be established with respect to the payment of
distributions on the classes of Shares of a 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 Fund might have different exchange privileges from another class;
and (6) each class of Shares of a Fund would have a different class designation
from another class of that Fund. The class of Shares shall also have the
distinct features described in Section III, below.
III. CLASS ARRANGEMENTS
A. RULE 12B-1 AND SHAREHOLDER SERVICES PLANS
FRIC has adopted a distribution plan pursuant to Rule 12b-1 under the
1940 Act with respect to Class C Shares of each Russell Fund and of
each Tax-Managed Fund and Class C Shares and Class D Shares of each
LifePoints Fund containing the following terms:
FRIC may compensate its principal underwriter (the "Distributor") or
any investment advisers, financial planners, banks, broker-dealers or
other financial institutions that have entered into Sales Support
Agreements for any activities or expenses primarily intended to result
in the sale of Class C Shares or Class D Shares as the case may be, of
the applicable Funds, as provided in the Shareholder Services Plan and
the Distribution Plan and any Supplements thereto, subject to an
annual limit of .75% of the average daily net assets of a Fund
attributable to its Class C Shares and Class D Shares as the case may
be.
FRIC has adopted a Shareholder Services Plan with respect to the Class
C Shares, Class D Shares, and Class E Shares of each applicable Fund
containing the following terms:
FRIC may compensate the Distributor or any broker-dealers, banks,
investment advisers, financial planners and other financial
institutions that are dealers of record or holders of record or that
have a servicing relationship with the beneficial owners or
shareholders of Class C, Class D, or Class E Shares for any activities
or expenses primarily intended to assist, support or service their
clients who beneficially own or are shareholders of Class C, Class D,
or Class E Shares, as set forth in the Shareholder Services Agreement
for FRIC, subject to an annual limit of 0.25% of the average daily net
assets of a Fund attributable to its Class C Shares, Class D Shares,
or Class E Shares, as the case may be.
B. ALLOCATION OF EXPENSES AND INCOME
1. "TRUST" AND "FUND" EXPENSES
The net investment income, realized and unrealized capital gains
and losses and expenses (other than "Class Expenses," as defined
below) of each Fund that is not a money market fund under Rule
2a-7 under the 1940 Act shall be allocated to each Class on the
basis of its net asset value relative to the net asset value of
the Fund. The net investment income, realized and unrealized
capital gains and losses and expenses (other than "Class
Expenses," as defined below) of each Fund that is a money market
fund under Rule 2a-7 under the 1940 Act shall be allocated to
each Share, regardless of class, on the basis of its net asset
value relative to the net asset value of the Fund. Expenses so
allocated include expenses of FRIC that are not attributable to a
particular Fund or class of a Fund ("Trust Expenses") and
expenses of a Fund not attributable to a particular class of a
Fund ("Fund Expenses"). Trust expenses include, but are not
limited to, Trustees' fees and expenses; insurance costs; certain
legal fees; expenses related to shareholder reports; and printing
expenses (other than those set forth in Section B.2 below). Fund
Expenses include, but are not limited to, certain registration
fees (i.e., state registration fees imposed on a Fund-wide basis
and SEC registration fees); custodial fees; audit fees; transfer
agent fees (other than those set forth in Section B.2 below);
advisory fees; fees related to the preparation of separate
documents of a particular Fund, such as a separate prospectus;
and other expenses relating to the management of the Fund's
assets.
2. "CLASS" EXPENSES
Class expenses include the following types of expenses, which are
attributable to a particular class ("Class Expenses"): (a)
payments pursuant to the Rule 12b-1 plan for that class; (b)
transfer agent fees attributable to a specific class; (c)
printing and postage expenses related to preparing and
distributing shareholder reports, prospectuses and proxy
materials to members of a specific class; (d) registration fees
(other than those set forth in Section B.1 above); (e) the
expense of Fund administrative personnel and services as required
to support the shareholders of a specific class; (f) litigation
or other legal expenses relating solely to a specific class of
Shares; (g) audit or accounting expenses relating solely to a
specific class; (h) Trustees' fees incurred solely as a result of
issues relating to a specific class of Shares; and (i) the
expense of holding meetings solely for shareholders of a specific
class. Expenses described in subpart (a) of this paragraph must
be allocated to the class for which they are incurred. All other
expenses described in this paragraph may (but need not) be
allocated as Class Expenses, but only if FRIC's Board of Trustees
determines, or FRIC's President and Secretary/Treasurer have
determined, subject to ratification by the Board of Trustees,
that the allocation of such expenses by class is consistent with
applicable legal principles under the 1940 Act and the Internal
Revenue Code of 1986, as amended.
In the event that a particular expense is no longer reasonably
allocable by class or to a particular class, it shall be treated
as a Trust Expense or Fund Expense, and in the event a Trust
Expense or Fund Expense becomes reasonably allocable as a Class
Expense, it shall be so allocated, subject to compliance with
Rule 18f-3 and to approval or ratification by the Board of
Trustees.
3. WAIVERS OR REIMBURSEMENTS OF EXPENSES
Expenses may be waived or reimbursed by any adviser to FRIC, by
FRIC's underwriter or any other provider of services to FRIC
without the prior approval of FRIC's Board of Trustees.
C. EXCHANGE PRIVILEGES
Shareholders of a Fund may, to the extent provided from time to time
in FRIC's registration statement under the Securities Act of 1933, as
amended, (the "1933 Act") exchange Shares of a particular class for
Shares of the same class in another Fund and exchange Shares of a
particular class for Shares of a different class in the same Fund,
each at the relative net asset values of the respective Shares to be
exchanged and with no sales charge, provided that the Shares to be
acquired in the exchange are, as may be necessary, registered under
the 1933 Act, qualified for sale in the shareholder's state of
residence and subject to the applicable requirements, if any, as to
minimum amount.
D. CONVERSION FEATURE
Shares of a class of a Fund may contain a conversion feature whereby
they could automatically convert into Shares of a different class
after a prescribed period following the purchase of the convertible
Shares. Shares acquired through the reinvestment of dividends and
other distributions paid with respect to convertible Shares also shall
have a conversion feature. All conversions shall be on the basis of
the relative net asset values of the two classes of Shares, without
the imposition of any sales or other charge. Any asset-based sales or
other charge applicable to the class of Shares into which the original
Shares were converted shall thereafter apply to the converted Shares.
IV. BOARD REVIEW
A. INITIAL APPROVAL
The Board of Trustees of FRIC, including a majority of the Trustees
who are not interested persons of FRIC, as defined under the 1940 Act
(the "Independent Trustees"), at a meeting held on April 22, 1996,
initially approved this Plan based on a determination that the Plan,
including the expense allocation, is in the best interests of each
class of Shares of each Fund individually and FRIC as a whole, and
approved revisions of this Plan on November 4, 1996, on April 28,
1997, on June 3, 1998, on November 9, 1998 and on August 9, 1999, in
each case based on a similar determination.
B. APPROVAL OF AMENDMENTS
Before any material amendments to this Plan, FRIC's Board of Trustees,
including a majority of the Independent Trustees, must find that the
Plan, as proposed to be amended (including any proposed amendments to
the method of allocating class and/or fund expenses), is in the best
interests of each class of Shares of each Fund individually and FRIC
as a whole. In considering whether to approve any proposed
amendment(s) to the Plan, the Trustees of FRIC shall request and
evaluate such information as they consider reasonably necessary to
evaluate the proposed amendment(s) to the Plan. Such information shall
address the issue of whether any waivers or reimbursements of advisory
or administrative fees could be considered subsidization of one class
by another, and other potential conflict of interest between classes.
C. PERIODIC REVIEW
The Board of Trustees of FRIC shall review the Plan as frequently as
it deems necessary, consistent with applicable legal requirements.
IV. EFFECTIVE DATE
The Plan first became effective as of April 22, 1996 and (a) was revised as
of November 4, 1996 to add the LifePoints Funds, and to add Class D Shares
and Class E Shares with respect to each of those Funds and (b) was revised
as of June 3, 1998 (i) to redesignate existing Class C shares of the
Russell Funds as Class E Shares; (ii) to add new and different Class C
Shares with respect to the Russell Funds and the LifePoints Funds, (iii) to
redesignate the existing shares of the Institutional Funds as Class I
Shares; and (iv) to add Class Y, Premier Advisor Class, and Premier
Institutional Class Shares with respect to the Institutional Funds and (c)
was revised as of November 9, 1998 (i) to authorize Class C Shares of the
Short Term Bond Fund (formerly known as Fixed Income II Fund), (ii) to
redesignate the Premier Advisor Class Shares of the Institutional Funds as
"Premier Class" and (iii) to redesignate the Premier Institutional Class
Shares of the Institutional Funds as "Class E Shares" and (d) was revised
as of August 9, 1999 to add the Class C and Class S Shares of the
Tax-Managed Funds.