<PAGE> 1
'33 Act File No. 2-73024
'40 Act File No. 811-3213
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 6, 1997
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 24 [x]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 25 [x]
(Check appropriate box or boxes)
NATIONWIDE SEPARATE ACCOUNT TRUST
TOTAL RETURN FUND
CAPITAL APPRECIATION FUND
GOVERNMENT BOND FUND
MONEY MARKET FUND
NATIONWIDE SMALL COMPANY FUND
NATIONWIDE INCOME FUND
NATIONWIDE STRATEGIC GROWTH FUND
NATIONWIDE STRATEGIC VALUE FUND
NATIONWIDE EQUITY INCOME FUND
NATIONWIDE HIGH INCOME BOND FUND
NATIONWIDE BALANCED FUND
NATIONWIDE MULTI SECTOR BOND FUND
NATIONWIDE SMALL CAP VALUE FUND
NATIONWIDE GLOBAL EQUITY FUND
NATIONWIDE SELECT ADVISERS MID CAP FUND
(Exact Name of Registrant as Specified in Charter)
THREE NATIONWIDE PLAZA
COLUMBUS, OHIO 43215
(Address of Principal Executive Office)(Zip Code)
Registrant's Telephone Number, including Area Code: (614) 249-7111
Send Copies of Communications to:
MS. RAE MERCER POLLINA DRUEN, DIETRICH, RENOLDS & KOOGLER
THREE NATIONWIDE PLAZA ONE NATIONWIDE PLAZA
COLUMBUS, OHIO 43215 COLUMBUS, OHIO 43215
(Name and Address of Agent for Service)
[x] It is proposed that this filing will become effective on October 20, 1997
pursuant to paragraph (a) of Rule 485.
Registrant has declared that an indefinite number of its shares are
registered by a prior registration statement in accordance with Rule 24f-2 under
the Investment Company Act of 1940. Registrant filed its Rule 24f-2 Notice for
the fiscal year ended December 31, 1996, on February 26, 1997.
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NATIONWIDE SEPARATE ACCOUNT TRUST
TOTAL RETURN FUND
CAPITAL APPRECIATION FUND
GOVERNMENT BOND FUND
MONEY MARKET FUND
NATIONWIDE SMALL COMPANY FUND
NATIONWIDE INCOME FUND
NATIONWIDE STRATEGIC GROWTH FUND
NATIONWIDE STRATEGIC VALUE FUND
NATIONWIDE EQUITY INCOME FUND
NATIONWIDE HIGH INCOME BOND FUND
NATIONWIDE BALANCED FUND
NATIONWIDE MULTI SECTOR BOND FUND
NATIONWIDE SMALL CAP VALUE FUND
NATIONWIDE GLOBAL EQUITY FUND
NATIONWIDE SELECT ADVISERS MID CAP FUND
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CROSS REFERENCE SHEET
N-1A Item No. Location
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PART A
(NATIONWIDE STRATEGIC GROWTH FUND, NATIONWIDE STRATEGIC VALUE FUND,
NATIONWIDE EQUITY INCOME FUND, NATIONWIDE HIGH INCOME BOND FUND,
NATIONWIDE BALANCED FUND, NATIONWIDE MULTI SECTOR BOND FUND,
NATIONWIDE SMALL CAP VALUE FUND, NATIONWIDE GLOBAL EQUITY FUND,
NATIONWIDE SELECT ADVISERS MID CAP FUND)
<TABLE>
<S> <C> <C>
Item 1. Cover Page................................... Cover Page
Item 2. Synopsis..................................... *
Item 3. Condensed Financial Information.............. *
Item 4. General Description of Registrant............ Investment Objectives and Policies;
Investment Techniques, Considerations
and Risk Factors
Item 5. Management of the Fund....................... Management of the Trust
Item 6. Capital Stock and Other Securities........... Additional Information, Tax Status
Item 7. Purchase of Securities Being Offered......... Sale of Fund Shares; Investment in Fund Shares;
............................................. Net Income and Distributions
Item 8. Redemption or Repurchase..................... Share Redemption
Item 9. Pending Legal Proceedings.................... *
</TABLE>
PART B
(NATIONWIDE STRATEGIC GROWTH FUND, NATIONWIDE STRATEGIC VALUE FUND,
NATIONWIDE EQUITY INCOME FUND, NATIONWIDE HIGH INCOME BOND FUND,
NATIONWIDE BALANCED FUND, NATIONWIDE MULTI SECTOR BOND FUND,
NATIONWIDE SMALL CAP VALUE FUND, NATIONWIDE GLOBAL EQUITY FUND,
NATIONWIDE SELECT ADVISERS MID CAP FUND)
<TABLE>
<S> <C> <C>
Item 10. Cover Page................................... Cover Page
Item 11. Table of Contents............................ Table of Contents
Item 12. General Information and History.............. General Information and History
Item 13. Investment Objectives and Policies........... Additional Information on Portfolio
Investments and Investment Policies;
Investment Restrictions
</TABLE>
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<TABLE>
<S> <C> <C>
Item 14. Management of the Registrant.... Trustees and Officers of the Trust
Item 15. Control Persons and Principal
Holders of Securities........... Major Shareholders
Item 16. Investment Advisory and Other
Services........................ Investment Adviser and Other Services
Item 17. Brokerage Allocation............ Brokerage Allocations
Item 18. Capital Stock and Other
Securities...................... Additional Information
Item 19. Purchase, Redemption and
Pricing of Securities Being
Offered......................... Purchases, Redemptions and Pricing
of Shares
Item 20. Tax Status...................... Tax Status; Other Tax Consequences;
Tax Consequences to Shareholders
Item 21. Underwriters.................... *
Item 22. Calculation of Performance
Data............................ Calculating Yield and Total Return --
Non-Money Market Funds
Item 23. Financial Statements............ Financial Statements
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C to this Registration Statement.
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* Not applicable or negative answer
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The Prospectus for the Total Return Fund, Capital Appreciation Fund, Government
Bond Fund and Money Market Fund, dated May 1, 1997 and the Prospectus for the
Nationwide Small Company Fund dated May 1, 1997, and the Prospectus for the
Nationwide Income Fund, dated May 1, 1997, as well as the Statement of
Additional Information for the Total Return Fund, Capital Appreciation Fund,
Government Bond Fund, Money Market Fund, Nationwide Small Company Fund, and
Nationwide Income Fund, dated May 1, 1997, are incorporated by reference into
this filing of Post-Effective Amendment No. 24 to the Registration Statement.
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PROSPECTUS
OCTOBER _____, 1997
SHARES OF BENEFICIAL INTEREST OF
NATIONWIDE STRATEGIC VALUE FUND
NATIONWIDE STRATEGIC GROWTH FUND
TWO SERIES OF
NATIONWIDE SEPARATE ACCOUNT TRUST
THREE NATIONWIDE PLAZA
COLUMBUS, OHIO 43215
FOR INFORMATION AND ASSISTANCE,
CALL (614) 249-5134
Nationwide Strategic Value Fund and Nationwide Strategic Growth Fund
(collectively, the "Funds" and individually a "Fund") are two separate
diversified portfolios of the Nationwide Separate Account Trust (the "Trust").
The Trust is an open-end management investment company organized under the laws
of Massachusetts, by a Declaration of Trust, dated June 30, 1981, as
subsequently amended. The Trust offers shares in 15 separate mutual funds, each
with its own investment objective. This Prospectus relates only to Nationwide
Strategic Value Fund and Nationwide Strategic Growth Fund. The shares of the
Funds are sold to other open-end investment companies created by Nationwide
Advisory Services, Inc., the Fund's investment adviser, as well as to life
insurance company separate accounts to fund the benefits of variable life
insurance policies and annuity contracts.
Nationwide Strategic Value Fund (the "Value Fund") has as its primary investment
objective long-term capital appreciation principally through investment in
common stocks and other equity securities. Current income is a secondary
objective.
Nationwide Strategic Growth Fund (the "Growth Fund") seeks capital growth. The
Growth Fund invests primarily in equity securities that the Fund's subadviser
believes have above-average growth prospects.
This Prospectus provides you with the basic information you should know before
investing in either Fund. You should read it and keep it for future reference. A
Statement of Additional Information dated October ___, 1997, has been filed with
the Securities and Exchange Commission. You can obtain a copy without charge by
calling (614) 249-5134, or writing Nationwide Life Insurance Company, One
Nationwide Plaza, Columbus, Ohio 43215.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
THE STATEMENT OF ADDITIONAL INFORMATION FOR THE TRUST, DATED
OCTOBER ___, 1997, IS INCORPORATED HEREIN BY REFERENCE.
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SALE OF FUND SHARES
Shares of the Funds may be sold to life insurance company separate accounts (the
"Accounts") to fund the benefits of variable life insurance policies or annuity
contracts ("Contracts") issued by life insurance companies, as well as to other
open-end investment companies (each, a "Fund of Funds") created by Nationwide
Advisory Services, Inc. (the "Adviser"), the Funds' investment adviser. The
Accounts purchase shares of a Fund in accordance with variable account
allocation instructions received from owners of the Contracts. The Fund then
uses the proceeds to buy securities for its portfolio. The Adviser, together
with a subadviser (the "Subadviser"), manages the portfolio of each Fund from
day to day to accomplish such Fund's investment objectives. The types of
investments and the way they are managed depend on what is happening in the
economy and the financial marketplaces. Each Fund of Funds and Account, as a
shareholder, has an ownership interest in a Fund's investments. Each Fund also
offers to buy back (redeem) its shares from the Funds of Funds or the Accounts
at any time at net asset value.
SUMMARY OF EXPENSES
The Value Fund The Growth Fund
-------------- ---------------
Shareholder Transaction Expenses None None
Estimated Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees .90% .90%
12b-1 Fees None None
Other Expenses .10% .10%
---- ----
Estimated Total Fund Operating Expenses(1) 1.00% 1.00%
===== =====
This summary is provided to assist investors in understanding the various costs
and expenses that an investor in a Fund will bear directly or indirectly. The
amount of "Other Expenses" is based on estimated amounts for the fiscal year
ending December 31, 1997.
Example:
You would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and
(2) redemption at the end of each time period: 1 year 3 years
------ -------
The Value Fund $10 $32
The Growth Fund $10 $32
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1 The Adviser has agreed with the Trust to waive management fees or to
reimburse expenses incurred by each Fund to the extent necessary to
limit the total expense ratio of each Fund to a maximum of 1.00% of the
average net assets of the particular Fund.
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THE EXAMPLE SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESSER THAN THOSE SHOWN.
For more information on Fund expenses, see "MANAGEMENT OF THE TRUST" below.
FINANCIAL HIGHLIGHTS
Financial highlights are not available for the Funds, because the Funds have not
yet commenced operations.
INVESTMENT OBJECTIVES AND POLICIES
NATIONWIDE STRATEGIC VALUE FUND
The Value Fund's primary investment objective is long-term capital appreciation,
and portfolio securities are selected primarily with a view to achievement of
this objective. Current income is a secondary objective in the selection of
investments.
The policy of the Value Fund is to invest in securities which are believed by
such Fund's subadviser to offer the possibility of increase in value, for the
most part common stocks of established companies having a strong financial
position and a low stock market valuation at the time of purchase (as measured
by price/earnings ratios as compared with average price/earnings ratios of major
market indices, e.g., Standard & Poor's 500 Index) in relation to investment
value (as measured by prospective earnings and dividend growth rates as compared
with market averages of such rates). Investments are then monitored by the
subadviser for price movement and earnings developments. Once a security is
purchased, it will generally be held in the Value Fund's portfolio until it no
longer meets the Value Fund's financial or valuation criteria as determined by
the subadviser.
The Value Fund expects to purchase and sell securities at such times as it deems
to be in the best interest of its shareholders. Although there may be some
short-term portfolio turnover, the subadviser will generally purchase securities
that are expected to appreciate in value over the long term. The Value Fund
anticipates that its annual portfolio turnover rate will not significantly
exceed 50%. The Value Fund, however, has not placed any limit on its rate of
portfolio turnover and securities may be sold without regard to the time they
have been held when, in the opinion of the subadviser, investment considerations
warrant such action.
The Value Fund does not concentrate its investments in any particular industry
or group of industries, but diversifies its holdings among as many different
companies and industries as seems appropriate in the light of conditions
prevailing at any given time.
Other than as considered appropriate for cash reserves, the Value Fund will
generally maintain a fully invested position in common stocks of publicly-held
companies, primarily in stocks of companies listed on a national securities
exchange and other equity securities (common stock or securities convertible
into common stocks). Investments may also be made in debt securities which are
convertible into equity securities and preferred stocks which are convertible
into common stock and in warrants or other rights to purchase common stock,
which in each case are considered equity securities by the Value Fund. The Value
Fund's subadviser rarely engages
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in market timing by shifting the portfolio or a significant portion thereof in
or out of the market in anticipation of market fluctuations. Although the Value
Fund's portfolio will normally be fully invested in equity securities as
described above, a portion of its assets may be held from time to time in cash
or cash equivalents (e.g., short-term money market securities such as U.S.
Treasury bills, prime-rated commercial paper, certificates of deposit, variable
rate demand notes, or repurchase agreements) when the subadviser is unable to
identify attractive equity investments. Variable rate demand notes are
non-negotiable instruments. The instruments the Value Fund invests in are rated
at least A1 by Standard & Poor's. However, the Value Fund may be susceptible to
credit risk with respect to these notes to the extent the issuer defaults on its
payment obligation.
NATIONWIDE STRATEGIC GROWTH FUND
The Growth Fund seeks capital growth. The Growth Fund invests primarily in
equity securities that such Fund's subadviser believes have above-average growth
prospects.
Under normal market conditions, the Growth Fund will invest at least 65% of its
total assets in equity securities, including common stocks, preferred stocks,
and securities that are convertible into common or preferred stocks, such as
warrants and convertible bonds. While the emphasis of the Growth Fund is clearly
on equity securities, the Growth Fund may invest a limited portion of its assets
in debt obligations when the subadviser perceives that they are more attractive
than stocks on a long-term basis. The Growth Fund may invest up to 35% of its
total assets in debt obligations, including intermediate- to long-term corporate
or U.S. government debt securities. Although the debt obligations in which the
Growth Fund invests will be primarily investment grade, the Growth Fund may
invest up to 5% of its net assets in non-investment-grade debt obligations.
The Growth Fund generally will invest in companies whose earnings are believed
to be in a relatively strong growth trend, and, to a lesser extent, in companies
in which significant further growth is not anticipated but whose market value is
thought to be undervalued. In identifying companies with favorable growth
prospects, the subadviser ordinarily looks to certain other characteristics,
such as the following:
-- prospects for above-average sales and earnings growth;
-- high return on invested capital;
-- overall financial strength, including sound financial and
accounting policies and a strong balance sheet;
-- competitive advantages, including innovative products and
service;
-- effective research, product development, and marketing; and
-- stable, capable management.
At various times the Funds may invest in derivative instruments for hedging or
risk management purposes or for any other permissible purpose. See "INVESTMENT
TECHNIQUES, CONSIDERATIONS AND RISK FACTORS - Derivative Instruments" below.
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In addition, for temporary or emergency purposes as determined by the applicable
Subadviser, each Fund may invest up to 100% of its total assets in cash,
short-term fixed income securities and/or short-term money market obligations as
described below.
For a further discussion of the types of securities in which the Funds may
invest and the related investment techniques, see "INVESTMENT TECHNIQUES,
CONSIDERATIONS AND RISK FACTORS" below.
While there is careful selection of the securities in which the Fund may invest
and constant supervision of the Fund's portfolio by a group of professional
investment managers, there can be no guarantee that either Fund's investment
objectives will be achieved. The investment objectives of the Funds are not
fundamental and may be changed by the Board of Trustees without shareholder
approval.
MANAGEMENT OF THE FUNDS
The Adviser provides investment management evaluation services to each Fund in
initially selecting and monitoring on an ongoing basis the performance of a
subadviser to manage each Fund's portfolio. The Adviser has selected Strong
Capital Management, Inc. ("Strong") to be the subadviser of each of the Funds.
Strong has subcontracted with Schafer Capital Management, Inc. ("Schafer
Capital") to subadvise the Value Fund. See "MANAGEMENT OF THE TRUST --
Investment Management of the Fund" below for further information.
INVESTMENT TECHNIQUES, CONSIDERATIONS AND RISK FACTORS
An investment in the Funds involves certain risks. As a general matter, an
investment in the Funds involves the risk that the net asset value of the Funds'
shares will fluctuate in response to changes in economic conditions, and the
market's perception of the securities held by the Funds. In addition, because
the Funds invest primarily in common stocks, an investment in the Funds is
subject to stock market risk, which means that such an investment is subject to
the risk that stock prices in general will decline over short or extended
periods of time. An investment in the Funds is subject to other risks as well,
depending upon the particular investment techniques employed by the Funds and
the types of securities in which the Funds invest.
SMALL COMPANY AND EMERGING GROWTH STOCKS - Investing in securities of
small-sized and emerging growth companies may involve greater risks than
investing in larger, more established issuers since these securities may have
limited marketability and thus may be more volatile than securities of larger,
more established companies or the market averages in general. Because
small-sized companies normally have fewer shares outstanding than larger
companies, it may be more difficult for a Fund to buy or sell significant
numbers of such shares without an unfavorable impact on prevailing prices.
Small-sized companies may have limited product lines, markets or financial
resources and may lack management depth. In addition, small-sized companies are
typically subject to wider variations in earnings and business prospects than
are
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larger, more established companies. There is typically less publicly available
information concerning small-sized companies than for larger, more established
ones.
Securities of issuers in "special situations" also may be more volatile, since
the market value of these securities may decline in value if the anticipated
benefits do not materialize. Companies in "special situations" include, but are
not limited to, companies involved in an acquisition or consolidation;
reorganization; recapitalization; merger, liquidation or distribution of cash,
securities or other assets; a tender or exchange offer, a breakup or workout of
a holding company; litigation which, if resolved favorably, would improve the
value of the companies' securities; or a change in corporate control.
Although investing in securities of emerging growth companies or of issuers in
"special situations" offers potential for above-average returns if the companies
are successful, the risk exists that the companies will not succeed, and the
prices of the companies' shares could significantly decline in value. Therefore,
an investment in a Fund may involve a greater degree of risk than an investment
in other mutual funds that seek long-term growth of capital by investing in
better-known, larger companies.
FOREIGN SECURITIES AND CURRENCIES - Each Fund may invest up to 25% of its total
assets in foreign securities, either directly or indirectly through the use of
depositary receipts. Depositary receipts, including American Depository
Receipts, European Depository Receipts and American Depository Shares, are
generally issued by banks or trust companies and evidence ownership of
underlying foreign securities. Each Fund may also invest in securities of
foreign investment funds or trusts (including passive foreign investment
companies).
Foreign investments involve special risks, including the possibility of
expropriation, confiscatory taxation, and withholding taxes on dividends and
interest; less extensive regulation of foreign brokers, securities markets, and
issuers; political, economic or social instability; and less publicly available
information and different accounting standards. When investing in foreign
securities, a Fund may also incur costs in conversions between currencies,
possible delays in settlement in foreign securities markets, limitations on the
use or transfer of assets (including suspension of the ability to transfer
currency from a given country), and difficulty in enforcing obligations in other
countries.
Foreign economies may differ favorably or unfavorably from the U.S. economy in
various respects, including growth of gross domestic product, rates of
inflation, currency depreciation, capital reinvestment, resource
self-sufficiency, and balance of payments positions. Many foreign securities are
less liquid and their prices more volatile than comparable U.S. securities.
Although the Funds generally invests only in securities that are regularly
traded on recognized exchanges or OTC, from time to time, foreign securities may
be difficult to liquidate rapidly without adverse price effects. Certain costs
attributable to foreign investing, such as custody charges and brokerage costs,
are higher than those attributable to domestic investing.
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Each Fund may invest a portion of its assets in securities of issuers in
developing or emerging markets and economies. Investing in securities of issuers
in developing or emerging markets involves special risks, including less social,
political, and economic stability; smaller securities markets and lower trading
volume, which may result in a lack of liquidity and greater price volatility;
certain national policies that may restrict a Fund's investment opportunities,
including restrictions on investments in issuers or industries deemed sensitive
to national interests, or expropriation or confiscation of assets or property,
which could result in a Fund's loss of its entire investment in that market; and
less developed legal structures governing private or foreign investment or
allowing for judicial redress for injury to private property.
In addition, brokerage commissions, custodial services, withholding taxes, and
other costs relating to investment in emerging markets generally are more
expensive than in the U.S. and certain more established foreign markets.
Economies in emerging markets generally are heavily dependent upon international
trade and, accordingly, have been and may continue to be affected adversely by
trade barriers, exchange controls, managed adjustments in relative currency
values, and other protectionist measures negotiated or imposed by the countries
with which they trade.
Because most foreign securities are denominated in non-U.S. currencies, the
investment performance of a Fund could be significantly affected by changes in
foreign currency exchange rates to the extent such Fund invests in non-U.S.
dollar denominated securities. The value of a Fund's assets denominated in
foreign currencies will increase or decrease in response to fluctuations in the
value of those foreign currencies relative to the U.S. dollar. Currency exchange
rates can be volatile at times in response to supply and demand in the currency
exchange markets, international balances of payments, governmental intervention,
speculation, and other political and economic conditions.
Each Fund may purchase and sell foreign currency on a spot basis and may engage
in forward currency contracts, currency options, and futures transactions for
hedging or any other lawful purpose. See "Derivative Instruments" below.
WARRANTS - A warrant is an instrument which gives the holder the right to
subscribe to a specified amount of the issuer's securities at a set price for a
specified period of time or on a specified date. Warrants do not carry the right
to dividends or voting rights with respect to their underlying securities and do
not represent any rights in assets of the issuer. An investment in warrants may
be considered speculative. In addition, the value of a warrant does not
necessarily change with the value of the underlying securities, and a warrant
ceases to have value if it is not exercised prior to its expiration date.
CONVERTIBLE SECURITIES - The Fund may invest in convertible securities, which
are bonds, debentures, notes, preferred stocks or other securities that may be
converted into or exchanged for a specified amount of common stock of the same
or a different issuer within a particular period of time at a specified price or
formula. Convertible securities have general characteristics similar to both
debt obligations and equity securities. Although to a lesser extent than with
debt obligations generally, the market value of convertible securities tends to
decline as interest rates
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<PAGE> 12
increase and, conversely, tends to increase as interest rates decline. In
addition, because of the conversion feature, the market value of convertible
securities tends to vary with fluctuations in the market value of the underlying
common stock and therefore will react to variations in the general market for
equity securities. A unique feature of convertible securities is that as the
market price of the underlying common stock declines, convertible securities
tend to trade increasingly on a yield basis, and so may not experience market
value declines to the same extent as the underlying common stock. When the
market price of the underlying common stock increases, the prices of the
convertible securities tend to rise as a reflection of the value of the
underlying common stock. While no securities investments are without risk,
investments in convertible securities generally entail less risk than
investments in common stock of the same issuer.
As debt obligations, convertible securities are investments that provide for a
stable stream of income with generally higher yields than common stocks. Of
course, like all debt obligations, there can be no assurance of current income
because the issuers of the convertible securities may default on their
obligations. Convertible securities, however, generally offer lower interest or
dividend yields than non-convertible securities of similar quality because of
the potential for capital appreciation. A convertible security, in addition to
providing fixed income, offers the potential for capital appreciation through
the conversion feature, which enables the holder to benefit from increases in
the market price of the underlying common stock. There can be no assurance of
capital appreciation, however, because the market value of securities will
fluctuate.
Convertible securities generally are subordinated to other similar but
non-convertible securities of the same issuer, although convertible bonds, as
corporate debt obligations, enjoy seniority in right of payment to all equity
securities, and convertible preferred stock is senior to common stock of the
same issuer. Because of the subordination feature, however, convertible
securities typically are rated below investment grade or are not rated.
DEBT OBLIGATIONS - Debt obligations in which each Fund may invest generally will
be investment grade debt obligations, although the Growth Fund may invest up to
5% of its assets in non-investment grade debt obligations. Subject to the
limitations described above, each Fund may invest in high-quality short-term
money market obligations. A Fund's risk and return potential, with respect to
debt obligations, depends in part on the maturity and credit-quality
characteristics of such investments in its portfolio. In general, the longer the
maturity of a debt obligation, the greater its sensitivity to changes in
interest rates. Similarly, debt obligations issued by less creditworthy entities
tend to carry higher yields than those with higher credit ratings. The market
value of all debt obligations is also affected by changes in the prevailing
interest rates. Therefore, the market value of such instruments generally reacts
inversely to interest rate changes. If the prevailing interest rates decrease,
the market value of debt obligations generally increases. If the prevailing
interest rates increase, the market value of debt obligations generally
decreases.
Investment grade debt obligations and short-term money market obligations in
which each Fund may invest include: 1) bonds or bank obligations rated in one of
the four highest rating
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categories by any nationally recognized statistical rating organization
("NRSRO") (e.g., Moody's Investors Service, Inc. or Standard & Poor's Ratings
Group); 2) U.S. government securities (as described below); 3) commercial paper
rated in one of the two highest ratings categories of any NRSRO; 4) short-term
bank obligations that are rated in one of the two highest categories by any
NRSRO, with respect to obligations maturing in one year or less; 5) repurchase
agreements relating to debt obligations which such Fund could purchase directly;
6) unrated debt obligations which are determined by the Subadviser to be of
comparable quality, including variable rate demand notes; 7) mortgage-backed and
asset-backed securities; or 8) money market mutual funds.
Medium-quality obligations are obligations rated in the fourth highest rating
category by any NRSRO. Medium-quality securities, although considered
investment-grade, may have some speculative characteristics and may be subject
to greater fluctuations in value than higher-rated securities. In addition, the
issuers of medium-quality securities may be more vulnerable to adverse economic
conditions or changing circumstances than that of higher-rated issuers.
All ratings are determined at the time of investment. Any subsequent rating
downgrade of a debt obligation will be monitored by the applicable Subadviser to
consider what action, if any, the Fund should take consistent with its
investment objective; such event will not automatically require the sale of the
downgraded securities.
HIGH YIELD CORPORATE DEBT OBLIGATIONS - The Fund may invest up to 5% of the
value of its total assets in corporate debt obligations that are not investment
grade securities or are not rated but are determined by the Subadviser to be of
comparable quality and may include bonds in default (commonly known as "junk
bonds").
Medium and lower rated securities will usually have higher yields than higher
rated securities. However, there is more risk associated with these investments.
This is because of reduced creditworthiness and increased risk of default. Under
rating agency guidelines, medium and lower rated securities and comparable
unrated securities will likely have some quality and protective characteristics
that are outweighed by large uncertainties or major risk exposures to adverse
conditions. Medium and lower rated securities are considered to have extremely
poor prospects of ever attaining any real investment standing, to have a current
identifiable vulnerability to default or to be in default, to be unlikely to
have the capacity to make required interest payments and repay principal when
due in the event of adverse business, financial or economic conditions, or to be
in default or not current in the payment of interest or principal. Such
securities are considered speculative with respect to the issuer's capacity to
make required interest and principal payments. The foregoing factors may, under
certain circumstances, reduce the value of securities held by the Fund and thus
affect the value of the Fund's shares.
Changes by recognized rating services in their ratings of any fixed-income
security and in the ability of an issuer to make payments of interest and
principal may also affect the value of these investments. The ratings of Moody's
and S&P generally represent the opinions of those organizations as to the
quality of the securities that they rate. Such ratings, however, are
-9-
<PAGE> 14
relative and subjective, are not absolute standards of quality, are subject to
change and do not evaluate the market risk or liquidity of the securities.
The secondary markets for high yield securities are not as liquid as the
secondary markets for higher rated securities. The secondary markets for high
yield securities are concentrated in relatively few market makers and
participants in the market are mostly institutional investors, including
insurance companies, banks, other financial institutions and mutual funds. In
addition, the trading volume for high yield securities is generally lower than
that for higher-rated securities and the secondary markets could contract under
adverse market or economic conditions independent of any specific adverse
changes in the condition of a particular issuer. These factors may have an
adverse effect on the ability of the Fund to dispose of particular portfolio
investments, may adversely affect the Fund's net asset value per share and may
limit the ability of the Fund to obtain accurate market quotations for purposes
of valuing securities and calculating net asset value. If the Fund is not able
to obtain precise or accurate market quotations for a particular security, it
will become more difficult to value the Fund's portfolio securities, and a
greater degree of judgment may be necessary in making such valuations. Less
liquid secondary markets may also affect the ability of the Fund to sell
securities at their fair value. If the secondary markets for high yield
securities contract due to adverse economic conditions or for other reasons,
certain liquid securities in the Fund's portfolio may become illiquid and the
proportion of the Fund's assets invested in illiquid securities may
significantly increase.
Prices for high yield securities may be affected by legislative and regulatory
developments. These laws could adversely affect the Fund's net asset value and
investment practices, the secondary market for high yield securities, the
financial condition of issuers of these securities and the value of outstanding
high yield securities. For example, federal legislation requiring the
divestiture by federally insured savings and loan associations of their
investments in high yield bonds and limiting the deductibility of interest by
certain corporate issuers of high yield bonds adversely affected the market in
recent years.
While the market values of securities rated below investment grade and
comparable unrated securities tend to react less to fluctuations in interest
rate levels than do the market values of higher-rated securities, the market
values of certain of these securities also tend to be more sensitive to
individual corporate developments and changes in economic conditions than are
the market values of higher-rated securities. In addition, such securities
present a higher degree of credit risk. Issuers of these securities are often
highly leveraged and may not have more traditional methods of financing
available to them, so that their ability to service their debt obligations
during an economic downturn or during sustained periods of rising interest rates
may be impaired. The risk of loss due to default by such issuers is
significantly greater than the risk of loss on investment grade securities,
because such securities generally are unsecured and frequently are subordinated
to the prior payment of senior indebtedness. The Fund also may incur additional
expenses to the extent that it is required to seek recovery upon a default in
the payment of principal or interest on its portfolio holdings.
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<PAGE> 15
High yield U.S. corporate securities in which the Fund may invest include bonds,
debentures, notes, and commercial paper and will generally be unsecured. Most of
the debt securities will bear interest at fixed rates. However, the Fund may
also invest in corporate debt securities with variable rates of interest or
which involve equity features, such as contingent interest or participations
based on revenues, sales or profits (i.e., interest or other payments, often in
addition to a fixed rate of return, that are based on the borrower's attainment
of specified levels of revenues, sales or profits and thus enable the holder of
the security to share in the potential success of the venture).
U.S. GOVERNMENT SECURITIES - U.S. government securities are issued or guaranteed
by the U.S. government or its agencies or instrumentalities. Securities issued
by the U.S. government include U.S. Treasury obligations, such as Treasury
bills, notes, and bonds. Securities issued by government agencies or
instrumentalities include, but are not limited to, obligations of the following:
- - the Federal Housing Administration, Farmers Home Administration, and
the Government National Mortgage Association ("GNMA"), including GNMA
pass-through certificates, whose securities are supported by the full
faith and credit of the United States;
- - the Federal Home Loan Banks whose securities are supported by the
right of the agency to borrow from the U.S. Treasury;
- - the Federal National Mortgage Association, whose securities are
supported by the discretionary authority of the U.S. government to
purchase certain obligations of the agency or instrumentality; and
- - the Student Loan Marketing Association and the International Bank for
Reconstruction and Development, whose securities are supported only by
the credit of such agencies.
Although the U.S. government provides financial support to such U.S.
government-sponsored agencies or instrumentalities, no assurance can be given
that it will always do so. The U.S. government and its agencies and
instrumentalities do not guarantee the market value of their securities;
consequently, the value of such securities will fluctuate.
DERIVATIVE INSTRUMENTS - Derivative instruments may be used by the Funds for
hedging or risk management purposes or for any other permissible purposes
consistent with that Fund's investment objective. Derivative instruments are
securities or agreements whose value is based on the value of some underlying
asset (e.g., a security or currency) or the level of a reference index. Options,
futures, and options on futures transactions are considered derivative
transactions. Derivatives generally have investment characteristics that are
based upon either forward contracts (under which one party is obligated to buy
and the other party is obligated to sell an underlying asset at a specific price
on a specified date) or option contracts (under which the holder of the option
has the right but not the obligation to buy or sell an underlying asset at a
specified price on or before a specified date). Consequently, the change in
value of a forward-based derivative generally is roughly proportional to the
change in value of the underlying asset. In contrast, the buyer of an
option-based derivative generally will benefit from favorable movements in the
price of the underlying asset but is not exposed to the corresponding
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<PAGE> 16
losses that result from adverse movements in the value of the underlying asset.
The seller of an option-based derivative generally will receive fees or premiums
but generally is exposed to losses resulting from changes in the value of the
underlying asset. Derivative transactions may include elements of leverage and,
accordingly, the fluctuation of the value of the derivative transaction in
relation to the underlying asset may be magnified.
In addition to options, futures, and options on futures transactions, derivative
transactions may include short sales against the box, in which the Fund sells a
security it owns for delivery at a future date. Derivative transactions may also
include (i) forward currency contracts and foreign currency exchange-related
securities; (ii) swaps, in which two parties agree to exchange a series of cash
flows in the future, such as interest-rate payments; (iii) interest-rate caps,
under which, in return for a premium, one party agrees to make payments to the
other to the extent that interest rates exceed a specified rate, or "cap"; (iv)
interest-rate floors, under which, in return for a premium, one party agrees to
make payments to the other to the extent that interest rates fall below a
specified level, or "floor"; and (v) structured instruments which combine the
foregoing in different ways.
Derivative transactions in which the Funds may engage include the writing of
covered put and call options on securities and the purchase of put and call
options thereon, the purchase of put and call options on securities indices and
exchange-traded options on currencies and the writing of put and call options on
securities indices. The Funds may enter into spread transactions and swap
agreements. The Funds also may buy and sell financial futures contracts which
may include interest-rate futures, futures on currency exchanges and stock and
bond index futures contracts. The Funds may enter into any futures contracts and
related options without limit for "bona fide hedging" purposes (as defined in
Commodity Futures Trading Commission regulations) and for other permissible
purposes, provided that aggregate initial margin and premiums on positions
engaged in for purposes other than "bona fide hedging" will not exceed 5% of its
net asset value, after taking into account unrealized profits and losses on such
contracts. Each Fund may also enter into forward currency contracts to purchase
or sell foreign currencies.
Derivative instruments may be exchange-traded or traded in OTC transactions
between private parties. OTC transactions are subject to the credit risk of the
counterparty to the instrument and are less liquid than exchange-traded
derivatives since they often can only be closed out with the other party to the
transaction. When required by guidelines of the Securities and Exchange
Commission, a Fund will set aside permissible liquid assets in a segregated
account to secure its obligations under derivative transactions. Segregated
assets cannot be sold or transferred unless equivalent assets are substituted in
their place or it is no longer necessary to segregate them. As a result, there
is a possibility that segregation of a large percentage of a Fund's assets could
impede portfolio management or a Fund's ability to meet redemption requests or
other current obligations. In order to maintain its required cover for a
derivative transaction, a Fund may need to sell portfolio securities at
disadvantageous prices or times since it may not be possible to liquidate a
derivative position.
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<PAGE> 17
The successful use of derivative transactions by each Fund is dependent upon the
applicable Subadviser's ability to correctly anticipate trends in the underlying
asset. Hedging transactions are subject to risks; if the Subadviser incorrectly
anticipates trends in the underlying asset, the Fund may be in a worse position
than if no hedging had occurred. In addition, there may be imperfect correlation
between a Fund's derivative transactions and the instruments being hedged.
SHORT SALES - Each Fund may engage in short sales of securities. In a short
sale, a Fund sells stock which it does not own, making delivery with securities
"borrowed" from a broker. The Fund is then obligated to replace the security
borrowed by purchasing it at the market price at the time of replacement. This
price may or may not be less than the price at which the security was sold by
the Fund. Until the security is replaced, such Fund is required to pay the
lender any dividends or interest which accrue during the period of the loan. In
order to borrow the security, the Fund may also have to pay a fee which would
increase the cost of the security sold. The proceeds of the short sale will be
retained by the broker, to the extent necessary to meet margin requirements,
until the short position is closed out.
Each Fund also must deposit in a segregated account an amount of cash or liquid
assets equal to the difference between (a) the market value of the securities
sold short at the time they were sold short and (b) the value of the collateral
deposited with the broker in connection with the short sale (not including the
proceeds from the short sale). While the short position is open, the Fund must
maintain daily the segregated account at such a level that (1) the amount
deposited in it plus the amount deposited with the broker as collateral equals
the current market value of the securities sold short and (2) the amount
deposited in it plus the amount deposited with the broker as collateral is not
less than the market value of the securities at the time they were sold short.
A Fund will incur a loss as a result of the short sale if the price of the
security increases between the date of the short sale and the date on which the
Fund replaces the borrowed security. A Fund will realize a gain if the security
declines in price between those two dates. The amount of any gain will be
decreased and the amount of any loss will be increased by any interest the Fund
may be required to pay in connection with the short sale. The dollar amount of
short sales at any one time (not including short sales against the box) may not
exceed 25% of the net assets of each Fund.
A short sale is "against-the-box" if at all times when the short position is
open a Fund owns an equal amount of the securities or securities convertible
into, or exchangeable without further consideration for, securities of the same
issue as the securities sold short. Such transactions serve to defer a gain or
loss for Federal income tax purposes.
REAL ESTATE SECURITIES - Although the Funds will not invest in real estate
directly, a Fund may invest in equity securities of real estate investment
trusts ("REITs") and other real estate industry companies or companies with
substantial real estate investments and, as a result, such Fund may be subject
to certain risks associated with direct ownership of real estate and with the
real estate industry in general. These risks include, among others: possible
declines in the value of real estate; possible lack of availability of mortgage
funds; extended vacancies of properties; risks related to general and local
economic conditions; overbuilding; increases in competition, property taxes and
operating expenses; changes in zoning laws; costs resulting from the clean-up
of, and liability to third parties for damages resulting from, environmental
problems; casualty or condemnation losses; uninsured damages from floods,
earthquakes or other natural disasters; limitations on and variations in rents;
and changes in interest rates.
REITs are pooled investment vehicles which invest primarily in income producing
real estate or real estate related loans or interests. REITs are generally
classified as equity REITs, mortgage REITs or hybrid REITs. Equity REITs invest
the majority of their assets directly in real property and derive income
primarily from the collection of rents. Equity REITs can also realize capital
gains by selling properties that have appreciated in value. Mortgage REITs
invest the majority of their assets in real estate mortgages and derive income
from the collection of interest payments. REITs are not taxed on income
distributed to shareholders provided they comply with several requirements of
Internal Revenue Code, as amended (the "Code").
ILLIQUID SECURITIES - Each Fund may invest up to 15% of its net assets in
securities that are illiquid, in that they cannot be expected to be sold within
seven days at approximately the price at which they are valued. Due to the
absence of an active trading market, a Fund may experience difficulty in valuing
or disposing of illiquid securities. The Subadviser will determine the liquidity
of the Fund's securities, under the supervision the Trust's trustees.
RESTRICTED SECURITIES, NON-PUBLICLY TRADED SECURITIES AND RULE 144A SECURITIES -
Each Fund may invest in restricted securities and Rule 144A securities.
Restricted securities cannot be sold to the public without registration under
the Securities Act of 1933 ("1933 Act"). Unless registered for sale, these
securities can be sold only in privately negotiated transactions or pursuant to
an exemption from registration. Restricted securities are generally considered
illiquid and are therefore subject to the Fund's 15% limitation on investments
in illiquid securities.
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<PAGE> 18
Non-publicly traded securities (including Rule 144A securities) may involve a
high degree of business and financial risk which may result in substantial
losses. The securities may be less liquid than publicly traded securities.
Although these securities may be resold in privately negotiated transactions,
the prices realized from these sales could be less than those originally paid by
a Fund. In particular, Rule 144A securities may be resold only to qualified
institutional buyers in accordance with Rule 144A under the 1933 Act.
Unregistered securities may also be sold abroad pursuant to Regulation S under
the 1933 Act. Companies whose securities are not publicly traded are not subject
to the disclosure and other investor protection requirements that would be
applicable if their securities were publicly traded. Acting pursuant to
guidelines established by the Trustees of the Trust, restricted securities and
Rule 144A securities may be considered liquid.
REPURCHASE AGREEMENTS - Each Fund may engage in repurchase agreement
transactions as long as the underlying securities are of the type that such Fund
would be permitted to purchase directly. Under the terms of a typical repurchase
agreement, a Fund would acquire an underlying debt obligation for a relatively
short period (usually not more than one week) subject to an obligation of the
seller to repurchase, and the Fund to resell, the obligation at an agreed upon
price and time, thereby determining the yield during the Fund's holding period.
Each Fund will enter into repurchase agreements with respect to securities in
which it may invest with member banks of the Federal Reserve System or certain
non-bank dealers. Under each repurchase agreement the selling institution will
be required to maintain the value of the securities subject to the repurchase
agreement at not less than their repurchase price. Repurchase agreements could
involve certain risks in the event of default or insolvency of the other party,
including possible delays or restrictions upon a Fund's ability to dispose of
the underlying securities. The Adviser or the applicable Subadviser, acting
under the supervision of the Board of Trustees, reviews the creditworthiness of
those banks and non-bank dealers with which the Funds enter into repurchase
agreements to evaluate these risks. For additional information, see "Repurchase
Agreements" in the Statement of Additional Information.
REVERSE REPURCHASE AGREEMENTS - The Funds may also enter into reverse repurchase
agreements with the same parties with whom they may enter into repurchase
agreements. Reverse repurchase agreements involve the sale of securities held by
a Fund pursuant to its agreement to repurchase them at a mutually agreed upon
date, price and rate of interest. At the time a Fund enters into a reverse
repurchase agreement, it will establish and maintain a segregated account with
an approved custodian containing liquid securities having a value not less than
the repurchase price (including accrued interest). The assets contained in the
segregated account will be marked-to-market daily and additional assets will be
placed in such account on any day in which the assets fall below the repurchase
price (plus accrued interest). A Fund's liquidity and ability to manage its
assets might be affected when it sets aside cash or portfolio securities to
cover such commitments. Reverse repurchase agreements involve the risk that the
market value of the securities retained in lieu of sale may decline below the
price of the securities the Fund has sold but is obligated to repurchase. In the
event the buyer of securities under a reverse repurchase agreement files for
bankruptcy or becomes insolvent, such buyer or its trustee or receiver may
receive an extension of time to determine whether to enforce the
-14-
<PAGE> 19
Fund's obligation to repurchase the securities, and the Fund's use of the
proceeds of the reverse repurchase agreement may effectively be restricted
pending such determination. Reverse repurchase agreements are considered to be
borrowings under the Investment Company Act of 1940 (the "1940 Act").
BANK OBLIGATIONS - The Fund may invest in bank obligations denominated in U.S.
dollars and other currencies, such as certificates of deposit, banker's
acceptances, and time deposits of domestic or foreign banks and their
subsidiaries and branches, and domestic savings and loan associations.
INVESTMENT COMPANIES - As permitted by the 1940 Act, the Fund reserves the right
to invest up to 10% of its total assets, calculated at the time of investment,
in the securities of other open-end or closed-end investment companies. No more
than 5% of the Fund's total assets may be invested in the securities of any one
investment company nor may it acquire more than 3% of the voting securities of
any other investment company. The Fund will indirectly bear its proportionate
share of any management fees paid by an investment company in which it invests
in addition to the advisory fee paid by the Fund.
The Funds may also invest, to a limited extent, in foreign investment companies.
Some of the countries in which the Funds invest may not permit direct investment
by outside investors. Investments in such countries may only be permitted
through foreign government-approved or authorized investment vehicles, which may
include other investment companies. In addition, it may be less expensive and
more expedient for a Fund to invest in a foreign investment company in a country
which permits direct foreign investment. The Funds do not intend to invest in
such investment companies unless, in the judgment of the Subadviser, the
potential benefits of such investments justify the payment of any associated
fees or expenses.
WHEN-ISSUED SECURITIES - Each Fund may invest without limitation in securities
purchased on a when-issued or delayed delivery basis. Although the payment and
interest terms of these securities are established at the time the purchaser
enters into the commitment, these securities may be delivered and paid for at a
future date, generally within 45 days (for mortgage-backed securities, the
delivery date may extend to as long as 120 days). Purchasing when-issued
securities allows a Fund to lock in a fixed price or yield on a security it
intends to purchase. However, when a Fund purchases a when-issued security, it
immediately assumes the risk of ownership, including the risk of price
fluctuation until the settlement date.
The greater a Fund's outstanding commitments for these securities, the greater
the exposure to potential fluctuations in the net asset value of a Fund.
Purchasing when-issued securities may involve the additional risk that the yield
available in the market when the delivery occurs may be higher or the market
price lower than that obtained at the time of commitment. Although a Fund may be
able to sell these securities prior to the delivery date, it will purchase
when-issued securities for the purpose of actually acquiring the securities,
unless after entering into the commitment a sale appears desirable for
investment reasons. When required by guidelines
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<PAGE> 20
issued by the Securities and Exchange Commission, the Fund will set aside
permissible liquid assets in a segregated account to secure its outstanding
commitments for when-issued securities.
LENDING PORTFOLIO SECURITIES - From time to time, each Fund may lend its
portfolio securities to brokers, dealers and other financial institutions which
need to borrow securities to complete certain transactions. In connection with
such loans, a Fund will receive collateral consisting of cash, U.S. Government
securities or irrevocable letters of credit. Such collateral will be maintained
at all times in an amount equal to at least 100% of the current market value of
the loaned securities. A Fund can increase its income through the investment of
such collateral. A Fund continues to be entitled to payments in amounts equal to
the interest, dividends or other distributions payable on the loaned security
and receives interest on the amount of the loan. Such loans will be terminable
at any time upon specified notice. A Fund might experience risk of loss if the
institution with which it has engaged in a portfolio loan transaction breaches
its agreement with the Fund.
BORROWING MONEY - Each Fund may borrow money from banks up to 33 1/3% of the
Fund's total assets (including the amount borrowed). However, the Funds
currently intend to borrow money only for temporary or emergency purposes (but
not for leverage or to purchase investments) up to 5% of the value of that
Fund's total assets (including the amount borrowed) valued at the time the
borrowing is made.
HISTORICAL PERFORMANCE INFORMATION
The Funds have not commenced operations and neither of them has an investment
performance record. However, the Growth Fund's investment objective and
policies and the Fund's strategies will be substantially similar to those
employed by Strong, with respect to the Strong Growth Fund; and the Value
Fund's investment objective and policies and the Fund's strategies will be
substantially similar to those employed by Schafer Capital with respect to the
Strong Schafer Value Fund, Inc. The charts below shows the historical
investment performance for the Strong Growth Fund and the Strong Schafer Value
Fund, Inc. (collectively, the "Strong Funds").
The investment performance of either of the Strong Funds does not represent the
corresponding Fund's performance and should not be construed a substitute for
that Fund's performance, nor should it be interpreted as indicative of a Fund's
future performance.
The investment performance results of the Strong Growth Fund reflect the
deduction of its total annual operating expenses of 1.34% as of _________,
1997. The Growth Fund's estimated total annual operating expenses are 1.00%,
and are expected to be lower than the total annual operating expenses of the
Strong Growth Fund. The investment performance results of the Strong Schafer
Value Fund, Inc. reflect the deduction of its total annual operating expenses
of 1.27% as of _________, 1997. The Value Fund's estimated total annual
operating expenses are 1.00%, and are expected to be lower than the total
annual operating expenses of the Strong Schafer Fund, Inc. The total return
performance figures of the Strong Funds represent the change, over a specified
period of time, in the value of an investment in the fund after reinvesting all
income and capital gains distributions. It is calculated by dividing that
change by the initial investment and is expressed as a percentage.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
----------------------------------------------------
ONE FIVE TEN SINCE
YEAR YEARS YEARS INCEPTION
<S> <C> <C> <C> <C>
AS OF June 30, 1997
Strong Growth Fund 11.52 24.73
Strong Schafer Value Fund 31.96 20.63 15.51
</TABLE>
* Strong Growth Fund commenced operations on 12/31/93.
ANNUAL TOTAL RETURNS FOR THE YEAR ENDED DECEMBER 31
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Strong Growth Fund 19.52 41.00 17.27 --- ---
Strong Schafer Value 23.17 34.15 -4.28 23.98 18.67
Fund
</TABLE>
MANAGEMENT OF THE TRUST
TRUSTEES AND OFFICERS
The business and affairs of the Trust are managed under the direction of its
Board of Trustees.
The Board of Trustees sets and reviews policies regarding the operation of the
Trust, whereas the officers perform the daily functions of the Trust.
INVESTMENT MANAGEMENT OF THE FUND
THE ADVISER - Under the terms of the Investment Advisory Agreement, Nationwide
Advisory Services, Inc., Three Nationwide Plaza, Columbus, Ohio 43215, oversees
the investment of the assets for the Funds and supervises the daily business
affairs of the Funds. Subject to the supervision and direction of the Trustees,
the Adviser also evaluates and monitors the performance of the Subadvisers. The
Adviser is also authorized to select and place portfolio investments on behalf
of the Fund; however, the Adviser does not intend to do so at this time.
The Adviser and the Trust have applied to the Securities and Exchange Commission
for an exemptive order which, if granted, will allow the Adviser to appoint,
replace or terminate subadvisers without the approval of shareholders; the order
would also allow the Adviser to revise a subadvisory agreement without
shareholder approval. Any change in subadvisers will be communicated to
shareholders within 60 days of such changes and all changes will be
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<PAGE> 21
approved by the Trust's Board of Trustees, including a majority of the Trustees
who are not interested persons of the Trust or the Adviser. The order, if
granted, is intended to facilitate the efficient operation of the Fund and
afford the Trust increased management flexibility. Prior to receiving the
exemptive order, the Adviser will not appoint, replace or terminate any
subadvisers or materially amend any subadvisory agreement without obtaining the
approval of shareholders.
The Adviser provides to each Fund investment management evaluation services
principally by performing initial due diligence on prospective subadvisers for
the Fund and thereafter monitoring the performance of the subadvisers through
quantitative and qualitative analysis as well as through periodic in-person,
telephonic and written consultations with the subadvisers. The Adviser has
responsibility for communicating performance expectations and evaluations to the
subadvisers and ultimately recommending to the Trust's Board of Trustees whether
each subadviser's contract should be renewed, modified or terminated; however,
the Adviser does not expect to recommend frequent changes of subadvisers. The
Adviser will regularly provide written reports to the Board of Trustees
regarding the results of its evaluation and monitoring functions. Although the
Adviser will monitor the performance of the subadvisers, there is no certainty
that any subadviser or Fund will obtain favorable results at any given time.
The Adviser, an Ohio corporation, is a wholly owned subsidiary of Nationwide
Life Insurance Company, which is owned by Nationwide Financial Services, Inc.
(NFS). NFS, a holding company, has two classes of common stock outstanding with
different voting rights enabling Nationwide Corporation (the holder of all the
outstanding Class B Common Stock) to control NFS. Nationwide Corporation is also
a holding company in the Nationwide Insurance Enterprise. All of the common
stock of Nationwide Corporation is held by Nationwide Mutual Insurance Company
(95.3%) and Nationwide Mutual Fire Insurance Company (4.7%), each of which is a
mutual company owned by its policyholders. Each Fund pays to the Adviser a fee
at the annual rate of 0.90% of that Fund's average daily net assets.
THE SUBADVISERS - Subject to the supervision of the Adviser and the Trustees,
Strong manages the Growth Fund's assets and Schafer Capital, though a
sub-contract with Strong, manages the Value Fund's assets in accordance with
such Fund's investment objective and policies. Strong and Schafer Capital shall
make investment decisions for its respective Fund, and, in connection with such
investment decisions, shall place purchase and sell orders for securities. For
the investment management services provided to the Funds, Strong receives an
annual fee from the Adviser in an amount equal to 0.50% of each Fund's first
$500 million of average daily net assets and 0.45% of each Fund's average daily
net assets in excess of $500 million. Pursuant to its subcontract with Schafer
Capital, Strong pays Schafer Capital's subadvisory fees. Below is a brief
description of each Subadviser.
SCHAFER CAPITAL MANAGEMENT, INC. ("SCHAFER CAPITAL"), 101 Carnegie Center,
Princeton, New Jersey 08540, a Delaware corporation formed in 1984 and
registered under the Investment Advisers Act of 1940, serves as subadviser to
the Value Fund pursuant to a Sub-Investment Advisory Agreement dated October __,
1997.
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<PAGE> 22
David K. Schafer, Schafer Capital's controlling person (within the meaning of
the 1940 Act) and sole shareholder, has been in the investment management
business for more than twenty-five years. Mr. Schafer is the President of
Schafer Capital and will be primarily responsible for the day-to-day management
of the Value Fund's portfolio. Mr. Schafer is also a minority shareholder of
Schafer Cullen Capital Management, Inc. Mr. Schafer was a securities analyst,
first for Arnold Bernhard & Co., Inc., publisher of The Value Line Investment
Survey, from June 1966 to June 1968; for J & W Seligman & Co. from June 1968 to
December 1970; and for Fariston Management Corp., from January 1971 to November
1972. In 1972, he joined the treasury department of INCO Ltd. to supervise the
investment managers of that company's pension assets, and in 1974 he began
managing a portion of those assets himself. In 1981, Mr. Schafer left INCO
Ltd. to found Schafer Capital.
STRONG CAPITAL MANAGEMENT, INC. ("STRONG"), P.O. Box 2936, Milwaukee, Wisconsin
53201, a Wisconsin corporation formed in 1974 and registered under the
Investment Advisers Act of 1940, serves as subadviser to the Growth Fund
pursuant to a Sub-Investment Advisory Agreement dated October ___, 1997. Strong
provides investment management services for mutual funds and other investment
portfolios representing assets of over $23 billion.
Ronald C. Ognar, a Chartered Financial Analyst with more than 25 years of
investment experience, joined Strong in April 1993 after two years as a
principal and portfolio manager with RCM Capital Management. For approximately
three years prior to that, he was a portfolio manager at Kemper Financial
Services in Chicago. Mr. Ognar began his investment career in 1968 at LaSalle
National Bank in Chicago after serving two years in the U.S. Army. Mr. Ognar
will be primarily responsible for the day-to-day management of the Growth Fund's
portfolio.
OTHER SERVICES
Under the terms of a Fund Administration Agreement, the Adviser also provides
various administrative and accounting services, including daily valuation of the
Fund's shares and preparation of financial statements, tax returns, and
regulatory reports. For these services, the Fund pays the Adviser an annual fee
in the amount of 0.07% of the Fund's first $250 million of average daily net
assets, 0.05% on the next $750 million and 0.04% on assets of more than $1
billion.
The Transfer and Dividend Disbursing Agent, Nationwide Investors Services, Inc.,
("NIS"), Three Nationwide Plaza, Columbus, Ohio 43216, serves as transfer agent
and dividend disbursing agent for the Trust. The Fund pays to NIS a fee for such
services at the annual rate of 0.01% of the Fund's average daily net assets. NIS
is a wholly owned subsidiary of the Adviser.
INVESTMENT IN FUND SHARES
An insurance company may purchase shares of the Fund using purchase payments
received on Contracts issued by Accounts. These Accounts are funded by shares of
the Funds. Funds of
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<PAGE> 23
Funds may also purchase shares of a Fund for their portfolios. There is no sales
charge, and all shares are sold at net asset value.
Shares of the Funds are currently sold only to separate accounts of Nationwide
Life Insurance Company and its wholly owned subsidiary Nationwide Life and
Annuity Insurance Company to fund the benefits under the Contract and to
affiliated Fund of Funds. The address for each of these entities is One
Nationwide Plaza, Columbus, Ohio 43215.
All investments in the Funds are credited to the shareholder's account in the
form of full and fractional shares of the Fund (rounded to the nearest 1/1000 of
a share). The Trust does not issue share certificates. Initial and subsequent
purchase payments allocated to a Fund are subject to the limits applicable to
the Contracts.
SHARE REDEMPTION
Redemptions are processed on any day on which the Trust is open for business and
are effected at net asset value next determined after the redemption order, in
proper form, is received by the Trust's transfer agent, NIS.
The net asset value per share of each Fund is determined once daily, as of the
close of regular trading on the New York Stock Exchange (generally 4:00 P.M.
Eastern Time), on each business day the New York Stock Exchange is open for
regular trading and on such other days as the Board determines and on any other
day during which there is a sufficient degree of trading in the Fund's portfolio
securities that the net asset value of such Fund is materially affected by
changes in the value of portfolio securities. The Trust will not compute net
asset value on customary national business holidays, including the following:
Christmas, New Year's Day, Martin Luther King's Birthday, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, and Thanksgiving Day. The net
asset value per share is calculated by adding the value of all securities and
other assets of a Fund, deducting its liabilities, and dividing by the number of
shares outstanding.
In determining net asset value, portfolio securities listed on national
exchanges are valued at the last sales price on the principal exchange; if the
securities are traded only in the over-the-counter market, they are valued at
the quoted bid prices. Other portfolio securities are valued at the quoted
prices obtained from an independent pricing organization which employs a
combination of methods, including among others, the obtaining and comparison of
market valuations from dealers who make markets and deal in such securities and
the comparison of valuations with those of other comparable securities in a
matrix of such securities. The pricing service activities and results are
reviewed by an officer of the Trust. Securities for which market quotations are
not readily available are valued at fair value in accordance with procedures
adopted by the Board of Trustees. Expenses and fees are accrued daily.
The Trust may suspend the right of redemption only under the following unusual
circumstances:
- - when the New York Stock Exchange is closed (other than weekends and
holidays) or trading is restricted;
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<PAGE> 24
- - when an emergency exists, making disposal of portfolio securities or
the valuation of net assets not reasonably practicable; or
- - during any period when the Securities and Exchange Commission has by
order permitted a suspension of redemption for the protection of
shareholders.
NET INCOME AND DISTRIBUTIONS
Substantially all of the net investment income, if any, of the Funds will be
declared and paid as dividends quarterly. Net realized capital gains of a Fund,
if any, will be distributed at least annually.
ADDITIONAL INFORMATION
DESCRIPTION OF SHARES - The Declaration of Trust permits the Trustees to issue
an unlimited number of full and fractional shares of beneficial interest of each
Fund and to divide or combine such shares into a greater or lesser number of
shares without thereby changing the proportionate beneficial interests in the
Trust. Each share of a Fund represents an equal proportionate interest in that
Fund with each other share. The Trust reserves the right to create and issue
shares of a number of different funds. In that case, the shares of each fund
would participate equally in the earnings, dividends, and assets of the
particular fund, but shares of all funds would vote together in the election of
Trustees. Upon liquidation of a fund, its shareholders are entitled to share pro
rata in the net assets of such fund available for distribution to shareholders.
VOTING RIGHTS - Shareholders are entitled to one vote for each share held.
Shareholders may vote in the election or removal of Trustees and on other
matters submitted to meetings of shareholders. No amendment may be made to the
Declaration of Trust without the affirmative vote of a majority of the
outstanding shares of the Trust. The sole shareholder of the Fund initially will
be Nationwide Life Insurance Company. The Trustees may, however, amend the
Declaration of Trust without the vote or consent of shareholders to:
- - designate series of the Trust;
- - change the name of the Trust; or
- - supply any omission, cure, correct, or supplement any ambiguous,
defective, or inconsistent provision to conform the Declaration of
Trust to the requirements of applicable federal and state laws or
regulations if they deem it necessary.
Shares have no pre-emptive or conversion rights. Shares are fully paid and
nonassessable. In regard to termination, sale of assets, or changes of
investment restrictions, the right to vote is limited to the holders of shares
of the particular fund affected by the proposal. When a majority is required, it
means the lesser of 67% or more of the shares present at a meeting when the
holders of more than 50% of the outstanding shares are present or represented by
proxy, or more than 50% of the outstanding shares.
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<PAGE> 25
SHAREHOLDER INQUIRIES - All inquiries regarding the Funds should be directed to
the Trust at the telephone number or address shown on the cover page of this
Prospectus.
PERFORMANCE ADVERTISING FOR THE FUNDS
Each Fund may use historical performance in advertisements, sales literature,
and the prospectus. Such figures will include quotations of average annual total
return for the most recent one, five, and ten year periods (or the life of the
Fund if less). Average annual total return represents the rate required each
year for an initial investment to equal the redeemable value at the end of the
specific period. Average annual total return reflects reinvestment of all
distributions.
TAX STATUS
The Trust's policy is to cause each fund to qualify as a regulated investment
company and to meet the requirements of Subchapter M of the Internal Revenue
Code (the "Code"). Each Fund intends to distribute all its taxable net
investment income and capital gains to shareholders and therefore will not be
required to pay any federal income taxes.
Because each fund of the Trust is treated as a separate entity for purposes of
the regulated investment company provisions of the Code, the assets, income, and
distributions of a Fund are considered separately for purposes of determining
whether or not the Fund qualifies as a regulated investment company. Each Fund
intends to comply with the diversification requirements currently imposed by the
Internal Revenue Service on separate accounts of insurance companies as a
condition of maintaining the tax-deferred status of the Contracts. See the
Statement of Additional Information for more specific information.
The tax treatment of payments made by an Account to a Contractholder is
described in the separate account prospectus.
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<PAGE> 26
CONTENTS
Sale of Fund Shares
Investment Objective and Policies
Investment Techniques, Considerations and Risk Factors
Management of the Trust
Investment in Fund Shares
Share Redemption
Net Income and Distributions
Additional Information
Performance Advertising for the Fund
Tax Status
INVESTMENT ADVISER AND ADMINISTRATOR
Nationwide Advisory Services, Inc.
One Nationwide Plaza
Columbus, Ohio 43215
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Nationwide Investors Services, Inc.
Box 1492
Three Nationwide Plaza
Columbus, Ohio 43216
AUDITORS
KPMG Peat Marwick LLP
Two Nationwide Plaza
Columbus, Ohio 43215
LEGAL COUNSEL
Druen, Dietrich, Koogler & Reynolds
One Nationwide Plaza
Columbus, Ohio 43215
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<PAGE> 27
PROSPECTUS
OCTOBER _____, 1997
SHARES OF BENEFICIAL INTEREST OF
NATIONWIDE HIGH INCOME BOND FUND
ONE SERIES OF
NATIONWIDE SEPARATE ACCOUNT TRUST
THREE NATIONWIDE PLAZA
COLUMBUS, OHIO 43215
FOR INFORMATION AND ASSISTANCE,
CALL (614) 249-5134
Nationwide High Income Bond Fund (the "Fund") is a diversified portfolio of the
Nationwide Separate Account Trust (the "Trust"). The Trust is an open-end
management investment company organized under the laws of Massachusetts, by a
Declaration of Trust, dated June 30, 1981, as subsequently amended. The Trust
offers shares in 15 separate mutual funds, each with its own investment
objective. This Prospectus relates only to Nationwide High Income Bond Fund. The
shares of the Fund are sold to other open-end investment companies created by
Nationwide Advisory Services, Inc., the Fund's investment adviser, as well as to
life insurance company separate accounts to fund the benefits of variable life
insurance policies and annuity contracts.
The Fund seeks, as its investment objective, high current income. The Fund
intends to pursue its investment objective by investing primarily in a
professionally managed, diversified portfolio of fixed income securities. The
fixed income securities in which the Fund intends to invest are lower-rated
corporate debt obligations, which are commonly referred to as "junk bonds." Some
of these fixed income securities may involve equity features. Capital growth
will be considered, but only when consistent with the investment objective of
high current income.
This Prospectus provides you with the basic information you should know before
investing in the Fund. You should read it and keep it for future reference. A
Statement of Additional Information dated October ___, 1997, has been filed with
the Securities and Exchange Commission. You can obtain a copy without charge by
calling (614) 249-5134, or writing Nationwide Life Insurance Company, One
Nationwide Plaza, Columbus, Ohio 43215.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
THE STATEMENT OF ADDITIONAL INFORMATION FOR THE TRUST, DATED
OCTOBER ___, 1997, IS INCORPORATED HEREIN BY REFERENCE.
<PAGE> 28
SALE OF FUND SHARES
Shares of the Fund may be sold to life insurance company separate accounts (the
"Accounts") to fund the benefits of variable life insurance policies or annuity
contracts ("Contracts") issued by life insurance companies, as well as to other
open-end investment companies (each, a "Fund of Funds") created by Nationwide
Advisory Services, Inc. (the "Adviser"), the Fund's investment adviser. The
Accounts purchase shares of the Fund in accordance with variable account
allocation instructions received from owners of the Contracts. The Fund then
uses the proceeds to buy securities for its portfolio. The Adviser, together
with a subadviser, manages the portfolio from day to day to accomplish the
Fund's investment objectives. The types of investments and the way they are
managed depend on what is happening in the economy and the financial
marketplaces. Each Fund of Funds and Account, as a shareholder, has an ownership
interest in the Fund's investments. The Fund also offers to buy back (redeem)
its shares from the Funds of Funds or the Accounts at any time at net asset
value.
SUMMARY OF EXPENSES
Shareholder Transaction Expenses None
Estimated Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees 0.80%
12b-1 Fees None
Other Expenses 0.15%
----
Estimated Total Fund Operating Expenses(1) 0.95%
====
This summary is provided to assist investors in understanding the various costs
and expenses that an investor in the Fund will bear directly or indirectly. The
amount of "Other Expenses" is based on estimated amounts for the fiscal year
ending December 31, 1997.
Example:
1 year 3 years
------ -------
You would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and
(2) redemption at the end of each time period $10 $30
THE EXAMPLE SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESSER THAN THOSE SHOWN.
- --------
1 The Adviser has agreed with the Trust to waive management fees or to
reimburse expenses incurred by the Fund to the extent necessary to
limit the total expense ratio of the Fund to a maximum of 0.95% of the
Fund's average net assets.
2
<PAGE> 29
For more information on Fund expenses, see "Management of the Trust."
FINANCIAL HIGHLIGHTS
Financial highlights are not available for the Fund, because the Fund has not
yet commenced operations.
INVESTMENT OBJECTIVE AND POLICIES
Nationwide High Income Bond Fund (the "Fund") seeks to provide high current
income. The Fund intends to pursue its investment objective by investing
primarily in a professionally managed, diversified portfolio of fixed income
securities. The fixed income securities in which the Fund intends to invest are
lower-rated corporate debt obligations, which are commonly referred to as "junk
bonds." Some of these fixed income securities may involve equity features.
Capital growth will be considered, but only when consistent with the investment
objective of high current income.
The Fund invests at least 65% of its assets in lower-rated fixed income bonds.
Under normal circumstances, the Fund will not invest more than 10% of the value
of its total assets in equity securities. The fixed income securities in which
the Fund may invest include, but are not limited to:
- - preferred stocks;
- - bonds;
- - debentures;
- - notes;
- - equipment lease certificates; and
- - equipment trust certificates
The securities in which the Fund may invest are generally rated BBB or lower by
Standard & Poor's Ratings Group ("S&P") or Fitch Investors Service ("Fitch") or
Baa or lower by Moody's Investors Service, Inc. ("Moody's"), or, if not rated,
are determined by the Fund's subadviser to be of comparable quality. Securities
that are rated BBB or lower by S&P or Fitch or Baa or lower by Moody's have
speculative characteristics. Changes in economic conditions or other
circumstances are more likely to lead to weakened capacity to make principal and
interest payments than highly rated bonds. There is no lower limit with respect
to rating categories for securities in which the Fund may invest. For a
description of the rating categories described above, see the Appendix to the
Statement of Additional Information.
The Fund may invest in foreign securities, including foreign securities not
publicly traded in the United States, which may include any of the types of
securities described above.
3
<PAGE> 30
At various times the Fund may invest in derivative instruments for hedging or
risk management purposes or for any other permissible purpose. See "INVESTMENT
TECHNIQUES, CONSIDERATIONS AND RISK FACTORS - Derivative Instruments" below.
In addition, for temporary or emergency purposes as determined by the Adviser,
the Fund can invest up to 100% of its total assets in short-term money market
obligations.
For a further discussion of the types of securities in which the Fund may invest
and the related investment techniques, see "INVESTMENT TECHNIQUES,
CONSIDERATIONS AND RISK FACTORS" below.
While there is careful selection of the securities in which the Fund may invest
and constant supervision of the Fund's portfolio by a group of professional
investment managers, there can be no guarantee that the Fund's investment
objective will be achieved. The investment objective of the Fund is not
fundamental and shareholder approval is not required to change the Fund's
investment objective.
MANAGEMENT OF THE FUND
The Adviser provides investment management evaluation services to the Fund in
initially selecting and monitoring on an ongoing basis the performance of a
subadviser to manage the Fund's portfolio. The Adviser has selected Federated
Investment Counseling to be the subadviser (the "Subadviser") of the Fund. See
"MANAGEMENT OF THE TRUST -- Investment Management of the Fund" below for further
information.
INVESTMENT TECHNIQUES, CONSIDERATIONS AND RISK FACTORS
An investment in the Fund involves certain risks. As a general matter, an
investment in the Fund involves the risk that the net asset value of the Fund's
shares will fluctuate in response to changes in economic conditions, interest
rates, and the market's perception of the securities held by the Fund. In
addition, because the Fund invests in bonds, an investment in the Fund is
subject to bond market risk, i.e., the risk that the market price of bonds in
general will fluctuate. Bond prices fluctuate largely in response to changes in
the level of interest rates. When interest rates rise, bond prices generally
fall; conversely, when interest rates fall, bond prices generally rise. Although
the fluctuation in the price of bonds is normally less than that of common
stocks, in the recent past there have been extended periods of cyclical
increases in interest rates, causing significant declines in the price of bonds
in general.
An investment in the Fund is subject to other risks as well, depending upon the
particular investment techniques employed by the Fund and the types of
securities in which the Fund invests. These risks are described below.
HIGH YIELD SECURITIES - The Fund may invest without limitation in domestic and
foreign "high yield" convertible securities (commonly known as "junk bonds").
4
<PAGE> 31
Medium and lower rated securities will usually have higher yields than higher
rated securities. However, there is more risk associated with these investments.
This is because of reduced creditworthiness and increased risk of default. Under
rating agency guidelines, medium and lower rated securities and comparable
unrated securities will likely have some quality and protective characteristics
that are outweighed by large uncertainties or major risk exposures to adverse
conditions. Medium and lower rated securities are considered to have extremely
poor prospects of ever attaining any real investment standing, to have a current
identifiable vulnerability to default or to be in default, to be unlikely to
have the capacity to make required interest payments and repay principal when
due in the event of adverse business, financial or economic conditions, or to be
in default or not current in the payment of interest or principal. Such
securities are considered speculative with respect to the issuer's capacity to
make required interest and principal payments. The foregoing factors may, under
certain circumstances, reduce the value of securities held by the Fund and thus
affect the value of the Fund's shares.
Changes by recognized rating services in their ratings of any fixed-income
security and in the ability of an issuer to make payments of interest and
principal may also affect the value of these investments. The ratings of Moody's
and S&P generally represent the opinions of those organizations as to the
quality of the securities that they rate. Such ratings, however, are relative
and subjective, are not absolute standards of quality, are subject to change and
do not evaluate the market risk or liquidity of the securities. Ratings of a
non-U.S. debt instrument, to the extent that those ratings are undertaken, are
related to evaluations of the country in which the issuer of the instrument is
located. Ratings generally take into account the currency in which a non-U.S.
debt instrument is denominated. Instruments issued by a foreign government in
other than the local currency, for example, typically have a lower rating than
local currency instruments due to the existence of an additional risk that the
government will be unable to obtain the required foreign currency to service its
foreign currency-denominated debt. In general, the ratings of debt securities or
obligations issued by a non-U.S. public or private entity will not be higher
than the rating of the currency or the foreign currency debt of the central
government of the country in which the issuer is located, regardless of the
intrinsic creditworthiness of the issuer.
The secondary markets for high yield securities are not as liquid as the
secondary markets for higher rated securities. The secondary markets for high
yield securities are concentrated in relatively few market makers and
participants in the market are mostly institutional investors, including
insurance companies, banks, other financial institutions and mutual funds. In
addition, the trading volume for high yield securities is generally lower than
that for higher-rated securities and the secondary markets could contract under
adverse market or economic conditions independent of any specific adverse
changes in the condition of a particular issuer. These factors may have an
adverse effect on the ability of the Fund to dispose of particular portfolio
investments, may adversely affect the Fund's net asset value per share and may
limit the ability of the Fund to obtain accurate market quotations for purposes
of valuing securities and calculating net asset value. If the Fund is not able
to obtain precise or accurate market quotations for a particular security, it
will become more difficult to value the Fund's portfolio securities, and a
greater degree of judgment may be necessary in making such valuations. Less
5
<PAGE> 32
liquid secondary markets may also affect the ability of the Fund to sell
securities at their fair value. If the secondary markets for high yield
securities contract due to adverse economic conditions or for other reasons,
certain liquid securities in the Fund's portfolio may become illiquid and the
proportion of the Fund's assets invested in illiquid securities may
significantly increase.
Prices for high yield securities may be affected by legislative and regulatory
developments. These laws could adversely affect the Fund's net asset value and
investment practices, the secondary market for high yield securities, the
financial condition of issuers of these securities and the value of outstanding
high yield securities. For example, federal legislation requiring the
divestiture by federally insured savings and loan associations of their
investments in high yield bonds and limiting the deductibility of interest by
certain corporate issuers of high yield bonds adversely affected the market in
recent years.
While the market values of securities rated below investment grade and
comparable unrated securities tend to react less to fluctuations in interest
rate levels than do the market values of higher-rated securities, the market
values of certain of these securities also tend to be more sensitive to
individual corporate developments and changes in economic conditions than are
the market values of higher-rated securities. In addition, such securities
present a higher degree of credit risk. Issuers of these securities are often
highly leveraged and may not have more traditional methods of financing
available to them, so that their ability to service their debt obligations
during an economic downturn or during sustained periods of rising interest rates
may be impaired. The risk of loss due to default by such issuers is
significantly greater than the risk of loss on investment grade securities,
because such securities generally are unsecured and frequently are subordinated
to the prior payment of senior indebtedness. The Fund also may incur additional
expenses to the extent that it is required to seek recovery upon a default in
the payment of principal or interest on its portfolio holdings.
The development of a market for high yield non-U.S. corporate securities has
been a relatively recent phenomenon. In contrast, the market for high yield U.S.
corporate debt securities is more established, although it has undergone
significant changes in the past and may undergo significant changes in the
future.
High yield non-U.S. and U.S. corporate securities in which the Fund may invest
include bonds, debentures, notes, commercial paper and preferred stock and will
generally be unsecured. Most of the debt securities will bear interest at fixed
rates. However, the Fund may also invest in corporate debt securities with
variable rates of interest or which involve equity features, such as contingent
interest or participations based on revenues, sales or profits (i.e., interest
or other payments, often in addition to a fixed rate of return, that are based
on the borrower's attainment of specified levels of revenues, sales or profits
and thus enable the holder of the security to share in the potential success of
the venture).
The Fund also anticipates investing in medium-quality obligations, which are
obligations rated in the fourth highest rating category by any rating service.
Medium-quality securities, although
6
<PAGE> 33
considered investment-grade, may have some speculative characteristics and may
be subject to greater fluctuations in value than higher-rated securities. In
addition, the issuers of medium- quality securities may be more vulnerable to
adverse economic conditions or changing circumstances than issues of
higher-rated securities.
All ratings are determined at the time of investment. Any subsequent rating
downgrade of a debt obligation will be monitored by the Adviser or the
Subadviser to consider what action, if any, the Fund should take consistent with
its investment objective; such an event will not automatically require the sale
of the downgraded securities.
FOREIGN SECURITIES AND CURRENCIES - The Fund may invest in foreign securities,
either directly or indirectly through the use of depositary receipts. Depositary
receipts, including American Depository Receipts, European Depository Receipts
and American Depository Shares, are generally issued by banks or trust companies
and evidence ownership of underlying foreign securities. The Fund may also
invest in securities of foreign investment funds or trusts (including passive
foreign investment companies).
Foreign investments involve special risks, including the possibility of
expropriation, confiscatory taxation, and withholding taxes on dividends and
interest; less extensive regulation of foreign brokers, securities markets, and
issuers; political, economic or social instability; less publicly available
information; and different accounting standards. When investing in foreign
securities, the Fund may also incur costs in conversions between currencies,
possible delays in settlement in foreign securities markets, limitations on the
use or transfer of assets (including suspension of the ability to transfer
currency from a given country), and difficulty in enforcing obligations in other
countries.
Foreign economies may differ favorably or unfavorably from the U.S. economy in
various respects, including growth of gross domestic product, rates of
inflation, currency depreciation, capital reinvestment, resource
self-sufficiency, and balance of payments positions. Many foreign securities are
less liquid and their prices more volatile than comparable U.S. securities.
Although the Fund generally invests only in securities that are regularly traded
on recognized exchanges or OTC, from time to time, foreign securities may be
difficult to liquidate rapidly without adverse price effects. Certain costs
attributable to foreign investing, such as custody charges and brokerage costs,
are higher than those attributable to domestic investing.
The Fund may invest a portion of its assets in securities of issuers in
developing or emerging markets and economies. Investing in securities of issuers
in developing or emerging markets involves special risks, including less social,
political, and economic stability; smaller securities markets and lower trading
volume, which may result in a lack of liquidity and greater price volatility;
certain national policies that may restrict the Fund's investment opportunities,
including restrictions on investments in issuers or industries deemed sensitive
to national interests; expropriation or confiscation of assets or property,
which could result in the loss of the Fund's entire investment in that market;
and less developed legal structures governing private or foreign investment or
allowing for judicial redress for injury to private property.
7
<PAGE> 34
In addition, brokerage commissions, custodial services, withholding taxes, and
other costs relating to investment in emerging markets generally are more
expensive than in the U.S. and certain more established foreign markets.
Economies in emerging markets generally are heavily dependent upon international
trade and, accordingly, have been and may continue to be affected adversely by
trade barriers, exchange controls, managed adjustments in relative currency
values, and other protectionist measures negotiated or imposed by the countries
with which they trade.
Because most foreign securities are denominated in non-U.S. currencies, the
investment performance of the Fund could be significantly affected by changes in
foreign currency exchange rates. The value of the Fund's assets denominated in
foreign currencies will increase or decrease in response to fluctuations in the
value of those foreign currencies relative to the U.S. dollar. Currency exchange
rates can be volatile at times in response to supply and demand in the currency
exchange markets, international balances of payments, governmental intervention,
speculation, and other political and economic conditions.
The Fund may purchase and sell foreign currency on a spot basis and may engage
in forward currency contracts, currency options, and futures transactions for
hedging or risk management purposes. See "Derivative Instruments" below.
WARRANTS - A warrant is an instrument which gives the holder the right to
subscribe to a specified amount of the issuer's securities at a set price for a
specified period of time or on a specified date. Warrants do not carry the right
to dividends or voting rights with respect to their underlying securities and do
not represent any rights in assets of the issuer. An investment in warrants may
be considered speculative. In addition, the value of a warrant does not
necessarily change with the value of the underlying securities, and a warrant
ceases to have value if it is not exercised prior to its expiration date.
CONVERTIBLE SECURITIES - The Fund may invest in convertible securities, which
are bonds, debentures, notes, preferred stocks or other securities that may be
converted into or exchanged for a specified amount of common stock of the same
or a different issuer within a particular period of time at a specified price or
formula. Convertible securities have general characteristics similar to both
debt obligations and equity securities. Although to a lesser extent than with
debt obligations generally, the market value of convertible securities tends to
decline as interest rates increase and, conversely, tends to increase as
interest rates decline. In addition, because of the conversion feature, the
market value of convertible securities tends to vary with fluctuations in the
market value of the underlying common stock and therefore will react to
variations in the general market for equity securities. A unique feature of
convertible securities is that as the market price of the underlying common
stock declines, convertible securities tend to trade increasingly on a yield
basis, and so may not experience market value declines to the same extent as the
underlying common stock. When the market price of the underlying common stock
increases, the prices of the convertible securities tend to rise as a reflection
of the value of the underlying common stock. While no securities investments are
without risk, investments in convertible securities generally entail less risk
than investments in common stock of the same issuer.
8
<PAGE> 35
As debt obligations, convertible securities are investments that provide for a
stable stream of income with generally higher yields than common stocks. Of
course, like all debt obligations, there can be no assurance of current income
because the issuers of convertible securities may default on their obligations.
Convertible securities, however, generally offer lower interest or dividend
yields than non- convertible securities of similar quality because of the
potential for capital appreciation. A convertible security, in addition to
providing fixed income, offers the potential for capital appreciation through
the conversion feature, which enables the holder to benefit from increases in
the market price of the underlying common stock. There can be no assurance of
capital appreciation, however, because the market value of securities will
fluctuate.
Convertible securities generally are subordinated to other similar but
non-convertible securities of the same issuer, although convertible bonds, as
corporate debt obligations, enjoy seniority in right of payment to all equity
securities, and convertible preferred stock is senior to common stock of the
same issuer. Because of the subordination feature, however, convertible
securities typically are rated below investment grade or are not rated.
MONEY MARKET OBLIGATIONS - As described above, debt obligations in which the
Fund may invest generally will be medium and lower grade debt obligations,
although the Fund may invest up to 100% of its assets in high-quality short-term
money market obligations.
Money market obligations in which the Fund may invest include: 1) U.S.
government securities (as described below); 2) commercial paper rated in one of
the two highest ratings categories of any nationally recognized statistical
rating organization ("NRSRO") (e.g., Moody's or S&P); 3) short-term bank
obligations that are rated in one of the two highest categories by any NRSRO,
with respect to obligations maturing in one year or less; 4) repurchase
agreements relating to debt obligations which the Fund could purchase directly;
5) unrated debt obligations which are determined by the Adviser or the
Subadviser to be of comparable quality; and 6) money market mutual funds.
U.S. GOVERNMENT SECURITIES - U.S. government securities are issued or guaranteed
by the U.S. government or its agencies or instrumentalities. Securities issued
by the U.S. government include U.S. Treasury obligations, such as Treasury
bills, notes, and bonds. Securities issued by government agencies or
instrumentalities include, but are not limited to, obligations of the following:
- - the Federal Housing Administration, Farmers Home Administration, and the
Government National Mortgage Association ("GNMA"), including GNMA
pass-through certificates, whose securities are supported by the full faith
and credit of the United States;
- - the Federal Home Loan Banks, whose securities are supported by the right of
the agency to borrow from the U.S. Treasury;
- - the Federal National Mortgage Association, whose securities are supported
by the discretionary authority of the U.S. government to purchase certain
obligations of the agency or instrumentality; and
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<PAGE> 36
- - the Student Loan Marketing Association and the International Bank for
Reconstruction and Development, whose securities are supported only by
the credit of such agencies.
Although the U.S. government provides financial support to such U.S.
government-sponsored agencies or instrumentalities, no assurance can be given
that it will always do so. The U.S. government and its agencies and
instrumentalities do not guarantee the market value of their securities;
consequently, the value of such securities will fluctuate.
DERIVATIVE INSTRUMENTS - Derivative instruments may be used by the Fund for
hedging or risk management purposes or for any other permissible purposes
consistent with the Fund's investment objective. Derivative instruments are
securities or agreements whose value is based on the value of some underlying
asset (e.g., a security or currency) or the level of a reference index. Options,
futures, and options on futures transactions are considered derivative
transactions. Derivatives generally have investment characteristics that are
based upon either forward contracts (under which one party is obligated to buy
and the other party is obligated to sell an underlying asset at a specific price
on a specified date) or option contracts (under which the holder of the option
has the right but not the obligation to buy or sell an underlying asset at a
specified price on or before a specified date). Consequently, the change in
value of a forward-based derivative generally is roughly proportional to the
change in value of the underlying asset. In contrast, the buyer of an
option-based derivative generally will benefit from favorable movements in the
price of the underlying asset but is not exposed to the corresponding losses
that result from adverse movements in the value of the underlying asset. The
seller of an option-based derivative generally will receive fees or premiums but
generally is exposed to losses resulting from changes in the value of the
underlying asset. Derivative transactions may include elements of leverage and,
accordingly, the fluctuation of the value of the derivative transaction in
relation to the underlying asset may be magnified. Derivative transactions may
also include forward currency contracts and foreign currency exchange-related
securities.
Derivative transactions in which the Fund may engage include the writing of
covered put and call options on securities and the purchase of put and call
options thereon, the purchase of put and call options on securities indices and
exchange-traded options on currencies and the writing of put and call options on
securities indices. The Fund may enter into spread transactions and swap
agreements. The Fund also may buy and sell financial futures contracts, which
may include interest-rate futures, futures on currency exchanges and stock and
bond index futures contracts. The Fund may enter into any futures contracts and
related options without limit for "bona fide hedging" purposes (as defined in
Commodity Futures Trading Commission regulations) and for other permissible
purposes, provided that aggregate initial margin and premiums on positions
engaged in for purposes other than "bona fide hedging" will not exceed 5% of its
net asset value, after taking into account unrealized profits and losses on such
contracts. The Fund may also enter into forward currency contracts to purchase
or sell foreign currencies.
Derivative instruments may be exchange-traded or traded in OTC transactions
between private parties. OTC transactions are subject to the credit risk of the
counterparty to the instrument and
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<PAGE> 37
are less liquid than exchange-traded derivatives since they often can only be
closed out with the other party to the transaction. When required by guidelines
of the Securities and Exchange Commission, the Fund will set aside permissible
liquid assets in a segregated account to secure its obligations under derivative
transactions. Segregated assets cannot be sold or transferred unless equivalent
assets are substituted in their place or it is no longer necessary to segregate
them. As a result, there is a possibility that segregation of a large percentage
of the Fund's assets could impede portfolio management or the Fund's ability to
meet redemption requests or other current obligations. In order to maintain its
required cover for a derivative transaction, the Fund may need to sell portfolio
securities at disadvantageous prices or times since it may not be possible to
liquidate a derivative position.
The successful use of derivative transactions by the Fund is dependent upon the
Subadviser's ability to correctly anticipate trends in the underlying asset.
Hedging transactions are subject to risks; if the Subadviser incorrectly
anticipates trends in the underlying asset, the Fund may be in a worse position
than if no hedging had occurred. In addition, there may be imperfect correlation
between the Fund's derivative transactions and the instruments being hedged.
ILLIQUID SECURITIES - The Fund may invest up to 15% of its net assets in
securities that are illiquid, in that they cannot be expected to be sold within
seven days at approximately the price at which they are valued. Due to the
absence of an active trading market, the Fund may experience difficulty in
valuing or disposing of illiquid securities. The Subadviser will determine the
liquidity of the Fund's securities, under the supervision the Trust's trustees.
RESTRICTED SECURITIES, NON-PUBLICLY TRADED SECURITIES AND RULE 144A SECURITIES -
The Fund may invest in restricted securities and Rule 144A securities.
Restricted securities cannot be sold to the public without registration under
the Securities Act of 1933 ("1933 Act"). Unless registered for sale, these
securities can be sold only in privately negotiated transactions or pursuant to
an exemption from registration. Restricted securities are generally considered
illiquid and are therefore subject to the Fund's 15% limitation on investments
in illiquid securities.
Non-publicly traded securities (including Rule 144A securities) may involve a
high degree of business and financial risk which may result in substantial
losses. The securities may be less liquid than publicly traded securities.
Although these securities may be resold in privately negotiated transactions,
the prices realized from these sales could be less than those originally paid by
the Fund. In particular, Rule 144A securities may be resold only to qualified
institutional buyers in accordance with Rule 144A under the 1933 Act.
Unregistered securities may also be sold abroad pursuant to Regulation S under
the 1933 Act. Companies whose securities are not publicly traded are not subject
to the disclosure and other investor protection requirements that would be
applicable if their securities were publicly traded. Acting pursuant to
guidelines established by the Trustees of the Trust, restricted securities and
Rule 144A securities may be considered liquid.
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<PAGE> 38
REPURCHASE AGREEMENTS - The Fund may engage in repurchase agreement transactions
as long as the underlying securities are of the type that the Fund would be
permitted to purchase directly. Under the terms of a typical repurchase
agreement, the Fund would acquire an underlying debt obligation for a relatively
short period (usually not more than one week) subject to an obligation of the
seller to repurchase, and the Fund to resell, the obligation at an agreed upon
price and time, thereby determining the yield during the Fund's holding period.
The Fund will enter into repurchase agreements with respect to securities in
which it may invest with member banks of the Federal Reserve System or certain
non-bank dealers. Under each repurchase agreement the selling institution will
be required to maintain the value of the securities subject to the repurchase
agreement at not less than their repurchase price. Repurchase agreements could
involve certain risks in the event of default or insolvency of the other party,
including possible delays or restrictions upon a Fund's ability to dispose of
the underlying securities. The Adviser or the Subadviser, acting under the
supervision of the Board of Trustees, reviews the creditworthiness of those
banks and non-bank dealers with which the Fund enters into repurchase agreements
to evaluate these risks. For additional information, see "Repurchase Agreements"
in the Statement of Additional Information.
REVERSE REPURCHASE AGREEMENTS - The Fund may also enter into reverse repurchase
agreements with the same parties with whom it may enter into repurchase
agreements. Reverse repurchase agreements involve the sale of securities held by
the Fund pursuant to its agreement to repurchase them at a mutually agreed upon
date, price and rate of interest. At the time the Fund enters into a reverse
repurchase agreement, it will establish and maintain a segregated account with
an approved custodian containing liquid securities having a value not less than
the repurchase price (including accrued interest). The assets contained in the
segregated account will be marked-to-market daily and additional assets will be
placed in such account on any day in which the assets fall below the repurchase
price (plus accrued interest). The Fund's liquidity and ability to manage its
assets might be affected when it sets aside cash or portfolio securities to
cover such commitments. Reverse repurchase agreements involve the risk that the
market value of the securities retained in lieu of sale may decline below the
price of the securities the Fund has sold but is obligated to repurchase. In the
event the buyer of securities under a reverse repurchase agreement files for
bankruptcy or becomes insolvent, such buyer or its trustee or receiver may
receive an extension of time to determine whether to enforce the Fund's
obligation to repurchase the securities, and the Portfolio's use of the proceeds
of the reverse repurchase agreement may effectively be restricted pending such
determination. Reverse repurchase agreements are considered to be borrowings
under the Investment Company Act of 1940 (the "1940 Act").
INVESTMENT COMPANIES - As permitted by the 1940 Act, the Fund reserves the right
to invest up to 10% of its total assets, calculated at the time of investment,
in the securities of other open-end or closed-end investment companies. No more
than 5% of the Fund's total assets may be invested in the securities of any one
investment company nor may it acquire more than 3% of the voting securities of
any other investment company. The Fund will indirectly bear its proportionate
share of any management fees paid by an investment company in which it invests
in addition to the advisory fee paid by the Fund.
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<PAGE> 39
WHEN-ISSUED SECURITIES - The Fund may invest without limitation in securities
purchased on a when-issued or delayed delivery basis. Although the payment and
interest terms of these securities are established at the time the purchaser
enters into the commitment, these securities may be delivered and paid for at a
future date, generally within 45 days. Purchasing when- issued securities allows
the Fund to lock in a fixed price or yield on a security it intends to purchase.
However, when the Fund purchases a when-issued security, it immediately assumes
the risk of ownership, including the risk of price fluctuation until the
settlement date.
The greater the Fund's outstanding commitments for these securities, the greater
the exposure to potential fluctuations in the net asset value of a Fund.
Purchasing when-issued securities may involve the additional risk that the yield
available in the market when the delivery occurs may be higher or the market
price lower than that obtained at the time of commitment. Although the Fund may
be able to sell these securities prior to the delivery date, it will purchase
when-issued securities for the purpose of actually acquiring the securities,
unless after entering into the commitment a sale appears desirable for
investment reasons. When required by guidelines issued by the Securities and
Exchange Commission, the Fund will set aside permissible liquid assets in a
segregated account to secure its outstanding commitments for when-issued
securities.
LENDING PORTFOLIO SECURITIES - From time to time, the Fund may lend its
portfolio securities to brokers, dealers and other financial institutions which
need to borrow securities to complete certain transactions. In connection with
such loans, the Fund will receive collateral consisting of cash, U.S. Government
securities or irrevocable letters of credit. Such collateral will be maintained
at all times in an amount equal to at least 100% of the current market value of
the loaned securities. The Fund can increase its income through the investment
of such collateral. The Fund continues to be entitled to payments in amounts
equal to the interest, dividends or other distributions payable on the loaned
security and receives interest on the amount of the loan. Such loans will be
terminable at any time upon specified notice. The Fund might experience risk of
loss if the institution with which it has engaged in a portfolio loan
transaction breaches its agreement with the Fund.
BORROWING MONEY - The Fund may borrow money from banks up to 33 1/3% of the
Fund's total assets (including the amount borrowed). However, the Funds
currently intend to borrow money only for temporary or emergency purposes (but
not for leverage or to purchase investments) up to 5% of the value of that
Fund's total assets (including the amount borrowed) valued at the time the
borrowing is made.
PERFORMANCE INFORMATION
The Fund has not commenced operations and has no investment performance record.
However, the Fund's investment objective and policies and the Fund's strategies
will be substantially similar to those employed by Federated Advisers, an
affiliate of the Subadviser, with respect to Federated High Income Bond Fund
II. The Chart below shows the historical investment performance for Federated
High Income Bond Fund II.
The investment performance of Federated High Income Bond Fund II does not
represent the Fund's performance and should not be construed a substitute for
the Fund's performance, nor should it be interpreted as indicative of the
Fund's future performance.
The investment performance results of Federated High Income Bond Fund II
reflect the deduction of its total annual operating expenses of 0.80% as of
September 30, 1997. The Fund's estimated total annual operating expenses are
0.95%, and are expected to be higher than the total annual operating expenses
of Federated High Income Bond Fund II. The total return performance figures of
Federated High Income Bond Fund II represent the change, over a specified
period of time, in the value of an investment in the fund after reinvesting all
income and capital gains distributions. It is calculated by dividing that
change by the initial investment and is expressed as a percentage.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
------------------------------
ONE FIVE TEN
YEAR YEARS YEARS
<S> <C> <C> <C>
AS OF September 30, 1997
Federated High Income Bond Fund II
Lehman Brothers Single B Rated
Index
Lipper High Current Yields Funds
Average
</TABLE>
<TABLE>
<CAPTION>
ANNUAL TOTAL RETURNS FOR THE YEAR ENDED DECEMBER 31
1996 1995 1994 1993 1992 1991 1990
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Federated High Income
Bond Fund II
Lehman Brothers Single
B Rated Index
Lipper High Current Yields
Funds Average
</TABLE>
MANAGEMENT OF THE TRUST
TRUSTEES AND OFFICERS
The business and affairs of the Trust are managed under the direction of its
Board of Trustees.
The Board of Trustees sets and reviews policies regarding the operation of the
Trust, whereas the officers perform the daily functions of the Trust.
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<PAGE> 40
INVESTMENT MANAGEMENT OF THE FUND
THE ADVISER - Under the terms of the Investment Advisory Agreement, Nationwide
Advisory Services, Inc., Three Nationwide Plaza, Columbus, Ohio 43215, oversees
the investment of the assets for the Fund and supervises the daily business
affairs of the Fund. Subject to the supervision and direction of the Trustees,
the Adviser also evaluates and monitors the performance of the Subadviser. The
Adviser is also authorized to select and place portfolio investments on behalf
of the Fund; however, the Adviser does not intend to do so at this time.
The Adviser and the Trust have applied to the Securities and Exchange Commission
for an exemptive order which, if granted, will allow the Adviser to appoint,
replace or terminate subadvisers without the approval of shareholders; the order
would also allow the Adviser to revise a subadvisory agreement without
shareholder approval. Any change in subadvisers will be communicated to
shareholders within 60 days of such changes and all changes will be approved by
the Trust's Board of Trustees, including a majority of the Trustees who are not
interested persons of the Trust or the Adviser. The order, if granted, is
intended to facilitate the efficient operation of the Fund and afford the Trust
increased management flexibility. Prior to receiving the exemptive order, the
Adviser will not appoint, replace or terminate any subadvisers or materially
amend any subadvisory agreement without obtaining the approval of shareholders.
The Adviser provides to the Fund investment management evaluation services
principally by performing initial due diligence on prospective subadvisers for
the Fund and thereafter monitoring the performance of the subadviser through
quantitative and qualitative analysis as well as through periodic in-person,
telephonic and written consultations with the subadviser. The Adviser has
responsibility for communicating performance expectations and evaluations to the
subadviser and ultimately recommending to the Trust's Board of Trustees whether
the subadviser's contract should be renewed, modified or terminated; however,
the Adviser does not expect to recommend frequent changes of subadvisers. The
Adviser will regularly provide written reports to the Board of Trustees
regarding the results of its evaluation and monitoring functions. Although the
Adviser will monitor the performance of the subadviser, there is no certainty
that the subadviser or the Fund will obtain favorable results at any given time.
The Adviser, an Ohio corporation, is a wholly owned subsidiary of Nationwide
Life Insurance Company, which is owned by Nationwide Financial Services, Inc.
(NFS). NFS, a holding company, has two classes of common stock outstanding with
different voting rights enabling Nationwide Corporation (the holder of all the
outstanding Class B Common Stock) to control NFS. Nationwide Corporation is also
a holding company in the Nationwide Insurance Enterprise. All of the common
stock of Nationwide Corporation is held by Nationwide Mutual Insurance Company
(95.3%) and Nationwide Mutual Fire Insurance Company (4.7%), each of which is a
mutual company owned by its policyholders. The Fund pays to the Adviser a fee at
the annual rate of .80% of the Fund's average daily net assets.
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<PAGE> 41
THE SUBADVISER - Subject to the supervision of the Adviser and the Trustees, the
Subadviser manages the Fund's assets in accordance with the Fund's investment
objective and policies. The Subadviser shall make investment decisions for the
Fund, and in connection with such investment decisions shall place purchase and
sell orders for securities. For the investment management services it provides
to the Fund, the Subadviser receives an annual fee from the Adviser in the
amount of 0.40% of the Fund's first $50 million of average daily net assets,
0.25% of the Fund's next $200 million of average daily net assets, 0.20% of the
Fund's next $250 million of average daily net assets, and 0.15% of the Fund's
average daily net assets in excess of $500 million. Below is a brief description
of the Subadviser.
Federated Investment Counseling, a Delaware business trust organized on April
11, 1989 (the "Subadviser"), is a registered investment adviser under the
Investment Advisers Act of 1940. It is a subsidiary of Federated Investors. All
of the Class A (voting) shares of Federated Investors are owned by a trust, the
trustees of which are John F. Donahue, Chairman and Trustee of Federated
Investors, Mr. Donahue's wife, and Mr. Donahue's son, J. Christopher Donahue,
who is President and Trustee of Federated Investors.
The Subadviser and other subsidiaries of Federated Investors serve as investment
advisers to a number of investment companies and private accounts. Certain other
subsidiaries also provide administrative services to a number of investment
companies. With over $110 billion invested across more than 300 funds under
management and/or administration by its subsidiaries, as of December 31, 1996,
Federated Investors is one of the largest mutual fund investment managers in the
United States. With more than 2,000 employees, Federated continues to be led by
the management who founded the company in 1955. Federated funds are presently at
work in and through 4,500 financial institutions nationwide.
Mark E. Durbiano and Constantine Kartsonas will be primarily responsible for the
day-to-day management of the Fund's portfolio. Mr. Durbiano joined Federated
Investors in 1982 and has been a Senior Vice President of a subsidiary of the
Subadviser since January 1996. From 1988 through 1995, Mr. Durbiano was a Vice
President of a subsidiary of the Subadviser. Mr. Durbiano is a Chartered
Financial Analyst. Mr. Kartsonas joined Federated Investors in 1994 as an
Investment Analyst. Since January 1997, Mr. Kartsonas has been an Assistant Vice
President of a subsidiary of the Subadviser. From 1990 to 1993, he served as an
Operations Analyst at Lehman Brothers.
OTHER SERVICES
Under the terms of a Fund Administration Agreement, the Adviser also provides
various administrative and acounting services, including daily valuation of the
Fund's shares and preparation of financial statements, tax returns, and
regulatory reports. For these services, the Fund pays the Adviser an annual fee
in the amount of 0.07% of the Fund's first $250 million of average daily net
assets, 0.05% on the next $750 million and 0.04% on assets of more than $1
billion.
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<PAGE> 42
The Transfer and Dividend Disbursing Agent, Nationwide Investors Services, Inc.,
("NIS"), Three Nationwide Plaza, Columbus, Ohio 43216, serves as transfer agent
and dividend disbursing agent for the Trust. The Fund pays to NIS a fee for such
services at the annual rate of 0.01% of the Fund's average daily net assets. NIS
is a wholly owned subsidiary of the Adviser.
INVESTMENT IN FUND SHARES
An insurance company may purchase shares of the Fund using purchase payments
received on Contracts issued by Accounts. These Accounts are funded by shares of
the Fund. Funds of Funds may also purchase shares of the Fund for their
portfolios. There is no sales charge, and all shares are sold at net asset
value.
Shares of the Fund are currently sold only to separate accounts of Nationwide
Life Insurance Company and its wholly owned subsidiary Nationwide Life and
Annuity Insurance Company to fund the benefits under the Contract and to
affiliated Fund of Funds. The address for each of these entities is One
Nationwide Plaza, Columbus, Ohio 43215.
All investments in the Fund are credited to the shareholder's account in the
form of full and fractional shares of the Fund (rounded to the nearest 1/1000 of
a share). The Trust does not issue share certificates. Initial and subsequent
purchase payments allocated to the Fund are subject to the limits applicable to
the Contracts.
SHARE REDEMPTION
Redemptions are processed on any day on which the Trust is open for business and
are effected at net asset value next determined after the redemption order, in
proper form, is received by the Trust's transfer agent, NIS.
The net asset value per share of the Fund is determined once daily, as of the
close of regular trading on the New York Stock Exchange (generally 4:00 P.M.
Eastern Time), on each business day the New York Stock Exchange is open for
regular trading and on such other days as the Board determines and on any other
day during which there is a sufficient degree of trading in the Fund's portfolio
securities that the net asset value of the Fund is materially affected by
changes in the value of portfolio securities. The Trust will not compute net
asset value on customary national business holidays, including the following:
Christmas, New Year's Day, Martin Luther King's Birthday, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, and Thanksgiving Day. The net
asset value per share is calculated by adding the value of all securities and
other assets of the Fund, deducting its liabilities, and dividing by the number
of shares outstanding.
In determining net asset value, portfolio securities listed on national
exchanges are valued at the last sales price on the principal exchange;
16
<PAGE> 43
if the securities are traded only in the over-the-counter market, they are
valued at the quoted bid prices. Other portfolio securities are valued at the
quoted prices obtained from an independent pricing organization which employs a
combination of methods, including among others, the obtaining and comparison of
market valuations from dealers who make markets and deal in such securities and
the comparison of valuations with those of other comparable securities in a
matrix of such securities. The pricing service activities and results are
reviewed by an officer of the Trust. Securities for which market quotations are
not readily available are valued at fair value in accordance with procedures
adopted by the Board of Trustees. Expenses and fees are accrued daily.
The Trust may suspend the right of redemption only under the following unusual
circumstances:
- - when the New York Stock Exchange is closed (other than weekends and
holidays) or trading is restricted;
- - when an emergency exists, making disposal of portfolio securities or
the valuation of net assets not reasonably practicable; or
- - during any period when the Securities and Exchange Commission has by
order permitted a suspension of redemption for the protection of
shareholders.
NET INCOME AND DISTRIBUTIONS
Substantially all of the net investment income, if any, of the Fund will be
declared and paid as dividends quarterly. Net realized capital gains of the
Fund, if any, will be distributed at least annually.
ADDITIONAL INFORMATION
DESCRIPTION OF SHARES - The Declaration of Trust permits the Trustees to issue
an unlimited number of full and fractional shares of beneficial interest of the
Fund and to divide or combine such shares into a greater or lesser number of
shares without thereby changing the proportionate beneficial interests in the
Trust. Each share of the Fund represents an equal proportionate interest in the
Fund with each other share. The Trust reserves the right to create and issue
shares of a number of different funds. In that case, the shares of each fund
would participate equally in the earnings, dividends, and assets of the
particular fund, but shares of all funds would vote together in the election of
Trustees. Upon liquidation of a fund, its shareholders are entitled to share pro
rata in the net assets of such fund available for distribution to shareholders.
VOTING RIGHTS - Shareholders are entitled to one vote for each share held.
Shareholders may vote in the election or removal of Trustees and on other
matters submitted to meetings of shareholders. No amendment may be made to the
Declaration of Trust without the affirmative vote of a majority of the
outstanding shares of the Trust. The sole shareholder of the Fund initially will
be Nationwide Life Insurance Company. The Trustees may, however, amend the
Declaration of Trust without the vote or consent of shareholders to:
17
<PAGE> 44
- - designate series of the Trust;
- - change the name of the Trust; or
- - supply any omission, cure, correct, or supplement any ambiguous,
defective, or inconsistent provision to conform the Declaration of
Trust to the requirements of applicable federal and state laws or
regulations if they deem it necessary.
Shares have no pre-emptive or conversion rights. Shares are fully paid and
nonassessable. In regard to termination, sale of assets, or changes of
investment restrictions, the right to vote is limited to the holders of shares
of the particular fund affected by the proposal. When a majority is required, it
means the lesser of 67% or more of the shares present at a meeting when the
holders of more than 50% of the outstanding shares are present or represented by
proxy, or more than 50% of the outstanding shares.
SHAREHOLDER INQUIRIES - All inquiries regarding the Fund should be directed to
the Trust at the telephone number or address shown on the cover page of this
Prospectus.
PERFORMANCE ADVERTISING FOR THE FUND
The Fund may use historical performance in advertisements, sales literature, and
the prospectus. Such figures will include quotations of average annual total
return for the most recent one, five, and ten year periods (or the life of the
Fund if less). Average annual total return represents the rate required each
year for an initial investment to equal the redeemable value at the end of the
specific period. Average annual total return reflects reinvestment of all
distributions.
TAX STATUS
The Trust's policy is to cause each fund to qualify as a regulated investment
company and to meet the requirements of Subchapter M of the Internal Revenue
Code (the "Code"). The Fund intends to distribute all its taxable net investment
income and capital gains to shareholders and therefore will not be required to
pay any federal income taxes.
Because each fund of the Trust is treated as a separate entity for purposes of
the regulated investment company provisions of the Code, the assets, income, and
distributions of the Fund are considered separately for purposes of determining
whether or not the Fund qualifies as a regulated investment company. The Fund
intends to comply with the diversification requirements currently imposed by the
Internal Revenue Service on separate accounts of insurance companies as a
condition of maintaining the tax-deferred status of the Contracts. See the
Statement of Additional Information for more specific information.
The tax treatment of payments made by an Account to a Contractholder is
described in the separate account prospectus.
18
<PAGE> 45
CONTENTS
Sale of Fund Shares
Investment Objective and Policies
Investment Techniques, Considerations and Risk Factors
Management of the Trust
Investment in Fund Shares
Share Redemption
Net Income and Distributions
Additional Information
Performance Advertising for the Fund
Tax Status
INVESTMENT ADVISER AND ADMINISTRATOR
Nationwide Advisory Services, Inc.
Three Nationwide Plaza
Columbus, Ohio 43215
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Nationwide Investors Services, Inc.
Box 1492
Three Nationwide Plaza
Columbus, Ohio 43216
AUDITORS
KPMG Peat Marwick LLP
Two Nationwide Plaza
Columbus, Ohio 43215
LEGAL COUNSEL
Druen, Dietrich, Koogler & Reynolds
One Nationwide Plaza
Columbus, Ohio 43215
19
<PAGE> 46
PROSPECTUS
OCTOBER _____, 1997
SHARES OF BENEFICIAL INTEREST OF
NATIONWIDE EQUITY INCOME FUND
ONE SERIES OF
NATIONWIDE SEPARATE ACCOUNT TRUST
THREE NATIONWIDE PLAZA
COLUMBUS, OHIO 43215
FOR INFORMATION AND ASSISTANCE,
CALL (614) 249-5134
Nationwide Equity Income Fund (the "Fund") is a diversified portfolio of the
Nationwide Separate Account Trust (the "Trust"). The Trust is an open-end
management investment company organized under the laws of Massachusetts, by a
Declaration of Trust, dated June 30, 1981, as subsequently amended. The Trust
offers shares in 15 separate mutual funds, each with its own investment
objective. This Prospectus relates only to Nationwide Equity Income Fund. The
shares of the Fund are sold to other open-end investment companies created by
Nationwide Advisory Services, Inc., the Fund's investment adviser, as well as to
life insurance company separate accounts to fund the benefits of variable life
insurance policies and annuity contracts.
The Fund seeks to provide above average income and capital appreciation. The
Fund intends to pursue its investment objective by investing at least 65% of its
assets in income producing equity securities.
This Prospectus provides you with the basic information you should know before
investing in the Fund. You should read it and keep it for future reference. A
Statement of Additional Information dated October __, 1997, has been filed with
the Securities and Exchange Commission. You can obtain a copy without charge by
calling (614) 249-5134, or writing Nationwide Life Insurance Company, One
Nationwide Plaza, Columbus, Ohio 43215.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
THE STATEMENT OF ADDITIONAL INFORMATION FOR THE TRUST, DATED OCTOBER __, 1997,
IS INCORPORATED HEREIN BY REFERENCE.
<PAGE> 47
SALE OF FUND SHARES
Shares of the Fund may be sold to life insurance company separate accounts (the
"Accounts") to fund the benefits of variable life insurance policies or annuity
contracts ("Contracts") issued by life insurance companies, as well as to other
open-end investment companies (each, a "Fund of Funds") created by Nationwide
Advisory Services, Inc. (the "Adviser"), the Fund's investment adviser. The
Accounts purchase shares of the Fund in accordance with variable account
allocation instructions received from owners of the Contracts. The Fund then
uses the proceeds to buy securities for its portfolio. The Adviser, together
with a subadviser, manages the portfolio from day to day to accomplish the
Fund's investment objectives. The types of investments and the way they are
managed depend on what is happening in the economy and the financial
marketplaces. Each Fund of Funds and Account, as a shareholder, has an ownership
interest in the Fund's investments. The Fund also offers to buy back (redeem)
its shares from the Funds of Funds or the Accounts at any time at net asset
value.
SUMMARY OF EXPENSES
Shareholder Transaction Expenses None
Estimated Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees 0.55%
12b-1 Fees None%
Other Expenses _____%
Estimated Total Fund Operating Expenses(1) _____%
This summary is provided to assist investors in understanding the various costs
and expenses that an investor in the Fund will bear directly or indirectly. The
amount of "Other Expenses" is based on estimated amounts for the fiscal year
ending December 31, 1997.
Example:
1 year 3 years
------ -------
You would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and
(2) redemption at the end of each time period $_____ $_____
THE EXAMPLE SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESSER THAN THOSE SHOWN.
- ----------------------
1 The Adviser has agreed with the Trust to waive management fees or to
reimburse expenses incurred by the Fund to the extent necessary to limit the
total expense ratio of the Fund to a maximum of ____% of the average net assets
of the Fund.
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<PAGE> 48
For more information on Fund expenses, see "MANAGEMENT OF THE TRUST" below.
FINANCIAL HIGHLIGHTS
Financial highlights are not available for the Fund, because the Fund has not
yet commenced operations.
INVESTMENT OBJECTIVE AND POLICIES
Nationwide Equity Income Fund (the "Fund") has as its investment objective above
average income and capital appreciation. The Fund intends to pursue its
investment objective by investing at least 65% of its assets in income-producing
equity securities. Equity securities include common stocks, preferred stocks,
and securities (including debt securities) that are convertible into common
stocks. The portion of the Fund's total assets invested in common stocks,
preferred stocks, and convertible securities will vary according to the Fund's
assessment of market and economic conditions and outlook.
The Fund's stock selection emphasizes those common stocks in each sector that
have good value, attractive yield, and dividend growth potential. The Fund will
utilize convertible securities because such securities typically offer high
yields and good potential for capital appreciation.
At various times the Fund may invest in derivative instruments for hedging or
risk management purposes or for any other permissible purpose. See "INVESTMENT
TECHNIQUES, CONSIDERATIONS AND RISK FACTORS - Derivative Instruments" below.
In addition, for temporary or emergency purposes as determined by the Adviser,
the Fund can invest up to 100% of its total assets in short-term money market
obligations.
For a further discussion of the types of securities in which the Fund may invest
and related investment techniques, see "INVESTMENT TECHNIQUES, CONSIDERATIONS
AND RISK FACTORS" below.
While there is careful selection and constant supervision by a group of
professional investment managers, there can be no guarantee that the Fund's
objective will be achieved. The investment objective of the Fund is not
fundamental and shareholder approval is not required to change the Fund's
investment objective.
MANAGEMENT OF THE FUND
The Adviser provides investment management evaluation services to the Fund in
initially selecting and monitoring on an ongoing basis the performance of a
subadviser to manage the Fund's portfolio. The Adviser has selected Federated
Investment Counseling to be the subadviser (the "Subadviser") of the Fund. See
"MANAGEMENT OF THE TRUST -- Investment Management of the Fund" below for further
information.
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<PAGE> 49
INVESTMENT TECHNIQUES, CONSIDERATIONS AND RISK FACTORS
An investment in the Fund involves certain risks. As a general matter, an
investment in the Fund involves the risk that the net asset value of the Fund's
shares will fluctuate in response to changes in economic conditions and the
market's perception of the securities held by the Fund. In addition, because the
Fund invests primarily in common stocks, an investment in the Fund is subject to
stock market risk, which means that such an investment is subject to the risk
that stock prices in general will decline over short or extended periods of
time. An investment in the Fund is subject to other risks as well, depending
upon the particular investment techniques employed by the Fund and the types of
securities in which the Fund invests.
FOREIGN SECURITIES AND CURRENCIES - The Fund may invest in foreign securities,
either directly, though non-U.S. dollar denominated securities which are not
publicly traded in the United States, or indirectly through the use of
depositary receipts. Depositary receipts, including American Depositary
Receipts, European Depository Receipts and American Depository Shares, are
generally issued by banks or trust companies and evidence ownership of
underlying foreign securities. The Fund may also invest in securities of foreign
investment funds or trusts (including passive foreign investment companies).
Foreign investments involve special risks, including the possibility of
expropriation, confiscatory taxation, and withholding taxes on dividends and
interest; less extensive regulation of foreign brokers, securities markets, and
issuers; political, economic or social instability; and less publicly available
information and different accounting standards. When investing in foreign
securities, the Fund may also incur costs in conversions between currencies,
possible delays in settlement in foreign securities markets, limitations on the
use or transfer of assets (including suspension of the ability to transfer
currency from a given country), and difficulty in enforcing obligations in other
countries.
Foreign economies may differ favorably or unfavorably from the U.S. economy in
various respects, including growth of gross domestic product, rates of
inflation, currency depreciation, capital reinvestment, resource
self-sufficiency, and balance of payments positions. Many foreign securities are
less liquid and their prices more volatile than comparable U.S. securities. The
Fund may diversify its investments broadly among foreign countries, including
both developed and developing countries. The Fund will take advantage of the
unusual opportunities for higher returns available from investing in developing
countries and may invest in the securities of such countries. These investments
carry considerably more volatility and risk because they are associated with
less mature economies and less stable political systems. Foreign securities may
be difficult to liquidate rapidly without adverse price effects. Certain costs
attributable to foreign investing, such as custody charges and brokerage costs,
are higher than those attributable to domestic investing.
Because most foreign securities are denominated in non-U.S. currencies, the
investment performance of the Fund could be significantly affected by changes in
foreign currency exchange rates. The value of the Fund's assets denominated in
foreign currencies will increase or
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<PAGE> 50
decrease in response to fluctuations in the value of those foreign currencies
relative to the U.S. dollar. Currency exchange rates can be volatile at times in
response to supply and demand in the currency exchange markets, international
balances of payments, governmental intervention, speculation, and other
political and economic conditions.
The Fund may purchase and sell foreign currency on a spot basis and may engage
in forward currency contracts, currency options, and futures transactions for
hedging or risk management purposes. (See "DERIVATIVE INSTRUMENTS" below.)
WARRANTS - A warrant is an instrument which gives the holder the right to
subscribe to a specified amount of the issuer's securities at a set price for a
specified period of time or on a specified date. Warrants do not carry the right
to dividends or voting rights with respect to their underlying securities and do
not represent any rights in assets of the issuer. An investment in warrants may
be considered speculative. In addition, the value of a warrant does not
necessarily change with the value of the underlying securities, and a warrant
ceases to have value if it is not exercised prior to its expiration date.
CONVERTIBLE SECURITIES - The Fund may invest in convertible securities, which
are bonds, debentures, notes, preferred stocks or other securities that may be
converted into or exchanged for a specified amount of common stock of the same
or a different issuer within a particular period of time at a specified price or
formula. Convertible securities have general characteristics similar to both
debt obligations and equity securities. Although to a lesser extent than with
debt obligations generally, the market value of convertible securities tends to
decline as interest rates increase and, conversely, tends to increase as
interest rates decline. In addition, because of the conversion feature, the
market value of convertible securities tends to vary with fluctuations in the
market value of the underlying common stock, and therefore, also will react to
variations in the general market for equity securities. A unique feature of
convertible securities is that as the market price of the underlying common
stock declines, convertible securities tend to trade increasingly on a yield
basis, and so may not experience market value declines to the same extent as the
underlying common stock. When the market price of the underlying common stock
increases, the prices of the convertible securities tend to rise as a reflection
of the value of the underlying common stock. While no securities investments are
without risk, investments in convertible securities generally entail less risk
than investments in common stock of the same issuer.
As debt obligations, convertible securities are investments that provide for a
stable stream of income with generally higher yields than common stocks. Of
course, like all debt obligations, there can be no assurance of current income
because the issuers of the convertible securities may default on their
obligations. Convertible securities, however, generally offer lower interest or
dividend yields than non- convertible securities of similar quality because of
the potential for capital appreciation. A convertible security, in addition to
providing fixed income, offers the potential for capital appreciation through
the conversion feature, which enables the holder to benefit from increases in
the market price of the underlying common stock. There can be no assurance of
capital appreciation, however, because the market value of securities will
fluctuate.
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<PAGE> 51
Convertible securities generally are subordinated to other similar but
non-convertible securities of the same issuer, although convertible bonds, as
corporate debt obligations, enjoy seniority in right of payment to all equity
securities, and convertible preferred stock is senior to common stock of the
same issuer. Because of the subordination feature, however, convertible
securities typically are rated below investment grade or are not rated. Hence,
an issuer with investment grade senior debt may issue convertible securities
with ratings less than investment grade or not rated. Convertible securities
rated below investment grade may be subject to some of the same risks as those
inherent in junk bonds. (See "HIGH YIELD CORPORATE DEBT OBLIGATIONS" below) The
Fund does not limit convertible securities by rating, and there is no minimal
acceptance rating for a convertible security to be purchased or held in the
Fund. Therefore, the Fund invests in convertible securities irrespective of
their ratings. This could result in the Fund's purchasing and holding, without
limit, convertible securities rated below investment grade by a nationally
recognized statistical rating organization ("NRSRO") (e.g., Moody's Investors
Services, Inc. or Standard & Poor's Ratings Group) or in the Fund's holding such
securities where they have acquired a rating below investment grade after the
Fund has purchased it.
The Fund may also invest in zero coupon convertible securities. Zero coupon
convertible securities are debt securities which are issued at a discount to
their face amount and do not entitle the holder to any periodic payments of
interest prior to maturity. Rather, interest earned on zero coupon convertible
securities accretes at a stated yield until the security reaches its face amount
at maturity. Zero coupon convertible securities are convertible into a specific
number of shares of the issuer's common stock. In addition, zero coupon
convertible securities usually have put features that provide the holder with
the opportunity to sell the bonds back to the issuer at a stated price before
maturity. Generally, the prices of zero coupon convertible securities may be
more sensitive to market interest rate fluctuations then conventional
convertible securities.
Federal income tax law require the holder of a zero coupon convertible security
to recognize income from the security prior to the receipt of cash payments. To
maintain its qualification as a regulated investment company and avoid liability
of federal income taxes, the Fund will be required to distribute income accrued
from zero coupon convertible securities which it owns, and may have to sell
portfolio securities (perhaps at disadvantageous times) in order to generate
cash to satisfy these distribution requirements.
DEBT OBLIGATIONS - Debt obligations in which the Fund invests generally will be
investment grade debt obligations, although the Fund may invest up to 35% of its
assets in corporate debt obligations that are not investment grade securities.
The Fund's risk and return potential with respect to its debt obligations
depends in part on the maturity and credit-quality characteristics of the
underlying investments in its portfolio. In general, the longer the maturity of
a debt obligation, the greater its sensitivity to changes in interest rates.
Similarly, debt obligations issued by less creditworthy entities tend to carry
higher yields than those with higher credit ratings. The market value of all
debt obligations is also affected by changes in the prevailing interest rates.
Therefore, the market value of such instruments generally reacts inversely to
interest rate changes. If the prevailing interest rates decrease, the market
value of debt
6
<PAGE> 52
obligations generally increases. If the prevailing interest rates increase, the
market value of debt obligations generally decreases.
Medium-quality obligations are obligations rated in the fourth highest rating
category by any NRSRO. Medium-quality securities, although considered
investment-grade, may have some speculative characteristics and may be subject
to greater fluctuations in value than higher-rated securities. In addition, the
issuers of medium-quality securities may be more vulnerable to adverse economic
conditions or changing circumstances than that of higher-rated issuers.
All ratings are determined at the time of investment. Any subsequent rating
downgrade of a debt obligation will be monitored by the Adviser or the
Subadviser to consider what action, if any, the Fund should take consistent with
its investment objective; such event will not automatically require the sale of
the downgraded securities.
HIGH YIELD CORPORATE DEBT OBLIGATIONS - The Fund may invest up to 35% of the
value of its total assets in corporate debt obligations that are not investment
grade securities or are not rated but are determined by the Subadviser to be of
comparable quality and may include bonds in default (commonly known as "junk
bonds").
Medium and lower rated securities will usually have higher yields than higher
rated securities. However, there is more risk associated with these investments.
This is because of reduced creditworthiness and increased risk of default. Under
rating agency guidelines, medium and lower rated securities and comparable
unrated securities will likely have some quality and protective characteristics
that are outweighed by large uncertainties or major risk exposures to adverse
conditions. Medium and lower rated securities are considered to have extremely
poor prospects of ever attaining any real investment standing, to have a current
identifiable vulnerability to default or to be in default, to be unlikely to
have the capacity to make required interest payments and repay principal when
due in the event of adverse business, financial or economic conditions, or to be
in default or not current in the payment of interest or principal. Such
securities are considered speculative with respect to the issuer's capacity to
make required interest and principal payments. The foregoing factors may, under
certain circumstances, reduce the value of securities held by the Fund and thus
affect the value of the Fund's shares.
Changes by recognized rating services in their ratings of any fixed-income
security and in the ability of an issuer to make payments of interest and
principal may also affect the value of these investments. The ratings of Moody's
and S&P generally represent the opinions of those organizations as to the
quality of the securities that they rate. Such ratings, however, are relative
and subjective, are not absolute standards of quality, are subject to change and
do not evaluate the market risk or liquidity of the securities.
The secondary markets for high yield securities are not as liquid as the
secondary markets for higher rated securities. The secondary markets for high
yield securities are concentrated in relatively few market makers and
participants in the market are mostly institutional investors, including
insurance companies, banks, other financial institutions and mutual funds. In
addition,
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<PAGE> 53
the trading volume for high yield securities is generally lower than that for
higher-rated securities and the secondary markets could contract under adverse
market or economic conditions independent of any specific adverse changes in the
condition of a particular issuer. These factors may have an adverse effect on
the ability of the Fund to dispose of particular portfolio investments, may
adversely affect the Fund's net asset value per share and may limit the ability
of the Fund to obtain accurate market quotations for purposes of valuing
securities and calculating net asset value. If the Fund is not able to obtain
precise or accurate market quotations for a particular security, it will become
more difficult to value the Fund's portfolio securities, and a greater degree of
judgment may be necessary in making such valuations. Less liquid secondary
markets may also affect the ability of the Fund to sell securities at their fair
value. If the secondary markets for high yield securities contract due to
adverse economic conditions or for other reasons, certain liquid securities in
the Fund's portfolio may become illiquid and the proportion of the Fund's assets
invested in illiquid securities may significantly increase.
Prices for high yield securities may be affected by legislative and regulatory
developments. These laws could adversely affect the Fund's net asset value and
investment practices, the secondary market for high yield securities, the
financial condition of issuers of these securities and the value of outstanding
high yield securities. For example, federal legislation requiring the
divestiture by federally insured savings and loan associations of their
investments in high yield bonds and limiting the deductibility of interest by
certain corporate issuers of high yield bonds adversely affected the market in
recent years.
While the market values of securities rated below investment grade and
comparable unrated securities tend to react less to fluctuations in interest
rate levels than do the market values of higher-rated securities, the market
values of certain of these securities also tend to be more sensitive to
individual corporate developments and changes in economic conditions than are
the market values of higher-rated securities. In addition, such securities
present a higher degree of credit risk. Issuers of these securities are often
highly leveraged and may not have more traditional methods of financing
available to them, so that their ability to service their debt obligations
during an economic downturn or during sustained periods of rising interest rates
may be impaired. The risk of loss due to default by such issuers is
significantly greater than the risk of loss on investment grade securities,
because such securities generally are unsecured and frequently are subordinated
to the prior payment of senior indebtedness. The Fund also may incur additional
expenses to the extent that it is required to seek recovery upon a default in
the payment of principal or interest on its portfolio holdings.
High yield U.S. corporate securities in which the Fund may invest include bonds,
debentures, notes, and commercial paper and will generally be unsecured. Most of
the debt securities will bear interest at fixed rates. However, the Fund may
also invest in corporate debt securities with variable rates of interest or
which involve equity features, such as contingent interest or participations
based on revenues, sales or profits (i.e., interest or other payments, often in
addition to a fixed rate of return, that are based on the borrower's attainment
of specified levels
8
<PAGE> 54
of revenues, sales or profits and thus enable the holder of the security to
share in the potential success of the venture).
MONEY MARKET OBLIGATIONS - The Fund may invest up to 100% of its assets in
high-quality short-term money market obligations.
Money market obligations in which the Fund may invest include: 1) U.S.
government securities (as described below); 2) commercial paper rated in one of
the two highest ratings categories of any NRSRO; 3) short-term bank obligations
that are rated in one of the two highest categories by any NRSRO, with respect
to obligations maturing in one year or less; 4) repurchase agreements relating
to debt obligations which the Fund could purchase directly; 5) unrated debt
obligations which are determined by the Adviser or the Subadviser to be of
comparable quality; and 6) money market mutual funds.
U.S. GOVERNMENT SECURITIES - U.S. government securities are issued or guaranteed
by the U.S. government or its agencies or instrumentalities. Securities issued
by the U.S. government include U.S. Treasury obligations, such as Treasury
bills, notes, and bonds. Securities issued by government agencies or
instrumentalities include, but are not limited to, obligations of the following:
- - the Federal Housing Administration, Farmers Home Administration, and the
Government National Mortgage Association ("GNMA"), including GNMA
pass-through certificates, whose securities are supported by the full faith
and credit of the United States;
- - the Federal Home Loan Banks, whose securities are supported by the right of
the agency to borrow from the U.S. Treasury;
- - the Federal National Mortgage Association, whose securities are supported
by the discretionary authority of the U.S. government to purchase certain
obligations of the agency or instrumentality; and
- - the Student Loan Marketing Association and the International Bank for
Reconstruction and Development, whose securities are supported only by the
credit of such agencies.
Although the U.S. government provides financial support to such U.S.
government-sponsored agencies or instrumentalities, no assurance can be given
that it will always do so. The U.S. government and its agencies and
instrumentalities do not guarantee the market value of their securities;
consequently, the value of such securities will fluctuate.
DERIVATIVE INSTRUMENTS - Derivative instruments may be used by the Fund for
hedging or risk management purposes or for any other permissible purposes
consistent with the Fund's investment objective. Derivative instruments are
securities or agreements whose value is based on the value of some underlying
asset (e.g., a security or currency) or the level of a reference index. Options,
futures, and options on futures transactions are considered derivative
transactions. Derivatives generally have investment characteristics that are
based upon either forward contracts (under which one party is obligated to buy
and the other party is obligated to sell an underlying asset at a specific price
on a specified date) or option contracts (under which
9
<PAGE> 55
the holder of the option has the right but not the obligation to buy or sell an
underlying asset at a specified price on or before a specified date).
Consequently, the change in value of a forward-based derivative generally is
roughly proportional to the change in value of the underlying asset. In
contrast, the buyer of an option-based derivative generally will benefit from
favorable movements in the price of the underlying asset but is not exposed to
the corresponding losses that the result from adverse movements in the value of
the underlying asset. The seller of an option-based derivative generally will
receive fees or premiums but generally is exposed to losses resulting from
changes in the value of the underlying asset. Derivative transactions may
include elements of leverage and, accordingly, the fluctuation of the value of
the derivative transaction in relation to the underlying asset may be magnified.
Derivative transactions may also include forward currency contracts and foreign
currency exchange-related securities.
Derivative transactions in which the Fund may engage include the writing of
covered put and call options on securities and the purchase of put and call
options thereon, the purchase of put and call options on securities indices and
exchange-traded options on currencies and the writing of put and call options on
securities indices. The Fund may enter into spread transactions and swap
agreements. The Fund also may buy and sell financial futures contracts which may
include interest-rate futures, futures on currency exchanges and stock and bond
index futures contracts. The Fund may enter into any futures contracts and
related options without limit for "bona fide hedging" purposes (as defined in
Commodity Futures Trading Commission regulations) and for other permissible
purposes, provided that aggregate initial margin and premiums on positions
engaged in for purposes other than "bona fide hedging" will not exceed 5% of its
net asset value, after taking into account unrealized profits and losses on such
contracts. The Fund may also enter into forward currency contracts to purchase
or sell foreign currencies.
Derivative instruments may be exchange-traded or traded in OTC transactions
between private parties. OTC transactions are subject to the credit risk of the
counterparty to the instrument and are less liquid than exchange-traded
derivatives since they often can only be closed out with the other party to the
transaction. When required by guidelines of the Securities and Exchange
Commission, the Fund will set aside permissible liquid assets in a segregated
account to secure its obligations under derivative transactions. Segregated
assets cannot be sold or transferred unless equivalent assets are substituted in
their place or it is no longer necessary to segregate them. As a result, there
is a possibility that segregation of a large percentage of the Fund's assets
could impede portfolio management or the Fund's ability to meet redemption
requests or other current obligations. In order to maintain its required cover
for a derivative transaction, the Fund may need to sell portfolio securities at
disadvantageous prices or times since it may not be possible to liquidate a
derivative position.
The successful use of derivative transactions by the Fund is dependent upon the
Subadviser's ability to correctly anticipate trends in the underlying asset.
Hedging transactions are subject to risks; if the Subadviser incorrectly
anticipates trends in the underlying asset, the Fund may be in a worse position
than if no hedging had occurred. In addition, there may be imperfect correlation
between the Fund's derivative transactions and the instruments being hedged.
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<PAGE> 56
REAL ESTATE SECURITIES - Although the Fund will not invest in real estate
directly, it may invest in equity securities of real estate investment trusts
("REITs") and other real estate industry companies or companies with substantial
real estate investments and therefore, the Fund may be subject to certain risks
associated with direct ownership of real estate and with the real estate
industry in general. These risks include, among others: possible declines in the
value of real estate; possible lack of availability of mortgage funds; extended
vacancies of properties; risks related to general and local economic conditions;
overbuilding; increases in competition, property taxes and operating expenses;
changes in zoning laws; costs resulting from the clean-up of, and liability to
third parties for damages resulting from, environmental problems; casualty or
condemnation losses; uninsured damages from floods, earthquakes or other natural
disasters; limitations on and variations in rents; and changes in interest
rates.
REITs are pooled investment vehicles which invest primarily in income producing
real estate or real estate related loans or interests. REITs are generally
classified as equity REITs, mortgage REITs or hybrid REITs. Equity REITs invest
the majority of their assets directly in real property and derive income
primarily from the collection of rents. Equity REITs can also realize capital
gains by selling properties that have appreciated in value. Mortgage REITs
invest the majority of their assets in real estate mortgages and derive income
from the collection of interest payments. REITs are not taxed on income
distributed to shareholders provided they comply with several requirements of
Internal Revenue Code, as amended (the "Code").
ILLIQUID SECURITIES - The Fund may invest up to 15% of its net assets in
securities that are illiquid, in that they cannot be expected to be sold within
seven days at approximately the price at which they are valued. Due to the
absence of an active trading market, the Fund may experience difficulty in
valuing or disposing of illiquid securities. The Subadviser will determine the
liquidity of the Fund's securities, under the supervision the Trust's trustees.
RESTRICTED SECURITIES, NON-PUBLICLY TRADED SECURITIES AND RULE 144A SECURITIES -
The Fund may invest in restricted securities and Rule 144A securities.
Restricted securities cannot be sold to the public without registration under
the Securities Act of 1933 ("1933 Act"). Unless registered for sale, these
securities can be sold only in privately negotiated transactions or pursuant to
an exemption from registration. Restricted securities are generally considered
illiquid and are therefore subject to the Fund's 15% limitation on investments
in illiquid securities.
Non-publicly traded securities (including Rule 144A securities) may involve a
high degree of business and financial risk which may result in substantial
losses. The securities may be less liquid than publicly traded securities.
Although these securities may be resold in privately negotiated transactions,
the prices realized from these sales could be less than those originally paid by
the Fund. In particular, Rule 144A securities may be resold only to qualified
institutional buyers in accordance with Rule 144A under the 1933 Act.
Unregistered securities may also be sold abroad pursuant to Regulation S under
the 1933 Act. Companies whose securities are not publicly traded are not subject
to the disclosure and other investor protection requirements that would be
applicable if their securities were publicly traded. Acting pursuant
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<PAGE> 57
to guidelines established by the Trustees of the Trust, restricted securities
and Rule 144A securities may be considered liquid.
REPURCHASE AGREEMENTS - The Fund may engage in repurchase agreement transactions
as long as the underlying securities are of the type that the Fund would be
permitted to purchase directly. Under the terms of a typical repurchase
agreement, the Fund would acquire an underlying debt obligation for a relatively
short period (usually not more than one week) subject to an obligation of the
seller to repurchase, and the Fund to resell, the obligation at an agreed upon
price and time, thereby determining the yield during the Fund's holding period.
The Fund will enter into repurchase agreements with respect to securities in
which it may invest with member banks of the Federal Reserve System or certain
non-bank dealers. Under each repurchase agreement the selling institution will
be required to maintain the value of the securities subject to the repurchase
agreement at not less than their repurchase price. Repurchase agreements could
involve certain risks in the event of default or insolvency of the other party,
including possible delays or restrictions upon a Fund's ability to dispose of
the underlying securities. The Adviser or the Subadviser, acting under the
supervision of the Board of Trustees, reviews the creditworthiness of those
banks and non-bank dealers with which the Fund enters into repurchase agreements
to evaluate these risks. For additional information, see "Repurchase Agreements"
in the Statement of Additional Information.
REVERSE REPURCHASE AGREEMENTS - The Fund may also enter into reverse repurchase
agreements with the same parties with whom it may enter into repurchase
agreements. Reverse repurchase agreements involve the sale of securities held by
the Fund pursuant to its agreement to repurchase them at a mutually agreed upon
date, price and rate of interest. At the time the Fund enters into a reverse
repurchase agreement, it will establish and maintain a segregated account with
an approved custodian containing liquid securities having a value not less than
the repurchase price (including accrued interest). The assets contained in the
segregated account will be marked-to-market daily and additional assets will be
placed in such account on any day in which the assets fall below the repurchase
price (plus accrued interest). The Fund's liquidity and ability to manage its
assets might be affected when it sets aside cash or portfolio securities to
cover such commitments. Reverse repurchase agreements involve the risk that the
market value of the securities retained in lieu of sale may decline below the
price of the securities the Fund has sold but is obligated to repurchase. In the
event the buyer of securities under a reverse repurchase agreement files for
bankruptcy or becomes insolvent, such buyer or its trustee or receiver may
receive an extension of time to determine whether to enforce the Fund's
obligation to repurchase the securities, and the Portfolio's use of the proceeds
of the reverse repurchase agreement may effectively be restricted pending such
determination. Reverse repurchase agreements are considered to be borrowings
under the Investment Company Act of 1940 (the "1940 Act").
INVESTMENT COMPANIES - As permitted by the 1940 Act, the Fund reserves the right
to invest up to 10% of its total assets, calculated at the time of investment,
in the securities of other open-end or closed-end investment companies. No more
than 5% of the Fund's total assets may be invested in the securities of any one
investment company nor may it acquire more than 3% of
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the voting securities of any other investment company. The Fund will indirectly
bear its proportionate share of any management fees paid by an investment
company in which it invests in addition to the advisory fee paid by the Fund.
WHEN-ISSUED SECURITIES - The Fund may invest without limitation in securities
purchased on a when-issued or delayed delivery basis. Although the payment and
interest terms of these securities are established at the time the purchaser
enters into the commitment, these securities may be delivered and paid for at a
future date, generally within 45 days. Purchasing when- issued securities allows
the Fund to lock in a fixed price or yield on a security it intends to purchase.
However, when the Fund purchases a when-issued security, it immediately assumes
the risk of ownership, including the risk of price fluctuation until the
settlement date.
The greater the Fund's outstanding commitments for these securities, the greater
the exposure to potential fluctuations in the net asset value of a Fund.
Purchasing when-issued securities may involve the additional risk that the yield
available in the market when the delivery occurs may be higher or the market
price lower than that obtained at the time of commitment. Although the Fund may
be able to sell these securities prior to the delivery date, it will purchase
when-issued securities for the purpose of actually acquiring the securities,
unless after entering into the commitment a sale appears desirable for
investment reasons. When required by guidelines issued by the Securities and
Exchange Commission, the Fund will set aside permissible liquid assets in a
segregated account to secure its outstanding commitments for when-issued
securities.]
LENDING PORTFOLIO SECURITIES - From time to time, the Fund may lend its
portfolio securities to brokers, dealers and other financial institutions which
need to borrow securities to complete certain transactions. In connection with
such loans, the Fund will receive collateral consisting of cash, U.S. Government
securities or irrevocable letters of credit. Such collateral will be maintained
at all times in an amount equal to at least 100% of the current market value of
the loaned securities. The Fund can increase its income through the investment
of such collateral. The Fund continues to be entitled to payments in amounts
equal to the interest, dividends or other distributions payable on the loaned
security and receives interest on the amount of the loan. Such loans will be
terminable at any time upon specified notice. The Fund might experience risk of
loss if the institution with which it has engaged in a portfolio loan
transaction breaches its agreement with the Fund.
BORROWING MONEY - The Fund may borrow money from banks up to 33 1/3% of its
total assets (including the amount borrowed). However, the Fund currently
intends to borrow money only for temporary or emergency purposes (but not for
leverage or the purchase of investments), in an amount up to 5% of the value of
the Fund's total assets (including the amount borrowed) valued at the time the
borrowing is made.
PERFORMANCE INFORMATION
The Fund has not commenced operations and has no investment performance record.
However, the Fund's investment objective and policies and the Fund's strategies
will be substantially similar to those employed by Federated Advisers, an
affiliate of the Subadviser, with respect to Class A shares of the Federated
Equity Income Fund, Inc. The chart below shows the historical investment
performance for the Class A shares of the Federated Equity Income Fund, Inc.
The investment performance of the Class A shares of the Federated Equity Income
Fund, Inc. does not represent the Fund's performance and should not be
construed a substitute for the Fund's performance, nor should it be interpreted
as indicative of the Fund's future performance.
The investment performance results of Class A shares of the Federated Equity
Income Fund, Inc. reflect the deduction of its total annual operating expenses
of 1.08% as of September 30, 1997. The Fund's estimated total annual operating
expenses are 0.95%, and are lower than the total annual operating expenses of
the Federated Equity Income Fund, Inc. The total return performance figures of
the Class A shares of the Federated Equity Income Fund, Inc. represent the
change, over a specified period of time, in the value of an investment in the
fund after reinvesting all income and capital gains distributions. It is
calculated by dividing that change by the initial investment and is expressed
as a percentage.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
------------------------------
ONE FIVE TEN
YEAR YEARS YEARS
<S> <C> <C> <C>
AS OF September 30, 1997
Federated Equity Income
Fund, Inc., Class A
Standard and Poor's 500 Index
Lipper Equity Income Fund Index
</TABLE>
<TABLE>
<CAPTION>
ANNUAL TOTAL RETURNS FOR THE YEAR ENDED DECEMBER 31
1997 1996 1995 1994 1993 1992 1991 1990
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Federated Equity
Income Fund, Inc.,
Class A
Standard and Poor's
500 Index
Lipper Equity
Income Fund Index
</TABLE>
13
<PAGE> 59
MANAGEMENT OF THE TRUST
TRUSTEES AND OFFICERS
The business and affairs of the Trust are managed under the direction of its
Board of Trustees.
The Board of Trustees sets and reviews policies regarding the operation of the
Trust, whereas the officers perform the daily functions of the Trust.
INVESTMENT MANAGEMENT OF THE FUND
THE ADVISER - Under the terms of the Investment Advisory Agreement, Nationwide
Advisory Services, Inc., Three Nationwide Plaza, Columbus, Ohio 43215, oversees
the investment of the assets for the Fund and supervises the daily business
affairs of the Fund. Subject to the supervision and direction of the Trustees,
the Adviser also evaluates and monitors the performance of the Subadviser. The
Adviser is also authorized to select and place portfolio investments on behalf
of the Fund; however, the Adviser does not intend to do so at this time.
The Adviser and the Trust have applied to the Securities and Exchange Commission
for an exemptive order which, if granted, will allow the Adviser to appoint,
replace or terminate subadvisers without the approval of shareholders; the order
would also allow the Adviser to revise a subadvisory agreement without
shareholder approval. Any change in subadvisers will be communicated to
shareholders within 60 days of such changes and all changes will be approved by
the Trust's Board of Trustees, including a majority of the Trustees who are not
interested persons of the Trust or the Adviser. The order, if granted, is
intended to facilitate the efficient operation of the Fund and afford the Trust
increased management flexibility. Prior to receiving the exemptive order, the
Adviser will not appoint, replace or terminate any subadvisers or materially
amend any subadvisory agreement without obtaining the approval of shareholders.
The Adviser provides to the Fund investment management evaluation services
principally by performing initial due diligence on prospective subadvisers for
the Fund and thereafter monitoring the performance of the subadvisers through
quantitative and qualitative analysis as well as through periodic in-person,
telephonic and written consultations with the subadvisers. The Adviser has
responsibility for communicating performance expectations and evaluations to the
subadvisers and ultimately recommending to the Trust's Board of Trustees whether
the subadviser's contract should be renewed, modified or terminated; however,
the Adviser does not expect to recommend frequent changes of subadvisers. The
Adviser will regularly provide written reports to the Board of Trustees
regarding the results of its evaluation and monitoring functions. Although the
Adviser will monitor the performance of the Subadviser, there is no certainty
that the Subadviser or the Fund will obtain favorable results at any given time.
The Adviser, an Ohio corporation, is a wholly owned subsidiary of Nationwide
Life Insurance Company, which is owned by Nationwide Financial Services, Inc.
(NFS). NFS, a holding
14
<PAGE> 60
company, has two classes of common stock outstanding with different voting
rights enabling Nationwide Corporation (the holder of all the outstanding Class
B Common Stock) to control NFS. Nationwide Corporation is also a holding company
in the Nationwide Insurance Enterprise. All of the common stock of Nationwide
Corporation is held by Nationwide Mutual Insurance Company (95.3%) and
Nationwide Mutual Fire Insurance Company (4.7%), each of which is a mutual
company owned by its policyholders. The Fund pays to the Adviser a fee at the
annual rate of 0.80% of the Fund's average daily net assets.
THE SUBADVISER - Subject to the supervision of the Adviser and the Trustees, the
Subadviser manages the Fund's assets in accordance with the Fund's investment
objective and policies. The Subadviser shall make investment decisions for the
Fund, and in connection with such investment decisions shall place purchase and
sell orders for securities. For the investment management services it provides
to the Fund, the Subadviser receives an annual fee from the Adviser in the
amount of 0.40% of the Fund's first $50 million of average daily net assets,
0.25% of the Fund's next $200 million of average daily net assets, 0.20% of the
Fund's next $250 million of average daily net assets, and 0.15% of the Fund's
average daily net assets in excess of $500 million.
Below is a brief description of the Subadviser.
Federated Investment Counseling, a Delaware business trust organized on April
11, 1989 (the "Subadviser"), is a registered investment adviser under the
Investment Advisers Act of 1940. It is a subsidiary of Federated Investors. All
of the Class A (voting) shares of Federated Investors are owned by a trust, the
trustees of which are John F. Donahue, Chairman and Trustee of Federated
Investors, Mr. Donahue's wife, and Mr. Donahue's son, J. Christopher Donahue,
who is President and Trustee of Federated Investors.
The Subadviser and other subsidiaries of Federated Investors serve as investment
advisers to a number of investment companies and private accounts. Certain other
subsidiaries also provide administrative services to a number of investment
companies. With over $110 billion invested across more than 300 funds under
management and/or administration by its subsidiaries, as of December 31, 1996,
Federated Investors is one of the largest mutual fund investment managers in the
United States. With more than 2,000 employees, Federated continues to be led by
the management who founded the company in 1955. Federated funds are presently at
work in and through 4,500 financial institutions nationwide.
Linda A. Duessel and Steven J. Lehman will be primarily responsible for the
day-to-day management of the Fund's portfolio. Ms. Duessel joined Federal
Investors in 1991 and has been a Vice President of a subsidiary of the
Subadviser since 1995. From 1991 through 1995, Ms. Duessel was an Assistant Vice
President of a subsidiary of the Subadviser. Ms. Duessel is a Chartered
Financial Analyst. Mr. Lehman joined Federated Investors in May 1997 as a Vice
President. From 1985 to May 1997, Mr. Lehman served as a Portfolio Manager, then
Vice President/Senior Portfolio Manager, at First Chicago NBD Investment
Management Company. Mr. Lehman is a Chartered Financial Analyst.
15
<PAGE> 61
OTHER SERVICES
Under the terms of a Fund Administration Agreement, the Adviser also provides
various administrative and accounting services, including daily valuation of the
Fund's shares and preparation of financial statements, tax returns, and
regulatory reports. For these services, the Fund pays the Adviser an annual fee
in the amount of 0.07% of the Fund's first $250 million of average daily net
assets, 0.05% on the next $750 million and 0.04% on assets of more than $1
billion.
The Transfer and Dividend Disbursing Agent, Nationwide Investors Services, Inc.,
("NIS"), Three Nationwide Plaza, Columbus, Ohio 43216, serves as transfer agent
and dividend disbursing agent for the Trust. The Fund pays to NIS a fee for such
services at the annual rate of 0.01% of the Fund's average daily net assets. NIS
is a wholly owned subsidiary of the Adviser.
INVESTMENT IN FUND SHARES
An insurance company may purchase the shares of the Fund using purchase payments
received on Contracts issued by Accounts. These Accounts are funded by shares of
the Fund. [Funds of Funds may also purchase shares of the Fund for their
portfolios.] There is no sales charge, and all shares are sold at net asset
value.
Shares of the Fund are currently sold only to separate accounts of Nationwide
Life Insurance Company and its wholly owned subsidiary Nationwide Life and
Annuity Insurance Company to fund the benefits under the Contract and to
affiliated Fund of Funds. The address for each of these entities is One
Nationwide Plaza, Columbus, Ohio 43215.
All investments in the Fund are credited to the shareholder's account in the
form of full and fractional shares of the Fund (rounded to the nearest 1/1000 of
a share). The Trust does not issue share certificates. Initial and subsequent
purchase payments allocated to the Fund are subject to the limits applicable to
the Contracts.
SHARE REDEMPTION
Redemptions are processed on any day on which the Trust is open for business and
are effected at net asset value next determined after the redemption order, in
proper form, is received by the Trust's transfer agent, NIS.
The net asset value per share of the Fund is determined once daily, as of the
close of regular-trading on the New York Stock Exchange (generally 4:00 P.M.
Eastern Time), on each business day the New York Stock Exchange is open for
regular trading and on such other days as the Board determines and on any other
day during which there is a sufficient degree of trading in the Fund's portfolio
securities that the net asset value of the Fund is materially affected by
changes in the value of portfolio securities. The Trust will not compute net
asset value on
16
<PAGE> 62
customary national business holidays, including the following: Christmas, New
Year's Day, Martin Luther King's Birthday, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, and Thanksgiving Day. The net asset
value per share is calculated by adding the value of all securities and other
assets of the Fund, deducting its liabilities, and dividing by the number of
shares outstanding.
In determining net asset value, portfolio securities listed on national
exchanges are valued at the last sales price on the principal exchange; if the
securities are traded only in the over-the-counter market, they are valued at
the quoted bid prices. Other portfolio securities are valued at the quoted
prices obtained from an independent pricing organization which employs a
combination of methods, including among others, the obtaining and comparison of
market valuations from dealers who make markets and deal in such securities and
the comparison of valuations with those of other comparable securities in a
matrix of such securities. The pricing service activities and results are
reviewed by an officer of the Trust. Securities for which market quotations are
not readily available are valued at fair value in accordance with procedures
adopted by the Board of Trustees. Expenses and fees are accrued daily.
The Trust may suspend the right of redemption only under the following unusual
circumstances:
- - when the New York Stock Exchange is closed (other than weekends and
holidays) or trading is restricted;
- - when an emergency exists, making disposal of portfolio securities or the
valuation of net assets not reasonably practicable; or
- - during any period when the Securities and Exchange Commission has by order
permitted a suspension of redemption for the protection of shareholders.
NET INCOME AND DISTRIBUTIONS
Substantially all of the net investment income, if any, of the Fund will be
declared and paid as dividends quarterly. Net realized capital gains of the
Fund, if any, will be distributed at least annually.
ADDITIONAL INFORMATION
DESCRIPTION OF SHARES - The Declaration of Trust permits the Trustees to issue
an unlimited number of full and fractional shares of beneficial interest of the
Fund and to divide or combine such shares into a greater or lesser number of
shares without thereby changing the proportionate beneficial interests in the
Trust. Each share of the Fund represents an equal proportionate interest in the
Fund with each other share. The Trust reserves the right to create and issue
17
<PAGE> 63
shares of a number of different funds. In that case, the shares of each fund
would participate equally in the earnings, dividends, and assets of the
particular fund, but shares of all funds would vote together in the election of
Trustees. Upon liquidation of a fund, its shareholders are entitled to share pro
rata in the net assets of such fund available for distribution to shareholders.
VOTING RIGHTS - Shareholders are entitled to one vote for each share held.
Shareholders may vote in the election or removal of Trustees and on other
matters submitted to meetings of shareholders. No amendment may be made to the
Declaration of Trust without the affirmative vote of a majority of the
outstanding shares of the Trust. The sole shareholder of the Fund initially will
be Nationwide Life Insurance Company. The Trustees may, however, amend the
Declaration of Trust without the vote or consent of shareholders to:
- - designate series of the Trust;
- - change the name of the Trust; or
- - supply any omission, cure, correct, or supplement any ambiguous,
defective, or inconsistent provision to conform the Declaration of
Trust to the requirements of applicable federal and state laws or
regulations if they deem it necessary.
Shares have no pre-emptive or conversion rights. Shares are fully paid and
nonassessable. In regard to termination, sale of assets, or changes of
investment restrictions, the right to vote is limited to the holders of shares
of the particular fund affected by the proposal. When a majority is required, it
means the lesser of 67% or more of the shares present at a meeting when the
holders of more than 50% of the outstanding shares are present or represented by
proxy, or more than 50% of the outstanding shares.
SHAREHOLDER INQUIRIES - All inquiries regarding the Fund should be directed to
the Trust at the telephone number or address shown on the cover page of this
Prospectus.
PERFORMANCE ADVERTISING FOR THE FUND
The Fund may use historical performance in advertisements, sales literature, and
the prospectus. Such figures will include quotations of average annual total
return for the most recent one, five, and ten year periods (or the life of the
Fund if less). Average annual total return represents the rate required each
year for an initial investment to equal the redeemable value at the end of the
specific period. Average annual total return reflects reinvestment of all
distributions.
TAX STATUS
The Trust's policy is to cause each fund to qualify as a regulated investment
company and to meet the requirements of Subchapter M of the Internal Revenue
Code (the "Code"). The Fund intends to distribute all its taxable net investment
income and capital gains to shareholders, and therefore, will not be required to
pay any federal income taxes.
18
<PAGE> 64
Because each fund of the Trust is treated as a separate entity for purposes of
the regulated investment company provisions of the Code, the assets, income, and
distributions of the Fund are considered separately for purposes of determining
whether or not the Fund qualifies as a regulated investment company. The Fund
intends to comply with the diversification requirements currently imposed by the
Internal Revenue Service on separate accounts of insurance companies as a
condition of maintaining the tax-deferred status of the Contracts. See the
Statement of Additional Information for more specific information.
The tax treatment of payments made by an Account to a Contractholder is
described in the separate account prospectus.
19
<PAGE> 65
CONTENTS
Sale of Fund Shares
Investment Objective and Policies
Investment Techniques, Considerations and Risk Factors
Management of the Trust
Investment in Fund Shares
Share Redemption
Net Income and Distributions
Additional Information
Performance Advertising for the Fund
Tax Status
INVESTMENT ADVISER AND ADMINISTRATOR
Nationwide Advisory Services, Inc.
One Nationwide Plaza
Columbus, Ohio 43215
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Nationwide Investors Services, Inc.
Box 1492
Three Nationwide Plaza
Columbus, Ohio 43216
AUDITORS
KPMG Peat Marwick LLP
Two Nationwide Plaza
Columbus, Ohio 43215
LEGAL COUNSEL
Druen, Dietrich, Koogler & Reynolds
One Nationwide Plaza
Columbus, Ohio 43216
20
<PAGE> 66
PROSPECTUS
OCTOBER _____, 1997
SHARES OF BENEFICIAL INTEREST OF
NATIONWIDE GLOBAL EQUITY FUND
ONE SERIES OF
NATIONWIDE SEPARATE ACCOUNT TRUST
THREE NATIONWIDE PLAZA
COLUMBUS, OHIO 43215
FOR INFORMATION AND ASSISTANCE,
CALL (614) 249-5134
Nationwide Global Equity Fund (the "Fund") is a diversified portfolio of the
Nationwide Separate Account Trust (the "Trust"). The Trust is an open-end
management investment company organized under the laws of Massachusetts, by a
Declaration of Trust, dated June 30, 1981, as subsequently amended. The Trust
currently offers shares in 15 separate mutual funds, each with its own
investment objective. This Prospectus relates only to Nationwide Global Equity
Fund. The shares of the Fund are sold to other open-end investment companies
created by Nationwide Advisory Services, Inc., the Fund's investment adviser, as
well as to life insurance company separate accounts to fund the benefits of
variable life insurance policies and annuity contracts.
The Fund seeks to provide a high total return from a globally diversified
portfolio of equity securities. Total return will consist of income plus
realized and unrealized capital gains and losses. The Fund is designed for
investors who wish to invest in an actively managed portfolio of equity
securities of issuers based in developed countries around the world.
This Prospectus provides you with the basic information you should know before
investing in the Fund. You should read it and keep it for future reference. A
Statement of Additional Information dated October ___, 1997, has been filed with
the Securities and Exchange Commission. You can obtain a copy without charge by
calling (614) 249-5134, or writing Nationwide Life Insurance Company, One
Nationwide Plaza, Columbus, Ohio 43215.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
THE STATEMENT OF ADDITIONAL INFORMATION FOR THE TRUST, DATED OCTOBER ___, 1997,
IS INCORPORATED HEREIN BY REFERENCE.
<PAGE> 67
SALE OF FUND SHARES
Shares of the Fund may be sold to life insurance company separate accounts (the
"Accounts") to fund the benefits of variable life insurance policies or annuity
contracts ("Contracts") issued by life insurance companies, as well as to other
open-end investment companies (each, a "Fund of Funds") created by Nationwide
Advisory Services, Inc. (the "Adviser"), the Fund's investment adviser. The
Accounts purchase shares of the Fund in accordance with variable account
allocation instructions received from owners of the Contracts. The Fund then
uses the proceeds to buy securities for its portfolio. The Adviser, together
with a subadviser, manages the portfolio from day to day to accomplish the
Fund's investment objectives. The types of investments and the way they are
managed depend on what is happening in the economy and the financial
marketplaces. Each Fund of Funds and Account, as a shareholder, has an ownership
interest in the Fund's investments. The Fund also offers to buy back (redeem)
its shares from the Fund of Funds or the Accounts at any time at net asset
value.
SUMMARY OF EXPENSES
Shareholder Transaction Expenses None
Estimated Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees 1.00%
12b-1 Fees None
Other Expenses .20%
----
Estimated Total Fund Operating Expenses(1) 1.20%
====
This summary is provided to assist investors in understanding the various costs
and expenses that an investor in the Fund will bear directly or indirectly. The
amount of "Other Expenses" is based on estimated amounts for the fiscal year
ending December 31, 1997.
Example:
1 year 3 years
------ -------
You would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and
(2) redemption at the end of each time period $12 $38
- --------
1 The Adviser has agreed with the Trust to waive fees or to reimburse
expenses incurred by the Fund to the extent necessary to limit the
total expense ratio of the Fund to a maximum of 1.20% of the Fund's
average net assets.
2
<PAGE> 68
THE EXAMPLE SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESSER THAN THOSE SHOWN.
For more information on Fund expenses, see "MANAGEMENT OF THE TRUST" below.
FINANCIAL HIGHLIGHTS
Financial highlights are not available for the Fund, because the Fund has not
yet commenced operations.
INVESTMENT OBJECTIVE AND POLICIES
Nationwide Global Equity Fund (the "Fund") seeks to provide a high total return
from a globally diversified portfolio of equity securities. Total return will
consist of income plus realized and unrealized capital gains and losses. The
Fund is designed for investors who wish to invest in an actively managed
portfolio of equity securities of issuers based in developed countries around
the world. The Fund seeks to achieve its investment objective through country
allocation, stock selection and management of currency exposure.
In normal circumstances, the subadviser intends to keep the Fund essentially
fully invested with at least 65% of the value of its total assets in equity
securities consisting of common stocks and other securities with equity
characteristics such as preferred stock, warrants, rights, convertible
securities, trust certificates, limited partnership interests and equity
participations. The Fund's primary equity investments are the common stock of
companies based in the developed countries of the world. The assets of the Fund
will ordinarily will be invested in the securities of issuers in at least five
different countries. The common stock in which the Fund may invest includes the
common stock of any class or series or any similar equity interest, such as
trust or limited partnership interests. These equity investments may or may not
pay dividends and may or may not carry voting rights. The Fund primarily invests
in securities listed on recognized stock exchanges but may also invest in
securities traded in over-the-counter markets, and in certain restricted or
unlisted securities.
The Fund may also invest in money market instruments denominated in U.S. dollars
and other currencies, purchase securities on a when-issued or delayed delivery
basis, enter into repurchase and reverse repurchase agreements, loan its
portfolio securities and purchase certain privately placed securities. In
addition, the Fund may enter into forward currency exchange contracts, use
options on securities, indices of securities and currencies, futures contracts
and options on futures contracts, and interest rate, index, total return and
currency swaps. Forward currency exchange contracts, options, futures and swaps
are derivative instruments.
In addition, for temporary or emergency purposes as determined by the Fund's
subadviser, the Fund can invest up to 100% of its total assets in short-term
money market obligations.
3
<PAGE> 69
For a discussion of these investments and investment techniques, and the risks
associated therewith, see "INVESTMENT TECHNIQUES, CONSIDERATIONS AND RISK
FACTORS" below.
While there is careful selection of the securities in which the Fund may invest
and constant supervision of the Fund's portfolio by a group of professional
investment managers, there can be no guarantee that the Fund's objective will be
achieved. The investment objective of the Fund is not fundamental and may be
changed by the Trustees of the Trust without shareholder approval.
MANAGEMENT OF THE FUND
The Adviser provides investment management evaluation services to the Fund in
initially selecting and monitoring on an ongoing basis the performance of a
subadviser to manage the Fund's portfolio. The Adviser has selected J.P. Morgan
Investment Management Inc. (the "Subadviser") to be the subadviser of the Fund.
See "MANAGEMENT OF THE TRUST -- Investment Management of the Fund" below for
further information.
The Subadviser uses a disciplined portfolio construction process to seek to
enhance returns and reduce volatility in the market value of the Fund relative
to that of the Morgan Stanley Capital International ("MSCI") World Equity Index.
Based on fundamental research, quantitative valuation techniques, and
experienced judgment, the Subadviser uses a structured decision-making process
to allocate the Fund primarily across the developed countries of the world by
under- or over weighting selected countries in the MSCI World Equity Index.
Using a dividend discount model and based on analysts' industry expertise,
companies in each country are ranked within industrial sectors according to
their relative value. Based on this valuation, the Subadviser selects the
companies which appear the most attractive for the Fund. The Subadviser believes
that under normal market conditions, industrial sector weightings generally will
be similar to those of the MSCI World Equity Index.
The Subadviser actively manages currency exposure in conjunction with country
and stock allocation in an attempt to protect and possibly enhance the Fund's
market value. Through the use of forward foreign currency exchange contracts,
the Subadviser will adjust the Fund's currency weightings relative to the
currency weightings in the MSCI World Equity Index to reduce exposure to
currencies deemed unattractive and in certain circumstances to increase exposure
to currencies deemed attractive. For further information on foreign currency
exchange transactions, see "INVESTMENT TECHNIQUES, CONSIDERATIONS AND RISK
FACTORS -- Foreign Securities and Currencies" below.
The Fund intends to manage its portfolio actively in pursuit of its investment
objective. The Fund does not expect to trade in securities for short-term
profits; however, when circumstances warrant, securities may be sold without
regard to the length of time held. To the extent the Fund engages in short-term
trading, it may incur increased transaction costs. The annual portfolio turnover
rate is generally not expected to exceed 100%.
4
<PAGE> 70
INVESTMENT TECHNIQUES, CONSIDERATIONS AND RISK FACTORS
An investment in the Fund involves certain risks. As a general matter, an
investment in the Fund involves the risk that the net asset value of the Fund's
shares will fluctuate in response to changes in economic conditions, and the
market's perception of the securities held by the Fund. In addition, because the
Fund invests primarily in common stocks, an investment in the Fund is subject to
stock market risk, which means that such an investment is subject to the risk
that stock prices in general will decline over short or extended periods of
time. An investment in the Fund is subject to other risks as well, depending
upon the particular investment techniques employed by the Fund and the types of
securities in which the Fund invests.
FOREIGN SECURITIES AND CURRENCIES - The Fund invests in foreign securities,
either directly or indirectly through the use of depositary receipts. Depository
receipts include American Depository Receipts ("ADRs"), European Depository
Receipts ("EDRs"), American Depository Shares and Global Depositary Receipts
("GDRs") or other similar securities of foreign issuers. ADRs are securities,
typically issued by a U.S. financial institution (a "depositary"), that evidence
ownership interests in a security or a pool of securities issued by a foreign
issuer and deposited with the depositary. EDRs are receipts issued by a European
financial institution. GDRs are securities, typically issued by a non-U.S.
financial institution, that evidence ownership interests in a security or a pool
of securities issued by either a U.S. or foreign issuer. ADRs, EDRs and GDRs may
be available for investment through "sponsored" or "unsponsored" facilities. A
sponsored facility is established jointly by the issuer of the security
underlying the receipt and a depositary, whereas an unsponsored facility may be
established by a depositary without participation by the issuer of the receipt's
underlying security.
Holders of an unsponsored depositary receipt generally bear all costs of the
unsponsored facility. The depositary of an unsponsored facility frequently is
under no obligation to distribute shareholder communications received from the
issuer of the deposited security or to pass through to the holders of the
receipts voting rights with respect to the deposited securities.
Foreign investments involve special risks, including the possibility of
expropriation, confiscatory taxation, and withholding taxes on dividends and
interest; less extensive regulation of foreign brokers, securities markets, and
issuers; political, economic or social instability; and less publicly available
information and different accounting standards. When investing in foreign
securities, the Fund may also incur costs in conversions between currencies,
possible delays in settlement in foreign securities markets, limitations on the
use or transfer of assets (including suspension of the ability to transfer
currency from a given country), and difficulty in enforcing obligations in other
countries.
Foreign economies may differ favorably or unfavorably from the U.S. economy in
various respects, including growth of gross domestic product, rates of
inflation, currency depreciation, capital reinvestment, resource
self-sufficiency, and balance of payments positions. Many foreign securities are
less liquid and their prices more volatile than comparable U.S. securities.
Although the Fund primarily invests in securities that are regularly traded on
recognized
5
<PAGE> 71
exchanges, from time to time, foreign securities may be difficult to liquidate
rapidly without adverse price effects. Certain costs attributable to foreign
investing, such as custody charges and brokerage costs, are higher than those
attributable to domestic investing.
Because most foreign securities are denominated in non-U.S. currencies, the
investment performance of the Fund could be significantly affected by changes in
foreign currency exchange rates. The value of the Fund's assets denominated in
foreign currencies will increase or decrease in response to fluctuations in the
value of those foreign currencies relative to the U.S. dollar. Currency exchange
rates can be volatile at times in response to supply and demand in the currency
exchange markets, international balances of payments, governmental intervention,
speculation, and other political and economic conditions.
The Fund may purchase and sell foreign currency on a spot basis and may engage
in forward currency contracts, currency options, and futures transactions for
hedging or risk management purposes. See "Derivative Instruments" below.
WARRANTS - A warrant is an instrument which gives the holder the right to
subscribe to a specified amount of the issuer's securities at a set price for a
specified period of time or on a specified date. Warrants do not carry the right
to dividends or voting rights with respect to their underlying securities and do
not represent any rights in assets of the issuer. An investment in warrants may
be considered speculative. In addition, the value of a warrant does not
necessarily change with the value of the underlying securities, and a warrant
ceases to have value if it is not exercised prior to its expiration date.
CONVERTIBLE SECURITIES - The Fund may invest in convertible securities, which
are bonds, debentures, notes, preferred stocks or other securities that may be
converted into or exchanged for a specified amount of common stock of the same
or a different issuer within a particular period of time at a specified price or
formula. Convertible securities have general characteristics similar to both
debt obligations and equity securities. Although to a lesser extent than with
debt obligations generally, the market value of convertible securities tends to
decline as interest rates increase and, conversely, tends to increase as
interest rates decline. In addition, because of the conversion feature, the
market value of convertible securities tends to vary with fluctuations in the
market value of the underlying common stock and therefore will react to
variations in the general market for equity securities. A unique feature of
convertible securities is that as the market price of the underlying common
stock declines, convertible securities tend to trade increasingly on a yield
basis, and so may not experience market value declines to the same extent as the
underlying common stock. When the market price of the underlying common stock
increases, the prices of the convertible securities tend to rise as a reflection
of the value of the underlying common stock. While no securities investments are
without risk, investments in convertible securities generally entail less risk
than investments in common stock of the same issuer.
As debt obligations, convertible securities are investments that provide for a
stable stream of income with generally higher yields than common stocks. Of
course, like all debt obligations,
6
<PAGE> 72
there can be no assurance of current income because the issuers of the
convertible securities may default on their obligations. Convertible securities,
however, generally offer lower interest or dividend yields than non-convertible
securities of similar quality because of the potential for capital appreciation.
A convertible security, in addition to providing fixed income, offers the
potential for capital appreciation through the conversion feature, which enables
the holder to benefit from increases in the market price of the underlying
common stock. There can be no assurance of capital appreciation, however,
because the market value of securities will fluctuate.
Convertible securities generally are subordinated to other similar but
non-convertible securities of the same issuer, although convertible bonds, as
corporate debt obligations, enjoy seniority in right of payment to all equity
securities, and convertible preferred stock is senior to common stock of the
same issuer. Because of the subordination feature, however, convertible
securities typically are rated below investment grade or are not rated.
SMALL COMPANY AND EMERGING GROWTH STOCKS - The Fund invests primarily in stocks
of larger companies, but it may from time to time invest in stocks of smaller
and emerging growth companies. Investing in securities of small-sized and
emerging growth companies may involve greater risks than investing in larger,
more established issuers since these securities may have limited marketability
and thus may be more volatile than securities of larger, more established
companies or the market averages in general. Because small-sized companies
normally have fewer shares outstanding than larger companies, it may be more
difficult for the Fund to buy or sell significant numbers of such shares without
an unfavorable impact on prevailing prices. Small-sized companies may have
limited product lines, markets or financial resources and may lack management
depth. In addition, small-sized companies are typically subject to wider
variations in earnings and business prospects than are larger, more established
companies. There is typically less publicly available information concerning
small-sized companies than for larger, more established ones.
Although investing in securities of emerging growth companies offers potential
for above-average returns if the companies are successful, the risk exists that
the companies will not succeed, and the prices of the companies' shares could
significantly decline in value.
MONEY MARKET INSTRUMENTS - The Fund may invest in money market instruments of
U.S. or non-U.S. issuers denominated in U.S. dollars and other currencies. Under
normal circumstances the Fund will purchase these securities to invest temporary
cash balances or to maintain liquidity to meet redemptions. However, the Fund
may also invest in money market instruments without limitation as a temporary
defensive measure taken in the Subadviser's judgment during, or in anticipation
of, adverse market conditions.
Money market instruments in which the Fund may invest include: 1) commercial
paper, bonds or bank obligations rated in one of the four highest rating
categories by any nationally recognized statistical rating organization
("NRSRO") (e.g., Moody's Investors Service, Inc. or Standard & Poor's Ratings
Group); 2) U.S. government securities (as described in the Statement Additional
Information) and obligations of sovereign foreign governments, their agencies,
7
<PAGE> 73
instrumentalities and political subdivisions; 3) repurchase agreements relating
to debt obligations which the Fund could purchase directly; or 4) unrated debt
obligations which are determined by the Adviser or the Subadviser to be of
comparable quality.
Medium-quality obligations are obligations rated in the fourth highest rating
category by any NRSRO. Medium-quality securities, although considered
investment-grade, may have some speculative characteristics and may be subject
to greater fluctuations in value than higher-rated securities. In addition, the
issuers of medium-quality securities may be more vulnerable to adverse economic
conditions or changing circumstances than that of higher-rated issuers.
All ratings are determined at the time of investment. Any subsequent rating
downgrade of a debt obligation will be monitored by the Adviser or the
Subadviser to consider what action, if any, the Fund should take consistent with
its investment objective; such event will not automatically require the sale of
the downgraded securities.
U.S. GOVERNMENT SECURITIES - U.S. government securities are issued or guaranteed
by the U.S. government or its agencies or instrumentalities. Securities issued
by the U.S. government include U.S. Treasury obligations, such as Treasury
bills, notes, and bonds. Securities issued by government agencies or
instrumentalities include, but are not limited to, obligations of the following:
- - the Federal Housing Administration, Farmers Home Administration, and the
Government National Mortgage Association ("GNMA"), including GNMA
pass-through certificates, whose securities are supported by the full faith
and credit of the United States;
- - the Federal Home Loan Banks, whose securities are supported by the right of
the agency to borrow from the U.S. Treasury;
- - the Federal National Mortgage Association, whose securities are supported
by the discretionary authority of the U.S. government to purchase certain
obligations of the agency or instrumentality; and
- - the Student Loan Marketing Association and the International Bank for
Reconstruction and Development, whose securities are supported only by the
credit of such agencies.
Although the U.S. government provides financial support to such U.S.
government-sponsored agencies or instrumentalities, no assurance can be given
that it will always do so. The U.S. government and its agencies and
instrumentalities do not guarantee the market value of their securities;
consequently, the value of such securities will fluctuate.
DERIVATIVE INSTRUMENTS - Derivative instruments may be used by the Fund for
hedging or risk management purposes or for any other permissible purposes
consistent with the Fund's investment objective. Derivative instruments are
securities or agreements whose value is based on the value of some underlying
asset (e.g., a security or currency) or the level of a reference index. Options,
futures, and options on futures transactions are considered derivative
transactions. Derivatives generally have investment characteristics that are
based upon either forward contracts (under which one party is obligated to buy
and the other party is obligated to
8
<PAGE> 74
sell an underlying asset at a specific price on a specified date) or option
contracts (under which the holder of the option has the right but not the
obligation to buy or sell an underlying asset at a specified price on or before
a specified date). Consequently, the change in value of a forward-based
derivative generally is roughly proportional to the change in value of the
underlying asset. In contrast, the buyer of an option-based derivative generally
will benefit from favorable movements in the price of the underlying asset but
is not exposed to the corresponding losses that result from adverse movements in
the value of the underlying asset. The seller of an option-based derivative
generally will receive fees or premiums but generally is exposed to losses
resulting from changes in the value of the underlying asset. Derivative
transactions may include elements of leverage and, accordingly, the fluctuation
of the value of the derivative transaction in relation to the underlying asset
may be magnified. Derivative transactions may also include forward currency
contracts and foreign currency exchange-related securities.
Because the Fund buys and sells securities and receives interest and dividends
in currencies other than the U.S. dollar (the currency in which Fund shares are
denominated) the Fund may from time to time enter into currency exchange
transactions. The Fund enters into these transactions on a spot (i.e., cash)
basis at the spot rate prevailing in the foreign currency exchange market or it
enters into forward contracts to purchase or sell foreign currencies.
A forward currency exchange contract is an obligation by the Fund to purchase or
sell a specific currency at a future date at a predetermined price. These
contracts are entered into in the interbank market directly between currency
traders (usually large commercial banks) and their customers. Neither spot
transactions nor forward currency exchange contracts eliminate fluctuations in
the prices of the Fund's securities or in foreign exchange rates, or prevent
loss if the prices of these securities should decline.
The Fund may enter into forward foreign currency exchange contracts to adjust
its currency exposure relative to its benchmark, the Morgan Stanley Capital
International World Equity Index. The Fund may also enter into forward foreign
currency exchange contracts in connection with settlements of securities
transactions and other anticipated payments or receipts. In addition, the Fund
may from time to time enter into forward foreign currency exchange contracts to
hedge against a change in foreign currency exchange rates that would cause a
decline in the U.S. dollar value of existing investments denominated in a
foreign currency.
Forward foreign currency exchange contracts may involve the purchase or sale of
a foreign currency in exchange for the U.S. dollar or may involve two foreign
currencies.
Although these transactions are intended to minimize 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 be realized should the value of the hedged currency
increase. In addition, forward contracts that convert one currency into another
will cause the Fund to assume the risk of fluctuations in the value of the
currency purchased against the hedged currency and the U.S. dollar. The precise
matching of the forward contract amounts and the value of the securities
involved will not generally be possible because the future value of such
securities will change as a consequence
9
<PAGE> 75
of market movements between the date when the forward contract is entered into
and the date when it matures. The projection of currency market movements is
extremely difficult, and the successful execution of a currency management
strategy is highly uncertain.
Derivative transactions in which the Fund may engage also include the writing of
covered put and call options on securities and the purchase of put and call
options thereon, the purchase of put and call options on securities indexes and
exchange-traded options on currencies and the writing of put and call options on
securities indexes. The Fund may enter into spread transactions and swap
agreements. The Fund also may buy and sell financial futures contracts which may
include interest-rate futures, futures on currency exchanges and stock and bond
index futures contracts. The Fund may enter into any futures contracts and
related options without limit for "bona fide hedging" purposes (as defined in
Commodity Futures Trading Commission regulations) and for other permissible
purposes, provided that aggregate initial margin and premiums on positions
engaged in for purposes other than "bona fide hedging" will not exceed 5% of its
net asset value, after taking into account unrealized profits and losses on such
contracts.
Derivative instruments may be exchange-traded or traded in OTC transactions
between private parties. OTC transactions are subject to the credit risk of the
counterparty to the instrument and are less liquid than exchange-traded
derivatives since they often can only be closed out with the other party to the
transaction. When required by guidelines of the Securities and Exchange
Commission, the Fund will set aside permissible liquid assets in a segregated
account to secure its obligations under derivative transactions. Segregated
assets cannot be sold or transferred unless equivalent assets are substituted in
their place or it is no longer necessary to segregate them. As a result, there
is a possibility that segregation of a large percentage of the Fund's assets
could impede portfolio management or the Fund's ability to meet redemption
requests or other current obligations. In order to maintain its required cover
for a derivative transaction, the Fund may need to sell portfolio securities at
disadvantageous prices or times since it may not be possible to liquidate a
derivative position.
The successful use of derivative transactions by the Fund is dependent upon the
Subadviser's ability to correctly anticipate trends in the underlying asset.
Hedging transactions are subject to risks; if the Subadviser incorrectly
anticipates trends in the underlying asset, the Fund may be in a worse position
than if no hedging had occurred. In addition, there may be imperfect correlation
between the Fund's derivative transactions and the instruments being hedged.
ILLIQUID SECURITIES - The Fund may invest up to 15% of its net assets in
securities that are illiquid, in that they cannot be expected to be sold within
seven days at approximately the price at which they are valued. Due to the
absence of an active trading market, the Fund may experience difficulty in
valuing or disposing of illiquid securities. The Subadviser will determine the
liquidity of the Fund's securities, under the supervision the Trust's trustees.
RESTRICTED SECURITIES, NON-PUBLICLY TRADED SECURITIES AND RULE 144A SECURITIES -
The Fund may invest in restricted securities and Rule 144A securities.
Restricted securities cannot be sold
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<PAGE> 76
to the public without registration under the Securities Act of 1933 ("1933
Act"). Unless registered for sale, these securities can be sold only in
privately negotiated transactions or pursuant to an exemption from registration.
Restricted securities are generally considered illiquid and are therefore
subject to the Fund's 15% limitation on investments in illiquid securities.
Non-publicly traded securities (including Rule 144A securities) may involve a
high degree of business and financial risk which may result in substantial
losses. The securities may be less liquid than publicly traded securities.
Although these securities may be resold in privately negotiated transactions,
the prices realized from these sales could be less than those originally paid by
the Fund. In particular, Rule 144A securities may be resold only to qualified
institutional buyers in accordance with Rule 144A under the 1933 Act.
Unregistered securities may also be sold abroad pursuant to Regulation S under
the 1933 Act. Companies whose securities are not publicly traded are not subject
to the disclosure and other investor protection requirements that would be
applicable if their securities were publicly traded. Acting pursuant to
guidelines established by the Trustees of the Trust, restricted securities and
Rule 144A securities may be considered liquid.
REPURCHASE AGREEMENTS - The Fund may engage in repurchase agreement transactions
as long as the underlying securities are of the type that the Fund would be
permitted to purchase directly. Under the terms of a typical repurchase
agreement, the Fund would acquire an underlying debt obligation for a relatively
short period (usually not more than one week) subject to an obligation of the
seller to repurchase, and the Fund to resell, the obligation at an agreed upon
price and time, thereby determining the yield during the Fund's holding period.
The Fund will enter into repurchase agreements with respect to securities in
which it may invest with member banks of the Federal Reserve System or certain
non-bank dealers. Under each repurchase agreement the selling institution will
be required to maintain the value of the securities subject to the repurchase
agreement at not less than their repurchase price. Repurchase agreements could
involve certain risks in the event of default or insolvency of the other party,
including possible delays or restrictions upon a Fund's ability to dispose of
the underlying securities. The Adviser or the Subadviser, acting under the
supervision of the Board of Trustees, reviews the creditworthiness of those
banks and non-bank dealers with which the Fund enters into repurchase agreements
to evaluate these risks. For additional information, see "Repurchase Agreements"
in the Statement of Additional Information.
REVERSE REPURCHASE AGREEMENTS - The Fund may also enter into reverse repurchase
agreements with the same parties with whom it may enter into repurchase
agreements. Reverse repurchase agreements involve the sale of securities held by
the Fund pursuant to its agreement to repurchase them at a mutually agreed upon
date, price and rate of interest. At the time the Fund enters into a reverse
repurchase agreement, it will establish and maintain a segregated account with
an approved custodian containing liquid securities having a value not less than
the repurchase price (including accrued interest). The assets contained in the
segregated account will be marked-to-market daily and additional assets will be
placed in such account on any day in which the assets fall below the repurchase
price (plus accrued interest). The Fund's liquidity
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<PAGE> 77
and ability to manage its assets might be affected when it sets aside cash or
portfolio securities to cover such commitments. Reverse repurchase agreements
involve the risk that the market value of the securities retained in lieu of
sale may decline below the price of the securities the Fund has sold but is
obligated to repurchase. In the event the buyer of securities under a reverse
repurchase agreement files for bankruptcy or becomes insolvent, such buyer or
its trustee or receiver may receive an extension of time to determine whether to
enforce the Fund's obligation to repurchase the securities, and the Fund's use
of the proceeds of the reverse repurchase agreement may effectively be
restricted pending such determination. Reverse repurchase agreements are
considered to be borrowings under the Investment Company Act of 1940 (the "1940
Act").
BANK OBLIGATIONS - The Fund may invest in bank obligations denominated in U.S.
dollars and other currencies, such as certificates of deposit, banker's
acceptances, and time deposits of domestic or foreign banks and their
subsidiaries and branches, and domestic savings and loan associations.
INVESTMENT COMPANIES - As permitted by the 1940 Act, the Fund reserves the right
to invest up to 10% of its total assets, calculated at the time of investment,
in the securities of other open-end or closed-end investment companies. No more
than 5% of the Fund's total assets may be invested in the securities of any one
investment company nor may it acquire more than 3% of the voting securities of
any other investment company. The Fund will indirectly bear its proportionate
share of any management fees paid by an investment company in which it invests
in addition to the advisory fee paid by the Fund.
WHEN-ISSUED SECURITIES - The Fund may invest without limitation in securities
purchased on a when-issued or delayed delivery basis. Although the payment and
interest terms of these securities are established at the time the purchaser
enters into the commitment, these securities may be delivered and paid for at a
future date. Purchasing when-issued securities allows the Fund to lock in a
fixed price or yield on a security it intends to purchase. However, when the
Fund purchases a when-issued security, it immediately assumes the risk of
ownership, including the risk of price fluctuation until the settlement date.
The greater the Fund's outstanding commitments for these securities, the greater
the exposure to potential fluctuations in the net asset value of a Fund.
Purchasing when-issued securities may involve the additional risk that the yield
available in the market when the delivery occurs may be higher or the market
price lower than that obtained at the time of commitment. Although the Fund may
be able to sell these securities prior to the delivery date, it will purchase
when-issued securities for the purpose of actually acquiring the securities,
unless after entering into the commitment a sale appears desirable for
investment reasons. When required by guidelines issued by the Securities and
Exchange Commission, the Fund will set aside permissible liquid assets in a
segregated account to secure its outstanding commitments for when-issued
securities.
LENDING PORTFOLIO SECURITIES - From time to time, the Fund may lend its
portfolio securities to brokers, dealers and other financial institutions who
need to borrow securities to complete
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<PAGE> 78
certain transactions. In connection with such loans, the Fund will receive
collateral consisting of cash, U.S. Government securities or irrevocable letters
of credit. Such collateral will be maintained at all times in an amount equal to
at least 100% of the current market value of the loaned securities. The Fund can
increase its income through the investment of such collateral. The Fund
continues to be entitled to payments in amounts equal to the interest, dividends
or other distributions payable on the loaned security and receives interest on
the amount of the loan. Such loans will be terminable at any time upon specified
notice. The Fund might experience risk of loss if the institution with which it
has engaged in a portfolio loan transaction breaches its agreement with the
Fund.
BORROWING MONEY - The Fund may borrow money from banks up to 33 1/3% of its
total assets (including the amount borrowed). However, the Fund currently
intends to borrow money only for temporary or emergency purposes (but not for
leverage or to purchase investments) up to 5% of the value of the Fund's total
assets (including the amount borrowed) valued at the time the borrowing is made.
PERFORMANCE INFORMATION DERIVED FROM PRIVATE ACCOUNTS
The Fund has not commenced operations and has no investment performance record.
However, the Fund's investment objective and policies and the Fund's strategies
will be substantially similar to those employed by the Subadviser and its
affiliates with respect to certain discretionary investment management accounts
under their management ("Private Accounts"). The chart below shows the
historical investment performance for a composite of these Private Accounts
("Private Account Composite").
The investment performance of the Private Account Composite does not represent
the Fund's performance, nor should it be interpreted as indicative of the Fund's
future performance. The accounts in the Private Account Composite are not
subject to the investment limitations, diversification requirements and other
restrictions imposed on registered mutual funds by the 1940 Act and the Internal
Revenue Code. If the accounts included in the Private Account Composite had been
subject to the requirements imposed on mutual funds, their performance might
have been lower.
The investment performance results of the Private Account Composite reflect the
deduction of the Fund's total annual operating expenses, estimated at 1.20%. The
Fund's estimated total annual operating expenses are higher than the highest
investment advisory fee charged to any private account in the Private Account
Composite. The Private Account Composite performance figures are time-weighted
rates of return which include all income and accrued income and realized and
unrealized gains or losses.
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<TABLE>
<CAPTION>
Total
Returns Average Annual Total Returns
--------- -------------------------------
Three One Five Ten
Months Year Years Years
------ ---- ----- -----
<S> <C> <C> <C> <C>
As of September 30, 1997
Private Account Composite...
MSCI World Equity Trade...
<CAPTION>
Annual Total Returns For The Year Ended December 31,
1996 1995 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C> <C> <C>
Private Account Composite...
MSCI World Equity Index...
</TABLE>
The Private Account Composite includes all discretionary accounts managed by the
Subadviser and its affiliates invested solely in global equity securities using
the same investment strategy that the Subadviser will employ on behalf of the
Fund. The inception date for the Private Account Composite was October 1, 1980.
Prior to January 1, 1993, when the Association for Investment Management and
Research (AIMR) performance presentation requirements went into effect, the
Subadviser's composites may not have included all discretionary accounts.
MANAGEMENT OF THE TRUST
TRUSTEES AND OFFICERS
The business and affairs of the Trust are managed under the direction of its
Board of Trustees.
The Board of Trustees sets and reviews policies regarding the operation of the
Trust, whereas the officers perform the daily functions of the Trust.
INVESTMENT MANAGEMENT OF THE FUND
THE ADVISER - Under the terms of the Investment Advisory Agreement, Nationwide
Advisory Services, Inc., Three Nationwide Plaza, Columbus, Ohio 43215, oversees
the investment of the assets for the Fund and supervises the daily business
affairs of the Fund. Subject to the supervision and direction of the Trustees,
the Adviser also evaluates and monitors the performance of the Subadviser. The
Adviser is also authorized to select and place portfolio investments on behalf
of the Fund; however, the Adviser does not intend to do so at this time.
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<PAGE> 80
The Adviser and the Trust have applied to the Securities and Exchange Commission
for an exemptive order which, if granted, will allow the Adviser to appoint,
replace or terminate subadvisers without the approval of shareholders; the order
would also allow the Adviser to revise a subadvisory agreement without
shareholder approval. Any change in subadvisers will be communicated to
shareholders within 60 days of such changes and all changes will be approved by
the Trust's Board of Trustees, including a majority of the Trustees who are not
interested persons of the Trust or the Adviser. The order, if granted, is
intended to facilitate the efficient operation of the Fund and afford the Trust
increased management flexibility. Prior to receiving the exemptive order, the
Adviser will not appoint, replace or terminate any subadvisers or materially
amend any subadvisory agreement without obtaining the approval of shareholders.
The Adviser provides to the Fund investment management evaluation services
principally by performing initial due diligence on prospective subadvisers for
the Fund and thereafter monitoring the performance of the subadviser through
quantitative and qualitative analysis as well as through periodic in-person,
telephonic and written consultations with the subadviser. The Adviser has
responsibility for communicating performance expectations and evaluations to the
subadviser and ultimately recommending to the Trust's Board of Trustees whether
the subadviser's contract should be renewed, modified or terminated; however,
the Adviser does not expect to recommend frequent changes of subadvisers. The
Adviser will regularly provide written reports to the Board of Trustees
regarding the results of its evaluation and monitoring functions. Although the
Adviser will monitor the performance of the subadviser, there is no certainty
that the subadviser or the Fund will obtain favorable results at any given time.
The Adviser, an Ohio corporation, is a wholly owned subsidiary of Nationwide
Life Insurance Company, which is owned by Nationwide Financial Services, Inc.
(NFS). NFS, a holding company, has two classes of common stock outstanding with
different voting rights enabling Nationwide Corporation (the holder of all the
outstanding Class B Common Stock) to control NFS. Nationwide Corporation is also
a holding company in the Nationwide Insurance Enterprise. All of the common
stock of Nationwide Corporation is held by Nationwide Mutual Insurance Company
(95.3%) and Nationwide Mutual Fire Insurance Company (4.7%), each of which is a
mutual company owned by its policyholders. The Fund pays to the Adviser a fee at
the annual rate of 1.05% of the Fund's average daily net assets.
THE SUBADVISER - Subject to the supervision of the Adviser and the Trustees, the
Subadviser manages the Fund's assets in accordance with the Fund's investment
objectives and policies. The Subadviser shall make investment decisions for the
Fund, and in connection with such investment decisions shall place purchase and
sell orders for securities. For the investment management services it provides
to the Fund, the Subadviser receives an annual fee from the Adviser in an amount
equal to 0.60% of the first $50 million of the Fund's average daily net assets
and 0.55% of average daily net assets in excess of $50 million. Below is a brief
description of the Subadviser.
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<PAGE> 81
The Subadviser, with its principal offices at 522 Fifth Avenue, New York, New
York 10036, is a wholly owned subsidiary of J.P. Morgan & Co. Incorporated, a
bank holding company organized under the laws of Delaware. The Subadviser offers
a wide range of investment management services and acts as investment adviser to
corporate and institutional clients. The Subadviser uses a sophisticated,
disciplined, collaborative process for managing all asset classes. As of March
31, 1997, the Subadviser had assets under management of approximately $184
billion, including approximately $7.4 billion in global equity portfolios.
Paul Quinsee and Ella Brown are primarily responsible for the day-to-day
management of the Fund's portfolio. Paul Quinsee, Vice President, joined the
Subadviser in 1992 as an international equity portfolio manager. Previously, he
worked for five years as an equity portfolio manager with Citibank and for two
years with Schroder Capital Management in London. Mr. Quinsee is an Associate of
the Society of Investment Analysts. Ella Brown, Vice President, is an
international equity portfolio manager. She joined the Subadviser's Research
Group as an analyst in July 1993, following six years as an analyst for the
Toronto-based brokerage firm Richardson Greenshields of Canada. Ms. Brown is a
Chartered Financial Analyst.
OTHER SERVICES
Under the terms of a Fund Administration Agreement, the Adviser also provides
various administrative and accounting services, including daily valuation of the
Fund's shares and preparation of financial statements, tax returns, and
regulatory reports. For these services, the Fund pays the Adviser an annual fee
in the amount of 0.07% of the Fund's first $250 million of average daily net
assets, 0.05% on the next $750 million and 0.04% on assets of more than $1
billion.
The Transfer and Dividend Disbursing Agent, Nationwide Investors Services, Inc.,
("NIS"), Three Nationwide Plaza, Columbus, Ohio 43216, serves as transfer agent
and dividend disbursing agent for the Trust. The Fund pays to NIS a fee for such
services at the annual rate of 0.01% of the Fund's average daily net assets. NIS
is a wholly owned subsidiary of the Adviser.
INVESTMENT IN FUND SHARES
An insurance company may purchase shares of the Fund using purchase payments
received on Contracts issued by Accounts. These Accounts are funded by shares of
the Fund. Funds of Funds may also purchase shares of the Fund for their
portfolios. There is no sales charge, and all shares are sold at net asset
value.
Shares of the Fund are currently sold only to separate accounts of Nationwide
Life Insurance Company and its wholly owned subsidiary Nationwide Life and
Annuity Insurance Company to fund the benefits under the Contract and to
affiliated Fund of Funds. The address for each of these entities is One
Nationwide Plaza, Columbus, Ohio 43215.
16
<PAGE> 82
All investments in the Fund are credited to the shareholder's account in the
form of full and fractional shares of the Fund (rounded to the nearest 1/1000 of
a share). The Trust does not issue share certificates. Initial and subsequent
purchase payments allocated to the Fund are subject to the limits applicable to
the Contracts.
SHARE REDEMPTION
Redemptions are processed on any day on which the Trust is open for business and
are effected at net asset value next determined after the redemption order, in
proper form, is received by the Trust's transfer agent, NIS.
The net asset value per share of the Fund is determined once daily, as of the
close of regular trading on the New York Stock Exchange (generally 4:00 P.M.
Eastern Time), on each business day the New York Stock Exchange is open for
regular trading and on such other days as the Board determines and on any other
day during which there is a sufficient degree of trading in the Fund's portfolio
securities that the net asset value of the Fund is materially affected by
changes in the value of portfolio securities. The Trust will not compute net
asset value on customary national business holidays, including the following:
Christmas, New Year's Day, Martin Luther King's Birthday, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, and Thanksgiving Day. The net
asset value per share is calculated by adding the value of all securities and
other assets of the Fund, deducting its liabilities, and dividing by the number
of shares outstanding.
In determining net asset value, portfolio securities listed on national
exchanges are valued at the last sales price on the principal exchange; if the
securities are traded only in the over-the-counter market, they are valued at
the quoted bid prices. Other portfolio securities are valued at the quoted
prices obtained from an independent pricing organization which employs a
combination of methods, including among others, the obtaining and comparison of
market valuations from dealers who make markets and deal in such securities and
the comparison of valuations with those of other comparable securities in a
matrix of such securities. The pricing service activities and results are
reviewed by an officer of the Trust. Securities for which market quotations are
not readily available are valued at fair value in accordance with procedures
adopted by the Board of Trustees. Expenses and fees are accrued daily.
The Trust may suspend the right of redemption only under the following unusual
circumstances:
- - when the New York Stock Exchange is closed (other than weekends and
holidays) or trading is restricted;
- - when an emergency exists, making disposal of portfolio securities or the
valuation of net assets not reasonably practicable; or
17
<PAGE> 83
- - during any period when the Securities and Exchange Commission has by order
permitted a suspension of redemption for the protection of shareholders.
NET INCOME AND DISTRIBUTIONS
Substantially all of the net investment income, if any, of the Fund will be
declared and paid as dividends quarterly. Net realized gains of the Fund, if
any, will be distributed at least annually.
ADDITIONAL INFORMATION
DESCRIPTION OF SHARES - The Declaration of Trust permits the Trustees to issue
an unlimited number of full and fractional shares of beneficial interest of the
Fund and to divide or combine such shares into a greater or lesser number of
shares without thereby changing the proportionate beneficial interests in the
Trust. Each share of the Fund represents an equal proportionate interest in the
Fund with each other share. The Trust reserves the right to create and issue
shares of a number of different funds. In that case, the shares of each fund
would participate equally in the earnings, dividends, and assets of the
particular fund, but shares of all funds would vote together in the election of
Trustees. Upon liquidation of a fund, its shareholders are entitled to share pro
rata in the net assets of such fund available for distribution to shareholders.
VOTING RIGHTS - Shareholders are entitled to one vote for each share held.
Shareholders may vote in the election or removal of Trustees and on other
matters submitted to meetings of shareholders. No amendment may be made to the
Declaration of Trust without the affirmative vote of a majority of the
outstanding shares of the Trust. The sole shareholder of the Fund initially will
be Nationwide Life Insurance Company. The Trustees may, however, amend the
Declaration of Trust without the vote or consent of shareholders to:
- - designate series of the Trust;
- - change the name of the Trust; or
- - supply any omission, cure, correct, or supplement any ambiguous, defective,
or inconsistent provision to conform the Declaration of Trust to the
requirements of applicable federal and state laws or regulations if they
deem it necessary.
Shares have no pre-emptive or conversion rights. Shares are fully paid and
nonassessable. In regard to termination, sale of assets, or changes of
investment restrictions, the right to vote is limited to the holders of shares
of the particular fund affected by the proposal. When a majority is required, it
means the lesser of 67% or more of the shares present at a meeting when the
holders of more than 50% of the outstanding shares are present or represented by
proxy, or more than 50% of the outstanding shares.
SHAREHOLDER INQUIRIES - All inquiries regarding the Fund should be directed to
the Trust at the telephone number or address shown on the cover page of this
Prospectus.
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<PAGE> 84
PERFORMANCE ADVERTISING FOR THE FUND
The Fund may use historical performance in advertisements, sales literature, and
the prospectus. Such figures will include quotations of average annual total
return for the most recent one, five, and ten year periods (or the life of the
Fund if less). Average annual total return represents the rate required each
year for an initial investment to equal the redeemable value at the end of the
specific period. Average annual total return reflects reinvestment of all
distributions.
TAX STATUS
The Trust's policy is to cause each fund to qualify as a regulated investment
company and to meet the requirements of Subchapter M of the Internal Revenue
Code (the "Code"). The Fund intends to distribute all its taxable net investment
income and capital gains to shareholders and therefore will not be required to
pay any federal income taxes.
Because each fund of the Trust is treated as a separate entity for purposes of
the regulated investment company provisions of the Code, the assets, income, and
distributions of the Fund are considered separately for purposes of determining
whether or not the Fund qualifies as a regulated investment company. The Fund
intends to comply with the diversification requirements currently imposed by the
Internal Revenue Service on separate accounts of insurance companies as a
condition of maintaining the tax-deferred status of the Contracts. See the
Statement of Additional Information for more specific information.
The tax treatment of payments made by an Account to a Contractholder is
described in the separate account prospectus.
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<PAGE> 85
CONTENTS
Sale of Fund Shares
Investment Objective and Policies
Investment Techniques, Considerations and Risk Factors
Management of the Trust
Investment in Fund Shares
Share Redemption
Net Income and Distributions
Additional Information
Performance Advertising for the Fund
Tax Status
INVESTMENT ADVISER AND ADMINISTRATOR
Nationwide Advisory Services, Inc.
Three Nationwide Plaza
Columbus, Ohio 43215
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Nationwide Investors Services, Inc.
Box 1492
Three Nationwide Plaza
Columbus, Ohio 43216
AUDITORS
KPMG Peat Marwick LLP
Two Nationwide Plaza
Columbus, Ohio 43215
LEGAL COUNSEL
Druen, Dietrich, Koogler & Reynolds
One Nationwide Plaza
Columbus, Ohio 43215
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<PAGE> 86
PROSPECTUS
OCTOBER _____, 1997
SHARES OF BENEFICIAL INTEREST OF
NATIONWIDE BALANCED FUND
ONE SERIES OF
NATIONWIDE SEPARATE ACCOUNT TRUST
THREE NATIONWIDE PLAZA
COLUMBUS, OHIO 43215
FOR INFORMATION AND ASSISTANCE,
CALL (614) 249-5134
Nationwide Balanced Fund (the "Fund") is a diversified portfolio of the
Nationwide Separate Account Trust (the "Trust"). The Trust is an open-end
management investment company organized under the laws of Massachusetts, by a
Declaration of Trust, dated June 30, 1981, as subsequently amended. The Trust
offers shares in 15 separate mutual funds, each with its own investment
objective. This Prospectus relates only to Nationwide Balanced Fund. The shares
of the Fund are sold to other open-end investment companies created by
Nationwide Advisory Services, Inc., the Fund's investment adviser, as well as to
life insurance company separate accounts to fund the benefits of variable life
insurance policies and annuity contracts.
The Fund seeks to obtain above-average income (compared to a portfolio entirely
invested in equity securities). As a secondary objective, the Fund seeks to take
advantage of opportunities for growth of capital and income. The Fund seeks to
achieve its objectives primarily through investments in a broad variety of
securities, including equity securities, fixed-income securities and short-term
obligations.
This Prospectus provides you with the basic information you should know before
investing in the Fund. You should read it and keep it for future reference. A
Statement of Additional Information dated October ___, 1997, has been filed with
the Securities and Exchange Commission. You can obtain a copy without charge by
calling (614) 249-5134, or writing Nationwide Life Insurance Company, One
Nationwide Plaza, Columbus, Ohio 43215.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
THE STATEMENT OF ADDITIONAL INFORMATION FOR THE TRUST, DATED OCTOBER ___, 1997,
IS INCORPORATED HEREIN BY REFERENCE.
<PAGE> 87
SALE OF FUND SHARES
Shares of the Fund may be sold to life insurance company separate accounts (the
"Accounts") to fund the benefits of variable life insurance policies or annuity
contracts ("Contracts") issued by life insurance companies, as well as to other
open-end investment companies (each, a "Fund of Funds") created by Nationwide
Advisory Services, Inc. (the "Adviser"), the Fund's investment adviser. The
Accounts purchase shares of the Fund in accordance with variable account
allocation instructions received from owners of the Contracts. The Fund then
uses the proceeds to buy securities for its portfolio. The Adviser, together
with a subadviser, manages the portfolio from day to day to accomplish the
Fund's investment objectives. The types of investments and the way they are
managed depend on what is happening in the economy and the financial
marketplaces. Each Fund of Funds and Account, as a shareholder, has an ownership
interest in the Fund's investments. The Fund also offers to buy back (redeem)
its shares from the Fund of Funds or the Accounts at any time at net asset
value.
SUMMARY OF EXPENSES
Shareholder Transaction Expenses None
Estimated Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees 0.75%
12b-1 Fees None
Other Expenses 0.15%
----
Estimated Total Fund Operating Expenses(1) 0.90%
====
This summary is provided to assist investors in understanding the various costs
and expenses that an investor in the Fund will bear directly or indirectly. The
amount of "Other Expenses" is based on estimated amounts for the fiscal year
ending December 31, 1997.
Example:
1 year 3 years
------ -------
You would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and
(2) redemption at the end of each time period $9 $29
- --------
1 The Adviser has agreed with the Trust to waive management fees or to
reimburse expenses incurred by the Fund to the extent necessary to
limit the total expense ratio of the Fund to a maximum of 0.90% of the
Fund's average net assets.
2
<PAGE> 88
THE EXAMPLE SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESSER THAN THOSE SHOWN.
For more information on Fund expenses, see "MANAGEMENT OF THE TRUST" below.
FINANCIAL HIGHLIGHTS
Financial highlights are not available for the Fund, because the Fund has not
yet commenced operations.
INVESTMENT OBJECTIVES AND POLICIES
The primary investment objective of the Fund is to obtain above average income
(compared to a portfolio entirely invested in equity securities). The Fund's
secondary objective is to take advantage of opportunities for growth of capital
and income. The policy of the Fund is to invest in a broad variety of
securities, including equity securities, fixed-income securities and short-term
obligations. The Fund may vary the percentage of assets invested in any one type
of security in accordance with the Fund's subadviser's view of existing and
anticipated economic and market conditions, fiscal and monetary policy and
underlying security values. Under normal market conditions, it is anticipated
that at least 40% of the Fund's total assets will be invested in equity
securities and that at least 25% of the Fund's total assets will be invested in
fixed income senior securities.
Equity securities include common and preferred stock (including convertible
preferred stock), bonds, notes and debentures convertible into common or
preferred stock, stock purchase warrants and rights, equity interests in trusts,
partnerships, joint ventures or similar enterprises and American, Global or
other types of Depositary Receipts. Most of the equity securities purchased by
the Fund are expected to be traded on a stock exchange or in an over-the-counter
market although the Fund may purchase securities for which there is a limited
trading market or which are subject to restriction on resale to the public.
The Fund's subadviser will have discretion to invest in the full range of
maturities of fixed-income securities. Generally, most of the Fund's long-term
debt investments will consist of "investment grade" securities; that is,
securities rated Baa or better by Moody's Investor Services, Inc. ("Moody's") or
BBB or better by Standard & Poor's Corporation ("S&P") or unrated securities
determined by the subadviser to be of comparable quality to securities so rated.
While debt securities carrying the fourth highest quality rating ("Baa" by
Moody's or "BBB" by S&P) are considered investment grade and are viewed to have
adequate capacity for payment of principal and interest, investments in such
securities involve a higher degree of risk than the risk associated with debt
securities in the higher rating categories, and such debt securities lack
outstanding investment characteristics and in fact have speculative
characteristics as well. See the Appendix to the Statement of Additional
Information for a description of these ratings.
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<PAGE> 89
Up to 20% of the Fund's net assets may be invested in nonconvertible fixed
income securities that are rated Ba or lower by Moody's or BB or lower by S&P or
that are determined by the subadviser to be of comparable quality. These
securities are commonly known as "junk bonds." There is no limit on the amount
of the Fund's assets that can be invested in convertible securities rated below
investment grade. For additional information on these lower rated, high yield
debt securities, which involve a high degree of risk, see "INVESTMENT
TECHNIQUES, CONSIDERATIONS AND RISK FACTORS -- High Yield Securities" below.
In addition to corporate debt securities, the Fund may invest in securities
issued or guaranteed by the U.S. Government or its agencies and
instrumentalities, mortgage-backed securities, including collateralized mortgage
obligations, zero coupon bonds, deferred interest bonds, and bonds on which the
interest is payable in kind ("PIK bonds"). Deferred interest bonds are debt
obligations which are issued or purchased at a significant discount from face
value and provide for a period of delay before the regular payment of interest
begins. The characteristics and related risks of these bonds are similar to
those of zero coupon bonds. For additional information on zero coupon bonds, PIK
bonds and Deferred Interest Bonds, see "INVESTMENT TECHNIQUES, CONSIDERATIONS
AND RISK FACTORS -- Zero Coupon Securities, PIK Bonds and Deferred Payment
Securities."
The Fund may invest up to 20% (and generally expects to invest between 10% and
20%) of its total assets in foreign securities (including American Depositary
Receipts ("ADRs")). The Fund may also invest a portion of its assets in Loan
Participations and Assignments (as described more fully below under "INVESTMENT
TECHNIQUES, CONSIDERATIONS, AND RISK FACTORS -- Loan Participations and
Assignments"), may enter into repurchase agreements and reverse repurchase
agreements, may purchase securities on a firm commitment basis, including
when-issued securities, and may lend portfolio securities.
At various times the Fund may invest in derivative instruments for hedging or
risk management purposes or for any other permissible purpose. See "INVESTMENT
TECHNIQUES, CONSIDERATIONS AND RISK FACTORS - Derivative Instruments" below.
With the exception of currency transactions, however, it is not presently
anticipated that any of these strategies will be used to a significant degree by
the Fund. The Fund's ability to pursue certain of these strategies may be
limited by applicable regulations of the Securities and Exchange Commission, the
Commodities Futures Trading Commission and the federal income tax requirements
applicable to regulated investment companies.
In addition, for temporary or emergency purposes as determined by the Fund's
subadviser, the Fund can invest up to 100% of its total assets in short-term
money market obligations.
For a further discussion of the types of securities in which the Fund may invest
and related investment techniques, see "INVESTMENT TECHNIQUES, CONSIDERATIONS
AND RISK FACTORS" below.
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<PAGE> 90
While there is careful selection of the securities in which the Fund may invest
and constant supervision of the Fund's portfolio by a group of professional
investment managers, there can be no guarantee that the Fund's investment
objectives will be achieved. The investment objectives of the Fund are not
fundamental and may be changed by the Board of Trustees of the Trust without
shareholder approval.
MANAGEMENT OF THE FUND
The Adviser provides investment management evaluation services to the Fund in
initially selecting and monitoring on an ongoing basis the performance of a
subadviser to manage the Fund's portfolio. The Adviser has selected Salomon
Brothers Asset Management, Inc. to be the subadviser (the "Subadviser") of the
Fund. See "MANAGEMENT OF THE TRUST -- Investment Management of the Fund" below
for further information.
INVESTMENT TECHNIQUES, CONSIDERATIONS AND RISK FACTORS
An investment in the Fund involves certain risks. As a general matter, an
investment in the Fund involves the risk that the net asset value of the Fund's
shares will fluctuate in response to changes in economic conditions, interest
rates, and the market's perception of the securities held by the Fund. In
addition, because the Fund invests in common stocks and bonds, an investment in
the Fund is subject to stock market risk, i.e., the risk that stock prices in
general will decline over short or extended periods of time, and bond market
risk, i.e., the risk that the market price of bonds in general will fluctuate.
Bond prices fluctuate largely in response to changes in the level of interest
rates. When interest rates rise, bond prices generally fall; conversely, when
interest rates fall, bond prices generally rise. Although the fluctuation in the
price of bonds is normally less than that of common stocks, in the recent past
there have been extended periods of cyclical increases in interest rates,
causing significant declines in the price of bonds in general. However, because
current income always increases total return, the current income generated by
the Fund will offset to some degree any adverse price fluctuations of the
securities held by the Fund. As a result, the return volatility of the Fund
should be lower than the return volatility of a fund that does not receive
current income. An investment in the Fund is subject to other risks as well,
depending upon the particular investment techniques employed by the Fund and the
types of securities in which the Fund invests.
FOREIGN SECURITIES AND CURRENCIES - The Fund may invest up to 20% of its total
assets in foreign securities, either directly or indirectly through the use of
depositary receipts. Depositary receipts, including ADRs, European Depository
Receipts and American Depository Shares, are generally issued by banks or trust
companies and evidence ownership of underlying foreign securities. The Fund may
also invest in securities of foreign investment funds or trusts (including
passive foreign investment companies).
Foreign investments involve special risks, including the possibility of
expropriation, confiscatory taxation, and withholding taxes on dividends and
interest; less extensive regulation of foreign brokers, securities markets, and
issuers; political, economic or social instability; less publicly
5
<PAGE> 91
available information; and different accounting standards. When investing in
foreign securities, the Fund may also incur costs in conversions between
currencies, possible delays in settlement in foreign securities markets,
limitations on the use or transfer of assets (including suspension of the
ability to transfer currency from a given country), and difficulty in enforcing
obligations in other countries.
Foreign economies may differ favorably or unfavorably from the U.S. economy in
various respects, including growth of gross domestic product, rates of
inflation, currency depreciation, capital reinvestment, resource
self-sufficiency, and balance of payments positions. Many foreign securities are
less liquid and their prices more volatile than comparable U.S. securities.
Although the Fund generally invests only in securities that are regularly traded
on recognized exchanges or OTC, from time to time, foreign securities may be
difficult to liquidate rapidly without adverse price effects. Certain costs
attributable to foreign investing, such as custody charges and brokerage costs,
are higher than those attributable to domestic investing.
The Fund may invest a portion of its assets in securities of issuers in
developing or emerging markets and economies. Investing in securities of issuers
in developing or emerging markets involves special risks, including less social,
political, and economic stability; smaller securities markets and lower trading
volume, which may result in a lack of liquidity and greater price volatility;
certain national policies that may restrict the Fund's investment opportunities,
including restrictions on investments in issuers or industries deemed sensitive
to national interests, or expropriation or confiscation of assets or property,
which could result in the Fund's loss of its entire investment in that market;
and less developed legal structures governing private or foreign investment or
allowing for judicial redress for injury to private property.
In addition, brokerage commissions, custodial services, withholding taxes, and
other costs relating to investment in emerging markets generally are more
expensive than in the U.S. and certain more established foreign markets.
Economies in emerging markets generally are heavily dependent upon international
trade and, accordingly, have been and may continue to be affected adversely by
trade barriers, exchange controls, managed adjustments in relative currency
values, and other protectionist measures negotiated or imposed by the countries
with which they trade.
Because most foreign securities are denominated in non-U.S. currencies, the
investment performance of the Fund could be significantly affected by changes in
foreign currency exchange rates. The value of the Fund's assets denominated in
foreign currencies will increase or decrease in response to fluctuations in the
value of those foreign currencies relative to the U.S. dollar. Currency exchange
rates can be volatile at times in response to supply and demand in the currency
exchange markets, international balances of payments, governmental intervention,
speculation, and other political and economic conditions.
The Fund may purchase and sell foreign currency on a spot basis and may engage
in forward currency contracts, currency options, and futures transactions for
hedging or risk management purposes. See "Derivative Instruments" below.
6
<PAGE> 92
WARRANTS - A warrant is an instrument which gives the holder the right, but not
the obligation, to subscribe to a specified amount of the issuer's securities at
a set price for a specified period of time or on a specified date. Warrants do
not carry the right to dividends or voting rights with respect to their
underlying securities and do not represent any rights in assets of the issuer.
An investment in warrants may be considered speculative. In addition, the value
of a warrant does not necessarily change with the value of the underlying
securities, and a warrant ceases to have value if it is not exercised prior to
its expiration date.
CONVERTIBLE SECURITIES - The Fund may invest in convertible securities, which
are bonds, debentures, notes, preferred stocks or other securities that may be
converted into or exchanged for a specified amount of common stock of the same
or a different issuer within a particular period of time at a specified price or
formula. Convertible securities have general characteristics similar to both
debt obligations and equity securities. Although to a lesser extent than with
debt obligations generally, the market value of convertible securities tends to
decline as interest rates increase and, conversely, tends to increase as
interest rates decline. In addition, because of the conversion feature, the
market value of convertible securities tends to vary with fluctuations in the
market value of the underlying common stock and therefore will react to
variations in the general market for equity securities. A unique feature of
convertible securities is that as the market price of the underlying common
stock declines, convertible securities tend to trade increasingly on a yield
basis and so may not experience market value declines to the same extent as the
underlying common stock. When the market price of the underlying common stock
increases, the prices of the convertible securities tend to rise as a reflection
of the value of the underlying common stock. While no securities investments are
without risk, investments in convertible securities generally entail less risk
than investments in common stock of the same issuer.
As debt obligations, convertible securities are investments that provide for a
stable stream of income with generally higher yields than common stocks. Of
course, like all debt obligations, there can be no assurance of current income
because the issuers of the convertible securities may default on their
obligations. Convertible securities, however, generally offer lower interest or
dividend yields than non-convertible securities of similar quality because of
the potential for capital appreciation. A convertible security, in addition to
providing fixed income, offers the potential for capital appreciation through
the conversion feature, which enables the holder to benefit from increases in
the market price of the underlying common stock. There can be no assurance of
capital appreciation, however, because the market value of securities will
fluctuate.
Convertible securities generally are subordinated to other similar but
non-convertible securities of the same issuer, although convertible bonds, as
corporate debt obligations, enjoy seniority in right of payment to all equity
securities, and convertible preferred stock is senior to common stock of the
same issuer. Because of the subordination feature, however, convertible
securities typically are rated below investment grade or are not rated.
7
<PAGE> 93
MONEY MARKET OBLIGATIONS - As described above, debt obligations in which the
Fund may invest generally will be medium and lower grade debt obligations,
although the Fund may invest its assets in high-quality short-term money market
obligations.
Money market obligations in which the Fund may invest include: 1) U.S.
government securities (as described below); 2) commercial paper rated in one of
the two highest ratings categories of any nationally recognized statistical
rating organization ("NRSRO") (e.g., Moody's or S&P); 3) short-term bank
obligations that are rated in one of the two highest categories by any NRSRO,
with respect to obligations maturing in one year or less; 4) repurchase
agreements relating to debt obligations which the Fund could purchase directly;
5) unrated debt obligations which are determined by the Adviser or the
Subadviser to be of comparable quality; or 6) money market mutual funds.
MEDIUM QUALITY OBLIGATIONS - Medium-quality obligations are obligations rated in
the fourth highest rating category by any NRSRO. Medium-quality securities,
although considered investment-grade, may have some speculative characteristics
and may be subject to greater fluctuations in value than higher-rated
securities. In addition, the issuers of medium quality securities may be more
vulnerable to adverse economic conditions or changing circumstances than that of
higher-rated issuers.
All ratings are determined at the time of investment. Any subsequent rating
downgrade of a debt obligation will be monitored by the Adviser or the
Subadviser to consider what action, if any, the Fund should take consistent with
its investment objective; such event will not automatically require the sale of
the downgraded securities.
HIGH YIELD SECURITIES - The Fund may invest without limitation in domestic and
foreign "high yield" convertible securities (commonly known as "junk bonds"),
and may invest up to 20% of its net assets in non-convertible securities of this
type.
Medium and lower rated securities will usually have higher yields than higher
rated securities. However, there is more risk associated with these investments.
This is because of reduced creditworthiness and increased risk of default. Under
rating agency guidelines, medium and lower rated securities and comparable
unrated securities will likely have some quality and protective characteristics
that are outweighed by large uncertainties or major risk exposures to adverse
conditions. Medium and lower rated securities are considered to have extremely
poor prospects of ever attaining any real investment standing, to have a current
identifiable vulnerability to default or to be in default, to be unlikely to
have the capacity to make required interest and principal payments in the event
of adverse business, financial or economic conditions, or to be behind in making
principal and interest payments. Such securities are considered speculative with
respect to the issuer's capacity to make required interest and principal
payments. The foregoing factors may, under certain circumstances, reduce the
value of securities held by the Fund and thus affect the value of the Fund's
shares.
8
<PAGE> 94
Changes by recognized rating services in their ratings of any fixed-income
security and in the ability of an issuer to make payments of interest and
principal may also affect the value of these investments. The ratings of Moody's
and S&P generally represent the opinions of those organizations as to the
quality of the securities that they rate. Such ratings, however, are relative
and subjective, are not absolute standards of quality, are subject to change and
do not evaluate the market risk or liquidity of the securities. Ratings of a
non-U.S. debt instrument, to the extent that those ratings are undertaken, are
related to evaluations of the country in which the issuer of the instrument is
located. Ratings generally take into account the currency in which a non-U.S.
debt instrument is denominated. Instruments issued by a foreign government in
other than the local currency, for example, typically have a lower rating than
local currency instruments due to the existence of an additional risk that the
government will be unable to obtain the required foreign currency to service its
foreign currency-denominated debt. In general, the ratings of debt securities or
obligations issued by a non-U.S. public or private entity will not be higher
than the rating of the currency or the foreign currency debt of the central
government of the country in which the issuer is located, regardless of the
intrinsic creditworthiness of the issuer.
The secondary markets for high yield securities are not as liquid as the
secondary markets for higher rated securities. The secondary markets for high
yield securities are concentrated in relatively few market makers and
participants in the market are mostly institutional investors, including
insurance companies, banks, other financial institutions and mutual funds. In
addition, the trading volume for high yield securities is generally lower than
that for higher-rated securities and the secondary markets could contract under
adverse market or economic conditions independent of any specific adverse
changes in the condition of a particular issuer. These factors may have an
adverse effect on the ability of the Fund to dispose of particular portfolio
investments, may adversely affect the Fund's net asset value per share and may
limit the ability of the Fund to obtain accurate market quotations for purposes
of valuing securities and calculating net asset value. If the Fund is not able
to obtain precise or accurate market quotations for a particular security, it
will become more difficult to value the Fund's portfolio securities, and a
greater degree of judgment may be necessary in making such valuations. Less
liquid secondary markets may also affect the ability of the Fund to sell
securities at their fair value. If the secondary markets for high yield
securities contract due to adverse economic conditions or for other reasons,
certain liquid securities in the Fund's portfolio may become illiquid and the
proportion of the Fund's assets invested in illiquid securities may
significantly increase.
Prices for high yield securities may be affected by legislative and regulatory
developments. These laws could adversely affect the Fund's net asset value and
investment practices, the secondary market for high yield securities, the
financial condition of issuers of these securities and the value of outstanding
high yield securities. For example, federal legislation requiring the
divestiture by federally insured savings and loan associations of their
investments in high yield bonds and limiting the deductibility of interest by
certain corporate issuers of high yield bonds adversely affected the market in
recent years.
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While the market values of securities rated below investment grade and
comparable unrated securities tend to react less to fluctuations in interest
rate levels than do the market values of higher-rated securities, the market
values of certain of these securities also tend to be more sensitive to
individual corporate developments and changes in economic conditions than are
the market values of higher-rated securities. In addition, such securities
present a higher degree of credit risk. Issuers of these securities are often
highly leveraged and may not have more traditional methods of financing
available to them, so that their ability to service their debt obligations
during an economic downturn or during sustained periods of rising interest rates
may be impaired. The risk of loss due to default by such issuers is
significantly greater than the risk of loss on investment grade securities,
because such securities generally are unsecured and frequently are subordinated
to the prior payment of senior indebtedness. The Fund also may incur additional
expenses to the extent that it is required to seek recovery upon a default in
the payment of principal or interest on its portfolio holdings.
The development of a market for high yield non-U.S. corporate securities has
been a relatively recent phenomenon. In contrast, the market for high yield U.S.
corporate debt securities is more established than the market for high yield
non-U.S. corporate securities, although it has undergone significant changes in
the past and may undergo significant changes in the future.
High yield non-U.S. and U.S. corporate securities in which the Fund may invest
include bonds, debentures, notes, commercial paper and preferred stock and will
generally be unsecured. Most of the debt securities will bear interest at fixed
rates. However, the Fund may also invest in corporate debt securities with
variable rates of interest or which involve equity features, such as contingent
interest or participations based on revenues, sales or profits (i.e., interest
or other payments, often in addition to a fixed rate of return, that are based
on the borrower's attainment of specified levels of revenues, sales or profits
and thus enable the holder of the security to share in the potential success of
the venture).
Investing in fixed and floating rate high yield foreign sovereign debt
securities will expose the Fund to the direct or indirect consequences of
political, social or economic changes in the countries that issue the
securities. The ability and willingness of sovereign obligors in developing and
emerging market countries or the governmental authorities that control repayment
of their external debt to pay principal and interest on such debts when due may
depend on general economic and political conditions within the relevant country.
Countries such as those in which the Fund may invest have historically
experienced, and may continue to experience, high rates of inflation, high
interest rates, exchange rate trade difficulties and extreme poverty and
unemployment. Many of these countries are also characterized by political
uncertainty or instability. Additional factors which may influence the ability
or willingness to service debt include, but are not limited to, a country's cash
flow situation, the availability of sufficient foreign exchange on the date a
payment is due, the relative size of its debt service burden to the economy as a
whole, and its government's policy towards the International Monetary Fund, the
World Bank and other international agencies.
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The ability of a foreign sovereign obligor to make timely payments on its
external debt obligations will also be strongly influenced by the obligor's
balance of payments, including export performance, its access to international
credits and investments, fluctuations in interest rates and the extent of its
foreign reserves. A country whose exports are concentrated in a few commodities
or whose economy depends on certain strategic imports could be vulnerable to
fluctuations in international prices of these commodities or imports. To the
extent that a country receives payment for its exports in currencies other than
U.S. dollars, its ability to make debt payments denominated in U.S. dollars
could be adversely affected. If a foreign sovereign obligor cannot generate
sufficient earnings from foreign trade to service its external debt, it may need
to depend on continuing loans and aid from foreign governments, commercial banks
and multilateral organizations, and inflows of foreign investment. The
commitment on the part of these foreign governments, multilateral organizations
and others to make such disbursements may be conditioned on the government's
implementation of economic reforms and/or economic performance and the timely
service of its obligations. Failure to implement such reforms, achieve such
levels of economic performance or repay principal or interest when due may
result in the cancellation of such third parties' commitments to lend funds,
which may further impair the obligor's ability or willingness to timely service
its debts. The cost of servicing external debt will also generally be adversely
affected by rising international interest rates, because many external debt
obligations bear interest at rates which are adjusted based upon international
interest rates. The ability to service external debt will also depend on the
level of the relevant government's international currency reserves and its
access to foreign exchange. Currency devaluations may affect the ability of a
sovereign obligor to obtain sufficient foreign exchange to service its external
debt.
As a result of the foregoing, a governmental obligor may default on its
obligations. If such an event occurs, the Fund may have limited legal recourse
against the issuer and/or guarantor. Remedies must, in come cases, be pursued in
the courts of the defaulting party itself, and the ability of the holder of
foreign sovereign debt securities to obtain recourse may be subject to the
political climate in the relevant country. In addition, no assurance can be
given that the holders of commercial bank debt will not contest payments to the
holders of other foreign debt obligations in the event of default under their
commercial bank loan agreements.
Certain debt obligations, customarily referred to as "Brady Bonds," are created
through the exchange of existing commercial bank loans to foreign entities for
new obligations in connection with debt restructuring under a plan introduced by
former U.S. Secretary of the Treasury, Nicholas F. Brady (the "Brady Plan").
Brady Bonds have been issued only recently, and, accordingly, do not have a long
payment history. They may be collateralized or uncollateralized and issued in
various currencies (although most are dollar-dominated) and they are actively
traded in the over-the-counter secondary market. Dollar-denominated,
collateralized Brady Bonds, which may be fixed rate par bonds or floating rate
discount bonds, are generally collateralized in full as to principal due at
maturity by U.S. Treasury zero coupon obligations which have the same maturity
as the Brady Bonds. Certain interest payments on these Brady Bonds may be
collateralized by cash or securities in an amount that, in the case of fixed
rate bonds, is typically equal to between 12 and 18 months of rolling interest
payments or, in the
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case of floating rate bonds, initially is typically equal to between 12 and 18
months rolling interest payments based on the applicable interest rate at the
time and is adjusted at regular intervals thereafter with the balance of
interest accruals in each case being uncollateralized. The Fund may purchase
Brady Bonds with no or limited collateralization, and will be relying for
payment of interest and (except in the case of principal collateralized Brady
Bonds) principal primarily on the willingness and ability of the foreign
government to make payment in accordance with the terms of the Brady Bonds. In
the event of a default with respect to collateralized Brady Bonds as a result of
which the payment obligations of the issuer are accelerated, the U.S. Treasury
zero coupon obligations held as collateral for the payment of principal will not
be distributed to investors, nor will such obligations be sold and the proceeds
distributed. The collateral will be held by the collateral agent to the
scheduled maturity of the defaulted Brady Bonds, which will continue to be
outstanding, at which time the face amount of the collateral will equal the
principal payments which would have then been due on the Brady Bonds in the
normal course. Based upon current market conditions, the Fund does not intend to
purchase Brady Bonds which, at the time of investment, are in default as to
payments. However, in light of the residual risk of the Brady Bonds and, among
other factors, the history of default with respect to commercial bank loans by
public and private entities of countries issuing Brady Bonds, investments in
Brady Bonds are to be viewed as speculative. A substantial portion of the Brady
Bonds and other sovereign debt securities in which the Fund invests are likely
to be acquired at a discount, which involves certain considerations discussed
below under "Tax Status."
Sovereign obligors in developing and emerging market countries are among the
world's largest debtors to commercial banks, other governments, international
financial organizations and other financial institutions. These obligors have in
the past experienced substantial difficulties in servicing their external debt
obligations, which led to defaults on certain obligations and the restructuring
of certain indebtedness. Restructuring arrangements have included, among other
things, reducing and rescheduling interest and principal payments by negotiating
new or amended credit agreements or converting outstanding principal and unpaid
interest to Brady Bonds, and obtaining new credit to finance interest payments.
Holders of certain foreign sovereign debt securities may be requested to
participate in the restructuring of such obligations and to extend further loans
to their issuers. There can be no assurance that the Brady Bonds and other
foreign sovereign debt securities in which the Fund may invest will not be
subject to similar restructuring arrangements or to requests for new credit
which may adversely affect the Fund's holdings. Furthermore, certain
participants in the secondary market for such debt may be directly involved in
negotiating the terms of these arrangements and may therefore have access to
information not available to other market participants.
U.S. GOVERNMENT SECURITIES - U.S. government securities are issued or guaranteed
by the U.S. government or its agencies or instrumentalities. Securities issued
by the U.S. government include U.S. Treasury obligations, such as Treasury
bills, notes, and bonds. Securities issued by government agencies or
instrumentalities include, but are not limited to, obligations of the following:
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- - the Federal Housing Administration, Farmers Home Administration, and the
Government National Mortgage Association ("GNMA"), including GNMA
pass-through certificates, whose securities are supported by the full faith
and credit of the United States;
- - the Federal Home Loan Banks, whose securities are supported by the right of
the agency to borrow from the U.S. Treasury;
- - the Federal National Mortgage Association, whose securities are supported
by the discretionary authority of the U.S. government to purchase certain
obligations of the agency or instrumentality; and
- - the Student Loan Marketing Association, Federal Home Loan Mortgage
Corporation ("FHLMC"), and the International Bank for Reconstruction and
Development, whose securities are supported only by the credit of such
agencies.
Although the U.S. government provides financial support to such U.S.
government-sponsored agencies or instrumentalities, no assurance can be given
that it will always do so. The U.S. government and its agencies and
instrumentalities do not guarantee the market value of their securities;
consequently, the value of such securities will fluctuate.
MORTGAGE-BACKED SECURITIES - The Fund may purchase mortgage-backed securities.
Mortgage- backed securities represent direct or indirect participation in, or
are secured by and payable from, mortgage loans secured by real property, and
include single- and multi-class pass-through securities and collateralized
mortgage obligations. Such securities may be issued or guaranteed by U.S.
government agencies or instrumentalities or by private issuers, generally
originators of or investors in mortgage loans, including savings and loan
associations, mortgage bankers, commercial banks, investment banks, and special
purpose entities (collectively, "private lenders"). Mortgage-backed securities
issued by private lenders may be supported by pools of mortgage loans or other
mortgage-backed securities that are guaranteed, directly or indirectly, by the
U.S. government or one of its agencies or instrumentalities, or they may be
issued without any governmental guarantee of the underlying mortgage assets but
with some form of non-governmental credit enhancement. The underlying mortgage
assets may have fixed rates or adjustable rates of interest.
The yield characteristics of mortgage-backed securities differ from those of
traditional debt obligations. Among the principal differences are that interest
and principal payments are made more frequently on mortgage-backed securities,
usually monthly, and that principal may be prepaid at any time because the
underlying mortgage loans or other assets generally may be prepaid at any time.
As a result, if the Fund purchases these securities at a premium, a prepayment
rate that is higher than expected will reduce yield to maturity, while a
prepayment rate that is lower than expected will have the opposite effect of
increasing the yield to maturity. Conversely, if the Fund purchases these
securities at a discount, a prepayment rate that is faster than expected will
increase yield to maturity, while a prepayment rate that is slower than expected
will reduce yield to maturity. Accelerated prepayments on securities purchased
by the Fund at a premium also impose a risk of loss of principal because the
premium may not have been fully amortized at the time the principal is prepaid
in full. The market for privately issued
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mortgage-backed securities is smaller and less liquid than the market for
government sponsored mortgage-backed securities.
Unlike fixed rate mortgage securities, adjustable rate mortgage securities are
collateralized by or represent interests in mortgage loans with variable rates
of interest. These variable rates of interest reset periodically to align
themselves with market rates. The Fund will not benefit from increases in
interest rates to the extent that interest rates rise to the point where they
cause the current coupon of the underlying adjustable rate mortgages to exceed
any maximum allowable annual or lifetime reset limits (or "cap rates") for a
particular mortgage. In this event, the value of the mortgage securities in the
Fund would likely decrease. Also, the Fund's net asset value could vary to the
extent that current yields on adjustable rate mortgage securities are different
than market yields during interim periods between coupon reset dates or if the
timing of changes to the index upon which the rate for the underlying mortgages
is based lags behind changes in market rates. During periods of declining
interest rates, income to the Fund derived from adjustable rate mortgages which
remain in a mortgage pool will decrease in contrast to the income on fixed rate
mortgages, which will remain constant. Adjustable rate mortgages also have less
potential for appreciation in value as interest rates decline than do fixed rate
investments.
The Fund may also purchase mortgage-backed securities issued by private issuers,
which may entail greater risk than mortgage-backed securities that are
guaranteed by the U.S. government, its agencies or instrumentalities. Since
privately-issued mortgage certificates are not guaranteed by an entity having
the credit status of GNMA or FHLMC, such securities generally are structured
with one or more types of credit enhancement. Such credit support falls into two
categories: (i) liquidity protection; and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provisions of advances, generally by the
entity administering the pool of assets, to ensure that the pass-through of
payments due on the underlying pool occurs in a timely fashion. Protection
against losses resulting from ultimate default enhances the likelihood of
ultimate payment of the obligations on at least a portion of the assets in the
pool. Such protection may be provided through guarantees, insurance policies or
letters of credit obtained by the issuer or sponsor from third parties, through
various means of structuring the transaction or through a combination of such
approaches.
The ratings of mortgage securities for which third-party credit enhancement
provides liquidity protection or protection against losses from default are
generally dependent upon the continued creditworthiness of the provider of the
credit enhancement. The ratings of such securities could be subject to reduction
in the event of deterioration in the creditworthiness of the credit enhancement
provider even in cases where the delinquency loss experience on the underlying
pool of assets is better than expected. There can be no assurance that the
private issuers or credit enhancers of mortgage-backed securities can meet their
obligations under the relevant policies or other forms of credit enhancement.
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Examples of credit support arising out of the structure of the transaction
include "senior-subordinated securities" (multiple class securities with one or
more classes subordinate to other classes as to the payment of principal thereof
and interest thereon, with the result that defaults on the underlying assets are
borne first by the holders of the subordinated class), creation of "reserve
funds" (where cash or investments sometimes funded from a portion of the
payments on the underlying assets are held in reserve against future losses) and
"over-collateralization" (where the scheduled payments on, or the principal
amount of, the underlying assets exceed those required to make payment of the
securities and pay any servicing or other fees). The degree of credit support
provided for each issue is generally based on historical information with
respect to the level of credit risk associated with the underlying assets.
Delinquency or loss in excess of that which is anticipated could adversely
affect the return on an investment in such security.
FLOATING AND VARIABLE RATE INSTRUMENTS - The Fund may invest in floating and
variable rate obligations. Floating or variable rate obligations bear interest
at rates that are not fixed, but vary with changes in specified market rates or
indices, such as the prime rate, and at specified intervals. Certain of the
floating or variable rate obligations that may be purchased by the Fund may
carry a demand feature that would permit the holder to tender them back to the
issuer at par value prior to maturity. Such obligations include variable rate
master demand notes, which are unsecured instruments issued pursuant to an
agreement between the issuer and the holder that permit the indebtedness
thereunder to vary and provide for periodic adjustments in the interest rate.
The Fund will limit its purchases of floating and variable rate obligations to
those of the same quality as it otherwise is allowed to purchase. The Subadviser
will monitor on an ongoing basis the ability of an issuer of a demand instrument
to pay principal and interest on demand. For a further discussion of floating
and variable rate obligations, see "Additional Information on Portfolio
Instruments and Investment Policies - Floating and Variable Rate Instruments"
in the Statement of Additional Information.
ZERO COUPON SECURITIES, PIK BONDS AND DEFERRED PAYMENT SECURITIES - The Fund may
invest in zero coupon securities, PIK bonds and deferred payment securities.
Zero coupon securities are debt securities that pay no cash income but are sold
at substantial discounts from their value at maturity. When a zero coupon
security is held to maturity, its entire return, which consists of the
amortization of discount, comes from the difference between its purchase price
and its maturity value. This difference is known at the time of purchase, so
that investors holding zero coupon securities until maturity know at the time of
their investment what the expected return on their investment will be. Certain
zero coupon securities also are sold at substantial discounts from their
maturity value and provide for the commencement of regular interest payments at
a deferred date. Zero coupon securities may have conversion features. The Fund
also may purchase PIK bonds. PIK bonds pay all or a portion of their interest in
the form of debt or equity securities. Deferred payment securities are
securities that remain zero coupon securities until a predetermined date, at
which time the stated coupon rate becomes effective and interest becomes payable
at regular intervals.
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Zero coupon securities, PIK bonds and deferred payment securities tend to be
subject to greater price fluctuations in response to changes in interest rates
than are ordinary interest-paying debt securities with similar maturities. The
value of zero coupon securities appreciates more during periods of declining
interest rates and depreciates more during periods of rising interest rates than
ordinary interest-paying debt securities with similar maturities. Zero coupon
securities, PIK bonds and deferred payment securities may be issued by a wide
variety of corporate and governmental issuers. Although these instruments are
generally not traded on a national securities exchange, they are widely traded
by brokers and dealers and, to such extent, will not be considered illiquid for
the purposes of the Fund's limitation on investments in illiquid securities.
Current federal income tax law requires the holder of a zero coupon security,
certain PIK bonds, deferred payment securities and certain other securities
acquired at a discount (such as Brady Bonds) to accrue income with respect to
these securities prior to the receipt of cash payments. Accordingly, to avoid
liability for federal income and excise taxes, the Fund may be required to
distribute income accrued with respect to these securities and may have to
dispose of portfolio securities under disadvantageous circumstances in order to
generate cash to satisfy these distribution requirements.
LOAN PARTICIPATIONS AND ASSIGNMENTS - The Fund may invest in Loan Participations
and Assignments. The Fund considers these investments to be investments in debt
securities for purposes of this Prospectus. Loan Participations typically will
result in the Fund having a contractual relationship only with the lender, not
with the borrower. The Fund will have the right to receive payments of
principal, interest and any fees to which it is entitled only from the lender
selling the Participation and only upon receipt by the lender of the payments
from the borrower. In connection with purchasing Loan Participations, the Fund
generally will have no right to enforce compliance by the borrower with the
terms of the loan agreement relating to the loan, nor any rights of set-off
against the borrower, and the Fund may not benefit directly from any collateral
supporting the loan in which it has purchased the Participation. As a result,
the Fund will assume the credit risk of both the borrower and the lender that is
selling the Participation. In the event of the insolvency of the lender selling
a Participation, the Fund may be treated as a general creditor of the lender and
may not benefit from any set-off between the lender and the borrower. The Fund
will acquire Loan Participations only if the lender interpositioned between the
Fund and the borrower is determined by the Subadviser to be creditworthy. When
the Fund purchases assignments from lenders, the Fund will acquire direct rights
against the borrower on the loan, except that under certain circumstances such
rights may be more limited than those held by the assigning lender.
The Fund may have difficulty disposing of Assignments and Loan Participations.
Because the market for such instruments is not highly liquid, the Fund
anticipates that such instruments could be sold only to a limited number of
institutional investors. The lack of a highly liquid secondary market may have
an adverse impact on the value of such instruments and will have an adverse
impact on the Fund's ability to dispose of particular assignments or loan
participations in
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response to a specific economic event, such as deterioration in the
creditworthiness of the borrower.
The Board of Trustees has adopted policies and procedures for the purpose of
determining whether assignments and loan participations are liquid or illiquid.
Pursuant to those policies and procedures, the Board of Trustees has delegated
to the Subadviser the determination as to whether a particular loan
participation or assignment is liquid or illiquid, requiring that consideration
be given to, among other things, the frequency of quotes, the number of dealers
willing to sell and the number of potential purchasers, the nature of the loan
participation or assignment and the time needed to dispose of it and the
contractual provisions of the relevant documentation. The Board of Trustees
periodically reviews purchases and sales of assignments and loan participations.
To the extent that liquid assignments and loan participation that the Fund holds
become illiquid, due to the lack of sufficient buyers or market or other
conditions, the percentage of the Fund's assets invested in illiquid assets
would increase. The Subadviser, under the supervision of the Board of Trustees,
monitors Fund investments in assignments and loan participations and will
consider appropriate measures to enable the Fund to maintain sufficient
liquidity for operating purposes and to meet redemption requests.
In valuing a loan participation or assignment held by the Fund for which a
secondary trading market exists, the Fund will rely upon prices or quotations
provided by banks, dealers or pricing services. To the extent a secondary
trading market does not exist, the Fund's loan participations and assignments
will be valued in accordance with procedures adopted by the Board of Trustees,
taking into consideration, among other factors: (i) the creditworthiness of the
borrower under the loan and the lender; (ii) the current interest rate; period
until next rate reset and maturity of the loan; (iii) recent prices in the
market for similar loans; and (iv) recent prices in the market for instruments
of similar quality, rate, period until next interest rate reset and maturity.
DERIVATIVE INSTRUMENTS - Derivative instruments may be used by the Fund for
hedging or risk management purposes or for any other permissible purposes
consistent with the Fund's investment objective. Derivative instruments are
securities or agreements whose value is based on the value of some underlying
asset (e.g., a security or currency) or the level of a reference index. Options,
futures, and options on futures transactions are considered derivative
transactions. Derivatives generally have investment characteristics that are
based upon either forward contracts (under which one party is obligated to buy
and the other party is obligated to sell an underlying asset at a specific price
on a specified date) or option contracts (under which the holder of the option
has the right but not the obligation to buy or sell an underlying asset at a
specified price on or before a specified date). Consequently, the change in
value of a forward-based derivative generally is roughly proportional to the
change in value of the underlying asset. In contrast, the buyer of an
option-based derivative generally will benefit from favorable movements in the
price of the underlying asset but is not exposed to the corresponding losses
that result from adverse movements in the value of the underlying asset. The
seller of an option-based derivative generally will receive fees or premiums but
generally is exposed to losses resulting from changes in the value of the
underlying asset. Derivative transactions may include elements of leverage and,
accordingly, the fluctuation of the value of the derivative
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transaction in relation to the underlying asset may be magnified. Derivative
transactions may also include forward currency contracts and foreign currency
exchange-related securities.
Derivative transactions in which the Fund may engage include the writing of
covered put and call options on securities and the purchase of put and call
options thereon, the purchase of put and call options on securities indices and
exchange-traded options on currencies and the writing of put and call options on
securities indices. The Fund may enter into spread transactions and swap
agreements. The Fund also may buy and sell financial futures contracts, which
may include interest-rate futures, futures on currency exchanges and stock and
bond index futures contracts. The Fund may enter into any futures contracts and
related options without limit for "bona fide hedging" purposes (as defined in
Commodity Futures Trading Commission regulations) and for other permissible
purposes, provided that aggregate initial margin and premiums on positions
engaged in for purposes other than "bona fide hedging" will not exceed 5% of its
net asset value, after taking into account unrealized profits and losses on such
contracts. The Fund may also enter into forward currency contracts to purchase
or sell foreign currencies.
Derivative instruments may be exchange-traded or traded in OTC transactions
between private parties. OTC transactions are subject to the credit risk of the
counterparty to the instrument and are less liquid than exchange-traded
derivatives since they often can only be closed out with the other party to the
transaction. When required by guidelines of the Securities and Exchange
Commission, the Fund will set aside permissible liquid assets in a segregated
account to secure its obligations under derivative transactions. Segregated
assets cannot be sold or transferred unless equivalent assets are substituted in
their place or it is no longer necessary to segregate them. As a result, there
is a possibility that segregation of a large percentage of the Fund's assets
could impede portfolio management or the Fund's ability to meet redemption
requests or other current obligations. In order to maintain its required cover
for a derivative transaction, the Fund may need to sell portfolio securities at
disadvantageous prices or times since it may not be possible to liquidate a
derivative position.
The successful use of derivative transactions by the Fund is dependent upon the
Subadviser's ability to correctly anticipate trends in the underlying asset.
Hedging transactions are subject to risks; if the Subadviser incorrectly
anticipates trends in the underlying asset, the Fund may be in a worse position
than if no hedging had occurred. In addition, there may be imperfect correlation
between the Fund's derivative transactions and the instruments being hedged.
ILLIQUID SECURITIES - The Fund may invest up to 15% of its net assets in
securities that are illiquid, in that they cannot be expected to be sold within
seven days at approximately the price at which they are valued. Due to the
absence of an active trading market, the Fund may experience difficulty in
valuing or disposing of illiquid securities. The Subadviser will determine the
liquidity of the Fund's securities, under the supervision the Trust's trustees.
RESTRICTED SECURITIES, NON-PUBLICLY TRADED SECURITIES AND RULE 144A SECURITIES -
The Fund may invest in restricted securities and Rule 144A securities.
Restricted securities cannot be sold
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to the public without registration under the Securities Act of 1933 ("1933
Act"). Unless registered for sale, these securities can be sold only in
privately negotiated transactions or pursuant to an exemption from registration.
Restricted securities are generally considered illiquid and are therefore
subject to the Fund's 15% limitation on investments in illiquid securities.
Non-publicly traded securities (including Rule 144A securities) may involve a
high degree of business and financial risk which may result in substantial
losses. The securities may be less liquid than publicly traded securities.
Although these securities may be resold in privately negotiated transactions,
the prices realized from these sales could be less than those originally paid by
the Fund. In particular, Rule 144A securities may be resold only to qualified
institutional buyers in accordance with Rule 144A under the 1933 Act.
Unregistered securities may also be sold abroad pursuant to Regulation S under
the 1933 Act. Companies whose securities are not publicly traded are not subject
to the disclosure and other investor protection requirements that would be
applicable if their securities were publicly traded. Acting pursuant to
guidelines established by the Trustees of the Trust, restricted securities and
Rule 144A securities may be considered liquid.
REPURCHASE AGREEMENTS - The Fund may engage in repurchase agreement transactions
as long as the underlying securities are of the type that the Fund would be
permitted to purchase directly. Under the terms of a typical repurchase
agreement, the Fund would acquire an underlying debt obligation for a relatively
short period (usually not more than one week) subject to an obligation of the
seller to repurchase, and the Fund to resell, the obligation at an agreed upon
price and time, thereby determining the yield during the Fund's holding period.
The Fund will enter into repurchase agreements with respect to securities in
which it may invest with member banks of the Federal Reserve System or certain
non-bank dealers. Under each repurchase agreement the selling institution will
be required to maintain the value of the securities subject to the repurchase
agreement at not less than their repurchase price. Repurchase agreements could
involve certain risks in the event of default or insolvency of the other party,
including possible delays or restrictions upon a Fund's ability to dispose of
the underlying securities. The Adviser or the Subadviser, acting under the
supervision of the Board of Trustees, reviews the creditworthiness of those
banks and non-bank dealers with which the Fund enters into repurchase agreements
to evaluate these risks. For additional information, see "Repurchase Agreements"
in the Statement of Additional Information.
REVERSE REPURCHASE AGREEMENTS - The Fund may also enter into reverse repurchase
agreements with the same parties with whom it may enter into repurchase
agreements. Reverse repurchase agreements involve the sale of securities held by
the Fund pursuant to its agreement to repurchase them at a mutually agreed upon
date, price and rate of interest. At the time the Fund enters into a reverse
repurchase agreement, it will establish and maintain a segregated account with
an approved custodian containing liquid securities having a value not less than
the repurchase price (including accrued interest). The assets contained in the
segregated account will be marked-to-market daily and additional assets will be
placed in such account on any day in which the assets fall below the repurchase
price (plus accrued interest). The Fund's liquidity
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and ability to manage its assets might be affected when it sets aside cash or
portfolio securities to cover such commitments. Reverse repurchase agreements
involve the risk that the market value of the securities retained in lieu of
sale may decline below the price of the securities the Fund has sold but is
obligated to repurchase. In the event the buyer of securities under a reverse
repurchase agreement files for bankruptcy or becomes insolvent, such buyer or
its trustee or receiver may receive an extension of time to determine whether to
enforce the Fund's obligation to repurchase the securities, and the Portfolio's
use of the proceeds of the reverse repurchase agreement may effectively be
restricted pending such determination. Reverse repurchase agreements are
considered to be borrowings under the Investment Company Act of 1940 (the "1940
Act").
BANK OBLIGATIONS - The Fund may invest in bank obligations, such as certificates
of deposit, banker's acceptances, and time deposits of domestic or foreign banks
and their subsidiaries and branches (only if the time deposits are denominated
in U.S. dollars), and domestic savings and loan associations. While these bank
obligations will be issued by institutions whose accounts are insured by the
Federal Deposit Insurance Corporation ("FDIC"), the Fund may invest in the
obligations in amounts in excess of the FDIC insurance coverage (currently
$100,000 per account).
Banks are subject to extensive governmental regulations which may limit both the
amounts and types of loans and other financial commitments which may be made and
interest rates and fees which may be charged. The profitability of this industry
is largely dependent upon the availability and cost of capital funds for the
purpose of financing lending operations under prevailing money market
conditions. Also, general economic conditions play an important part in the
operations of this industry and exposure to credit losses arising from possible
financial difficulties of borrowers might affect a bank's ability to meet its
obligations.
Investors should also be aware that securities issued or guaranteed by foreign
banks, foreign branches of U.S. banks, and foreign government and private
issuers may involve investment risks in addition to those relating to domestic
obligations. See " -- Foreign Securities and Currencies" above. The Fund will
not purchase bank obligations which SBAM Limited believes, at the time of
purchase, will be subject to exchange controls or foreign withholding taxes;
however, there can be no assurance that such laws may not become applicable to
certain of the Fund's investments. In the event unforeseen exchange controls or
foreign withholding taxes are imposed with respect to the Fund's investments,
the effect may be to reduce the income received by the Fund on such investments.
INVESTMENT COMPANIES - As permitted by the 1940 Act, the Fund reserves the right
to invest up to 10% of its total assets, calculated at the time of investment,
in the securities of other open-end or closed-end investment companies. No more
than 5% of the Fund's total assets may be invested in the securities of any one
investment company nor may it acquire more than 3% of the voting securities of
any other investment company. The Fund will indirectly bear its proportionate
share of any management fees paid by an investment company in which it invests
in addition to the advisory fee paid by the Fund.
20
<PAGE> 106
WHEN-ISSUED SECURITIES - The Fund may invest without limitation in securities
purchased on a when-issued or delayed delivery basis. Although the payment and
interest terms of these securities are established at the time the purchaser
enters into the commitment, these securities may be delivered and paid for at a
future date, generally within 45 days (for mortgage-backed securities, the
delivery date may extend to as long as 120 days). Purchasing when-issued
securities allows the Fund to lock in a fixed price or yield on a security it
intends to purchase. However, when the Fund purchases a when-issued security, it
immediately assumes the risk of ownership, including the risk of price
fluctuation until the settlement date.
The greater the Fund's outstanding commitments for these securities, the greater
the exposure to potential fluctuations in the net asset value of a Fund.
Purchasing when-issued securities may involve the additional risk that the yield
available in the market when the delivery occurs may be higher or the market
price lower than that obtained at the time of commitment. Although the Fund may
be able to sell these securities prior to the delivery date, it will purchase
when-issued securities for the purpose of actually acquiring the securities,
unless after entering into the commitment a sale appears desirable for
investment reasons. When required by guidelines issued by the Securities and
Exchange Commission, the Fund will set aside permissible liquid assets in a
segregated account to secure its outstanding commitments for when-issued
securities.
LENDING PORTFOLIO SECURITIES - From time to time, the Fund may lend its
portfolio securities to brokers, dealers and other financial institutions who
need to borrow securities to complete certain transactions. In connection with
such loans, the Fund will receive collateral consisting of cash, U.S. Government
securities or irrevocable letters of credit. Such collateral will be maintained
at all times in an amount equal to at least 100% of the current market value of
the loaned securities. The Fund can increase its income through the investment
of such collateral. The Fund continues to be entitled to payments in amounts
equal to the interest, dividends or other distributions payable on the loaned
security and receives interest on the amount of the loan. Such loans will be
terminable at any time upon specified notice. The Fund might experience risk of
loss if the institution with which it has engaged in a portfolio loan
transaction breaches its agreement with the Fund.
BORROWING MONEY - The Fund may borrow money from banks up to 33 1/3% of its
total assets (including the amount borrowed). However, the Fund currently
intends to borrow money only for temporary or emergency purposes (but not for
leverage or to purchase investments) up to 5% of the value of the Fund's total
assets (including the amount borrowed) valued at the time the borrowing is made.
PORTFOLIO TURNOVER
The Fund will attempt to purchase securities with the intent of holding them for
investment but may purchase and sell portfolio securities whenever the Adviser
or the Subadviser believes it to be in the best interests of the Fund. The Fund
will not consider portfolio turnover rate a limiting factor in making investment
decisions consistent with its investment objective and policies.
21
<PAGE> 107
The annual portfolio turnover rate for the Fund is not expected to exceed 33% of
the fixed income securities portion of the Fund's portfolio but will be greater
than 100% with respect to the equity securities portion of the Fund's portfolio.
Higher turnover rates will generally result in higher transaction costs to the
Fund, as well as higher brokerage expenses and higher levels of capital gains.
The portfolio turnover rates of the Fund may vary greatly from year to year and
within a particular year.
HISTORICAL PERFORMANCE INFORMATION
The Fund has not commenced operations and has no investment performance record.
However, the Fund's portfolio manager is the same as, and its investment
objective, policies and strategies will be substantially similar to, those
employed by the Subadviser with respect to another open-end U.S. registered
investment company (the "SBAM Fund"). Set forth in the chart below is
performance data provided by the Subadviser relating to the SBAM Fund. The size
of the SBAM Fund ranged from approximately $5.7 million to approximately $94.9
million for the period shown.
The investment performance of the SBAM Fund does not represent the Fund's
performance and should not be construed a substitute for the Fund's performance,
nor should it be interpreted as indicative of the Fund's future performance. The
results shown below should not be deemed to be indicative of future results for
the Fund owing to differences in brokerage commissions and dealer spreads,
expenses, including investment advisory fees, the size of positions taken in
relation to fund size, timing of purchases and sales and market conditions at
the time of a transaction, timing of cash flows and availability of cash for new
investments.
The Benchmark in the chart is an amalgamation of two indices: 50% of the
Benchmark's results are composed of the performance of the Standard & Poors 500
Index (the "S&P 500"), and 50% is composed of the performance of the Salomon
Brothers Broad Investment-Grade (BIG) Bond Index (the "BIG Bond Index"). The S&P
500 is an unmanaged index of 500 large company stocks and includes reinvested
dividends. S&P 500 results are based on the historical performance of this
unmanaged index and do not reflect the deduction of advisory fees or transaction
costs. The BIG Bond Index is an unmanaged index designed to cover the
investment-grade universe of bonds issued in the United States and includes
institutionally traded investment-grade U.S. Treasury, Government-sponsored
(agency and supranational), mortgage and corporate securities. The BIG Bond
Index results are based on the historical performance of this unmanaged index
and do not reflect the deduction of advisory fees or transaction costs.
The performance data shown below should be read in conjunction with the
information that follows the chart.
<TABLE>
<CAPTION>
SBAM Fund Benchmark
Annualized Return Annualized Return
----------------- -----------------
<S> <C> <C>
Year Ending 22.41% 20.96%
June 30, 1997
Since October 1, 1995 19.92% 17.55%
(The SBAM Fund commenced
investment operations on
September 11, 1995)
</TABLE>
The performance results shown above for the SBAM Fund are based on total returns
reflecting realized and unrealized gains and losses and income, including that
derived from cash positions. Returns are calculated monthly and are compounded
monthly. The performance results are time-weighted on a daily basis and
market-weighted based on market values determined as of the first business day
of each month. The performance results are net of transaction costs and advisory
and other fees incurred and reflect reinvestment of dividends and capital gains
distributions, if any.
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS. INVESTORS SHOULD ALSO BE
AWARE THAT THE USE OF METHODS OF DETERMINING PERFORMANCE DIFFERENT THAN THAT
USED BY THE SUBADVISER WOULD RESULT IN DIFFERENT PERFORMANCE DATA.
MANAGEMENT OF THE TRUST
TRUSTEES AND OFFICERS
The business and affairs of the Trust are managed under the direction of its
Board of Trustees.
The Board of Trustees sets and reviews policies regarding the operation of the
Trust, whereas the officers perform the daily functions of the Trust.
INVESTMENT MANAGEMENT OF THE FUND
THE ADVISER - Under the terms of the Investment Advisory Agreement, Nationwide
Advisory Services, Inc., Three Nationwide Plaza, Columbus, Ohio 43215, oversees
the investment of the assets for the Fund and supervises the daily business
affairs of the Fund. Subject to the supervision and direction of the Trustees,
the Adviser also evaluates and monitors the performance of the Subadviser. The
Adviser is also authorized to select and place portfolio investments on behalf
of the Fund; however, the Adviser does not intend to do so at this time.
The Adviser and the Trust have applied to the Securities and Exchange Commission
for an exemptive order which, if granted, will allow the Adviser to appoint,
replace or terminate subadvisers without the approval of shareholders; the order
would also allow the Adviser to revise a subadvisory agreement without
shareholder approval. Any change in subadvisers will be communicated to
shareholders within 60 days of such changes and all changes will be approved by
the Trust's Board of Trustees, including a majority of the Trustees who are not
interested persons of the Trust or the Adviser. The order, if granted, is
intended to facilitate the efficient operation of the Fund and afford the Trust
increased management flexibility. Prior to receiving the exemptive order, the
Adviser will not appoint, replace or terminate any subadvisers or materially
amend any subadvisory agreement without obtaining the approval of shareholders.
The Adviser provides to the Fund investment management evaluation services
principally by performing initial due diligence on prospective subadvisers for
the Fund and thereafter by monitoring the performance of the subadviser through
quantitative and qualitative analysis as well as through periodic in-person,
telephonic and written consultations with the subadviser. The Adviser has
responsibility for communicating performance expectations and evaluations to the
subadviser and ultimately recommending to the Trust's Board of Trustees whether
the subadviser's contract should be renewed, modified or terminated; however,
the Adviser does not
22
<PAGE> 108
expect to recommend frequent changes of subadvisers. The Adviser will regularly
provide written reports to the Board of Trustees regarding the results of its
evaluation and monitoring functions. Although the Adviser will monitor the
performance of the subadviser, there is no certainty that the subadviser or the
Fund will obtain favorable results at any given time.
The Adviser, an Ohio corporation, is a wholly owned subsidiary of Nationwide
Life Insurance Company, which is owned by Nationwide Financial Services, Inc.
(NFS). NFS, a holding company, has two classes of common stock outstanding with
different voting rights enabling Nationwide Corporation (the holder of all the
outstanding Class B Common Stock) to control NFS. Nationwide Corporation is also
a holding company in the Nationwide Insurance Enterprise. All of the common
stock of Nationwide Corporation is held by Nationwide Mutual Insurance Company
(95.3%) and Nationwide Mutual Fire Insurance Company (4.7%), each of which is a
mutual company owned by its policyholders. The Fund pays to the Adviser a fee at
the annual rate of 0.75% of the Fund's average daily net assets.
THE SUBADVISER - Subject to the supervision of the Adviser and the Trustees, the
Subadviser manages the Fund's assets in accordance with the Fund's investment
objective and policies. The Subadviser shall make investment decisions for the
Fund, and in connection with such investment decisions shall place purchase and
sell orders for securities. For the investment management services it provides
to the Fund, the Subadviser receives an annual fee from the Adviser in an amount
equal to 0.35% of the first $150 million of the Fund's average daily net assets,
0.30% of the Fund's next $350 million of average daily net assets, and 0.25% of
the Fund's average daily net assets in excess of $500 million. Below is a brief
description of the Subadviser.
The Subadviser is a wholly owned subsidiary of Salomon Brothers Holding Company
Inc, which is in turn wholly owned by Salomon Inc. The Subadviser was
incorporated in 1987 and together with affiliates in London, Frankfurt, Tokyo
and Hong Kong, provides a broad range of fixed-income and equity investment
advisory services to various individuals and institutional clients located
throughout the world, and serves as investment adviser to various investment
companies. In providing such services, the Subadviser has access to Salomon
Inc's more than 400 economists and mortgage, bond, sovereign and equity
analysts. As of __________, 1997, the Subadviser and its worldwide investment
advisory affiliates managed approximately $_____ billion of assets. Michael S.
Hyland serves as President of the Subadviser. The Subadviser's business offices
are located at 7 World Trade Center, New York, New York 10048.
Richard E. Dahlberg is primarily responsible for the day-to-day management of
the Fund. Prior to joining the Subadviser in July 1995, Mr. Dahlberg was
employed by Massachusetts Financial Services Company since 1968. Mr. Dahlberg
had been primarily responsible for the day-to-day management of the MFS Total
Return Fund for ten years prior to joining the Subadviser.
OTHER SERVICES
Under the terms of a Fund Administration Agreement, the Adviser also provides
various administrative and accounting services, including daily valuation of the
Fund's shares and
23
<PAGE> 109
preparation of financial statements, tax returns, and regulatory reports. For
these services, the Fund pays the Adviser an annual fee in the amount of 0.07%
of the Fund's first $250 million of average daily net assets, 0.05% on the next
$750 million and 0.04% on assets of more than $1 billion.
The Transfer and Dividend Disbursing Agent, Nationwide Investors Services, Inc.,
("NIS"), Three Nationwide Plaza, Columbus, Ohio 43216, serves as transfer agent
and dividend disbursing agent for the Trust. The Fund pays to NIS a fee for such
services at the annual rate of 0.01% of the Fund's average daily net assets. NIS
is a wholly owned subsidiary of the Adviser.
INVESTMENT IN FUND SHARES
An insurance company may purchase shares of the Fund using purchase payments
received on Contracts issued by Accounts. These Accounts are funded by shares of
the Fund. Funds of Funds may also purchase shares of the Fund for their
portfolios. There is no sales charge, and all shares are sold at net asset
value.
Shares of the Fund are currently sold only to separate accounts of Nationwide
Life Insurance Company and its wholly owned subsidiary Nationwide Life and
Annuity Insurance Company to fund the benefits under the Contract and to
affiliated Fund of Funds. The address for each of these entities is One
Nationwide Plaza, Columbus, Ohio 43215.
All investments in the Fund are credited to the shareholder's account in the
form of full and fractional shares of the Fund (rounded to the nearest 1/1000 of
a share). The Trust does not issue share certificates. Initial and subsequent
purchase payments allocated to the Fund are subject to the limits applicable to
the Contracts.
SHARE REDEMPTION
Redemptions are processed on any day on which the Trust is open for business and
are effected at net asset value next determined after the redemption order, in
proper form, is received by the Trust's transfer agent, NIS.
The net asset value per share of the Fund is determined once daily, as of the
close of regular trading on the New York Stock Exchange (generally 4:00 P.M.
Eastern Time), on each business day the New York Stock Exchange is open for
regular trading and on such other days as the Board determines and on any other
day during which there is a sufficient degree of trading in the Fund's portfolio
securities that the net asset value of the Fund is materially affected by
changes in the value of portfolio securities. The Trust will not compute net
asset value on customary national business holidays, including the following:
Christmas, New Year's Day, Martin Luther King's Birthday, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, and Thanksgiving Day. The net
asset value per share is calculated by adding
24
<PAGE> 110
the value of all securities and other assets of the Fund, deducting its
liabilities, and dividing by the number of shares outstanding.
In determining net asset value, portfolio securities listed on national
exchanges are valued at the last sales price on the principal exchange; if the
securities are traded only in the over-the-counter market, they are valued at
the quoted bid prices. Other portfolio securities are valued at the quoted
prices obtained from an independent pricing organization which employs a
combination of methods, including among others, the obtaining and comparison of
market valuations from dealers who make markets and deal in such securities and
the comparison of valuations with those of other comparable securities in a
matrix of such securities. The pricing service activities and results are
reviewed by an officer of the Trust. Securities for which market quotations are
not readily available are valued at fair value in accordance with procedures
adopted by the Board of Trustees. Expenses and fees are accrued daily.
The Trust may suspend the right of redemption only under the following unusual
circumstances:
- - when the New York Stock Exchange is closed (other than weekends and
holidays) or trading is restricted;
- - when an emergency exists, making disposal of portfolio securities or the
valuation of net assets not reasonably practicable; or
- - during any period when the Securities and Exchange Commission has by order
permitted a suspension of redemption for the protection of shareholders.
NET INCOME AND DISTRIBUTIONS
Substantially all of the net investment income, if any, of the Fund will be
declared and paid as dividends quarterly. Net realized capital gains of the
Fund, if any, will be distributed at least annually.
ADDITIONAL INFORMATION
DESCRIPTION OF SHARES - The Declaration of Trust permits the Trustees to issue
an unlimited number of full and fractional shares of beneficial interest of the
Fund and to divide or combine such shares into a greater or lesser number of
shares without thereby changing the proportionate beneficial interests in the
Trust. Each share of the Fund represents an equal proportionate interest in the
Fund with each other share. The Trust reserves the right to create and issue
shares of a number of different funds. In that case, the shares of each fund
would participate equally in the earnings, dividends, and assets of the
particular fund, but shares of all funds would vote together in the election of
Trustees. Upon liquidation of a fund, its shareholders are entitled to share pro
rata in the net assets of such fund available for distribution to shareholders.
25
<PAGE> 111
VOTING RIGHTS - Shareholders are entitled to one vote for each share held.
Shareholders may vote in the election or removal of Trustees and on other
matters submitted to meetings of shareholders. No amendment may be made to the
Declaration of Trust without the affirmative vote of a majority of the
outstanding shares of the Trust. The sole shareholder of the Fund initially will
be Nationwide Life Insurance Company. The Trustees may, however, amend the
Declaration of Trust without the vote or consent of shareholders to:
- - designate series of the Trust;
- - change the name of the Trust; or
- - supply any omission, cure, correct, or supplement any ambiguous,
defective, or inconsistent provision to conform the Declaration of
Trust to the requirements of applicable federal and state laws or
regulations if they deem it necessary.
Shares have no pre-emptive or conversion rights. Shares are fully paid and
nonassessable. In regard to termination, sale of assets, or changes of
investment restrictions, the right to vote is limited to the holders of shares
of the particular fund affected by the proposal. When a majority is required, it
means the lesser of 67% or more of the shares present at a meeting when the
holders of more than 50% of the outstanding shares are present or represented by
proxy, or more than 50% of the outstanding shares.
SHAREHOLDER INQUIRIES - All inquiries regarding the Fund should be directed to
the Trust at the telephone number or address shown on the cover page of this
Prospectus.
PERFORMANCE ADVERTISING FOR THE FUND
The Fund may use historical performance in advertisements, sales literature, and
the prospectus. Such figures will include quotations of average annual total
return for the most recent one, five, and ten year periods (or the life of the
Fund if less). Average annual total return represents the rate required each
year for an initial investment to equal the redeemable value at the end of the
specific period. Average annual total return reflects reinvestment of all
distributions.
TAX STATUS
The Trust's policy is to cause each fund to qualify as a regulated investment
company and to meet the requirements of Subchapter M of the Internal Revenue
Code (the "Code"). The Fund intends to distribute all its taxable net investment
income and capital gains to shareholders and therefore will not be required to
pay any federal income taxes.
Because each fund of the Trust is treated as a separate entity for purposes of
the regulated investment company provisions of the Code, the assets, income, and
distributions of the Fund are considered separately for purposes of determining
whether or not the Fund qualifies as a regulated investment company. The Fund
intends to comply with the diversification
26
<PAGE> 112
requirements currently imposed by the Internal Revenue Service on separate
accounts of insurance companies as a condition of maintaining the tax-deferred
status of the Contracts. See the Statement of Additional Information for more
specific information.
The Fund may make investments that produce income that is not matched by a
corresponding cash distribution to the Fund, such as investments in PIK bonds or
in obligations such as certain Brady Bonds or zero coupon securities having
original issue discount (i.e., an amount equal to the excess of the stated
redemption price of the security at maturity over its issue price), or market
discount (i.e., an amount equal to the excess of the stated redemption price of
the security over the basis of such bond immediately after it was acquired) if
the Fund elects to accrue market discount on a current basis. In addition,
income may continue to accrue for federal income tax purposes with respect to a
non-performing investment. Any such income would be treated as income earned by
the Fund and therefore would be subject to the distribution requirements of the
Code. Because such income may not be matched by a corresponding cash
distribution to the Fund, the Fund may be required to borrow money or dispose of
other securities to be able to make distributions to its investors. The extent
to which the Fund may liquidate securities at a gain may be limited by the
requirement that less than 30% of its annual gross income be derived from the
sale or other disposition of securities and certain other investments held for
less than three months (the "short-short test"). In addition, if an election is
not made to currently accrue market discount with respect to a market discount
bond, all or a portion of any deduction or any interest expense incurred to
purchase or hold such bond may be deferred until such bond is sold or otherwise
disposed of.
The tax treatment of payments made by an Account to a Contractholder is
described in the separate account prospectus.
27
<PAGE> 113
CONTENTS
Sale of Fund Shares
Investment Objective and Policies
Investment Techniques, Considerations and Risk Factors
Management of the Trust
Investment in Fund Shares
Share Redemption
Net Income and Distributions
Additional Information
Performance Advertising for the Fund
Tax Status
INVESTMENT ADVISER AND ADMINISTRATOR
Nationwide Advisory Services, Inc.
One Nationwide Plaza
Columbus, Ohio 43215
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Nationwide Investors Services, Inc.
Box 1492
Three Nationwide Plaza
Columbus, Ohio 43216
AUDITORS
KPMG Peat Marwick LLP
Two Nationwide Plaza
Columbus, Ohio 43215
LEGAL COUNSEL
Druen, Dietrich, Koogler & Reynolds
One Nationwide Plaza
Columbus, Ohio 43216
28
<PAGE> 114
PROSPECTUS
OCTOBER ___, 1997
SHARES OF BENEFICIAL INTEREST OF
NATIONWIDE SMALL CAP VALUE FUND
ONE SERIES OF
NATIONWIDE SEPARATE ACCOUNT TRUST
THREE NATIONWIDE PLAZA
COLUMBUS, OHIO 43215
FOR INFORMATION AND ASSISTANCE,
CALL (614) 249-5134
Nationwide Small Cap Value Fund (the "Fund") is a non-diversified portfolio of
the Nationwide Separate Account Trust (the "Trust"). The Trust is an open-end
management investment company organized under the laws of Massachusetts, by a
Declaration of Trust, dated June 30, 1981, as subsequently amended. The Trust
offers shares in 15 separate mutual funds, each with its own investment
objective. This Prospectus relates only to Nationwide Small Cap Value Fund. The
shares of the Fund are sold to other open-end investment companies created by
Nationwide Advisory Services, Inc., the Fund's investment adviser, as well as to
life insurance company separate accounts to fund the benefits of variable life
insurance policies and annuity contracts.
The Fund has as its investment objective capital appreciation through
investments in a diversified portfolio of equity securities of companies with a
median market capitalization of approximately $1 billion. The Fund intends to
pursue its investment objective by investing, under normal market conditions, at
least 75% of the Fund's total assets in equity securities of companies with
market capitalizations at the time of purchase of between $200 million and $2.5
billion.
This Prospectus provides you with the basic information you should know before
investing in the Fund. You should read it and keep it for future reference. A
Statement of Additional Information dated October ___, 1997, has been filed with
the Securities and Exchange Commission. You can obtain a copy without charge by
calling (614) 249-5134, or writing Nationwide Life Insurance Company, One
Nationwide Plaza, Columbus, Ohio 43215.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
THE STATEMENT OF ADDITIONAL INFORMATION FOR THE TRUST, DATED
OCTOBER ___, 1997, IS INCORPORATED HEREIN BY REFERENCE.
<PAGE> 115
SALE OF FUND SHARES
Shares of the Fund may be sold to life insurance company separate accounts (the
"Accounts") to fund the benefits of variable life insurance policies or annuity
contracts ("Contracts") issued by life insurance companies, as well as to other
open-end investment companies (each, a "Fund of Funds") created by Nationwide
Advisory Services, Inc. (the "Adviser"), the Fund's investment adviser. The
Accounts purchase shares of the Fund in accordance with variable account
allocation instructions received from owners of the Contracts. The Fund then
uses the proceeds to buy securities for its portfolio. The Adviser, together
with a group of subadvisers, manages the portfolio from day to day to accomplish
the Fund's investment objectives. The types of investments and the way they are
managed depend on what is happening in the economy and the financial
marketplaces. Each Fund of Funds and Account, as a shareholder, has an ownership
interest in the Fund's investments. The Fund also offers to buy back (redeem)
its shares from the Funds of Funds or the Accounts at any time at net asset
value.
SUMMARY OF EXPENSES
Shareholder Transaction Expenses None
Estimated Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees 0.97%
12b-1 Fees None
Other Expenses 0.08%
----
Estimated Total Fund Operating Expenses(1) 1.05%
====
This summary is provided to assist investors in understanding the various costs
and expenses that an investor in the Fund will bear directly or indirectly. The
amount of "Other Expenses" is based on estimated amounts for the fiscal year
ending December 31, 1997.
Example:
1 year 3 years
------ -------
You would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and
(2) redemption at the end of each time period $11 $33
THE EXAMPLE SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESSER THAN THOSE SHOWN.
For more information on Fund expenses, see "MANAGEMENT OF THE TRUST" below.
- --------
(1) The Adviser has agreed with the Trust to waive management fees or to
reimburse expenses incurred by the Fund to the extent necessary to
limit the total expense ratio of the Fund to a maximum of 1.05% of the
average net assets of the Fund.
2
<PAGE> 116
FINANCIAL HIGHLIGHTS
Financial highlights are not available for the Fund, because the Fund has not
yet commenced operations.
INVESTMENT OBJECTIVE AND POLICIES
Nationwide Small Cap Value Fund (the "Fund") has as its investment objective
capital appreciation through investment in a diversified portfolio of equity
securities of companies with a median market capitalization of approximately $1
billion. Under normal market conditions, at least 75% of the Fund's total assets
will be invested in equity securities of companies with market capitalizations
at the time of purchase of between $200 million and $2.5 billion. The Fund may
invest up to 20% of its total assets in equity securities of foreign issuers,
which involve additional risk. See "INVESTMENT TECHNIQUES, CONSIDERATIONS AND
RISK FACTORS -- Foreign Securities and Currencies."
The Fund will invest in equity securities of domestic and foreign issuers
characterized as "value" companies according to criteria established by the
Fund's subadviser. To manage the Fund, the subadviser classifies issuers as
"growth" or "value" companies. The Fund's subadviser generally believes that
companies with relatively low price to book ratios, low price to earnings ratios
or higher than average dividend payments in relation to price should be
classified as value companies.
Small capitalization companies are often under valued for one of the following
reasons: (1) institutional investors, which currently represent a majority of
the trading volume in the shares of publicly traded companies, are often less
interested in smaller capitalization companies because of the difficulty of
acquiring a meaningful position without purchasing a large percentage of the
company's outstanding equity securities; and (ii) such companies may not be
regularly researched by securities analysts, thereby resulting in greater
discrepancies in valuation.
While seeking desirable equity investments, the Fund may also invest in money
market instruments, including U.S. Government securities, certificates of
deposit, time deposits, bankers' acceptances, short-term investment grade
corporate bonds and other short-term debt instruments, and repurchase
agreements. Under normal market conditions, the Fund does not expect to have a
substantial portion of its assets invested in money market instruments. If,
however, the Fund's subadviser determines that adverse market conditions exist,
the Fund may adopt a temporary defensive posture and invest all of its assets in
money market instruments.
The equity securities in which the Fund may invest consist of common stocks,
preferred stocks and securities convertible into common stocks. The Fund also
may invest in options, warrants, bonds, notes and debentures that are
convertible into or exchangeable for, or that grant a right to purchase or sell,
such securities. In addition, the Fund may invest in securities issued by
closed-end investment companies and foreign securities, including those in the
form of American Depositary Receipts or European Depositary Receipts.
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The Fund is expected to have greater risk exposure and reward potential than a
fund that invests primarily in larger capitalization companies. The trading
volumes of securities of smaller capitalization companies are normally lower
than those of larger capitalization companies. This often translates into
greater price volatility. Since trading volumes are lower, new demand for the
securities of such companies could result in disproportionately large increases
in the price of such securities. The waiting period for the achievement of an
investor's objectives might be longer since these securities are not closely
monitored by securities analysts and thus investors nay not become aware as
quickly of fundamental changes or other factors that could influence the
company's share price. Smaller capitalization companies often achieve higher
growth rates and experience higher failure rates than do larger capitalization
companies.
For a further discussion of the types of securities in which the Fund may invest
and related investment techniques, see "INVESTMENT TECHNIQUES, CONSIDERATIONS
AND RISK FACTORS" below.
At various times the Fund may invest in derivative instruments for hedging or
risk management purposes or for any other permissible purpose. See "INVESTMENT
TECHNIQUES, CONSIDERATIONS AND RISK FACTORS - Derivative Instruments" below.
While there is careful selection of the securities in which the Fund may invest
and constant supervision of the Fund's portfolio by a group of professional
investment managers, there can be no guarantee that the Fund's investment
objective will be achieved. The investment objective of the Fund is not
fundamental and shareholder approval is not required to change the Fund's
investment objective.
MANAGEMENT OF THE FUND
Nationwide Advisory Services, Inc. (the "Adviser") provides investment
management evaluation services to the Fund in initially selecting and monitoring
on an ongoing basis the performance of a subadviser to manage the Fund's
portfolio. The Adviser has selected The Dreyfus Corporation (the "Subadviser"),
to be the subadviser of the Fund. See "MANAGEMENT OF THE TRUST -- Investment
Management of the Fund" below for further information.
INVESTMENT TECHNIQUES, CONSIDERATIONS AND RISK FACTORS
An investment in the Fund involves certain risks. As a general matter, an
investment in the Fund involves the risk that the net asset value of the Fund's
shares will fluctuate in response to changes in economic conditions and the
market's perception of the securities held by the Fund. In addition, because the
Fund invests primarily in common stocks, an investment in the Fund is subject to
stock market risk, which means that such an investment is subject to the risk
that stock prices in general will decline over short or extended periods of
time. An investment in the Fund is subject to other risks as well, depending
upon the particular investment techniques employed by the Fund and the types of
securities in which the Fund invests.
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SMALL COMPANY AND EMERGING GROWTH STOCKS - Investing in securities of
small-sized and emerging growth companies may involve greater risks than
investing in larger, more established issuers since these securities may have
limited marketability and thus may be more volatile than securities of larger,
more established companies or the market averages in general. Because
small-sized companies normally have fewer shares outstanding than larger
companies, it may be more difficult for the Fund to buy or sell significant
numbers of such shares without an unfavorable impact on prevailing prices.
Small-sized companies may have limited product lines, markets or financial
resources and may lack management depth. In addition, small-sized companies are
typically subject to wider variations in earnings and business prospects than
are larger, more established companies. There is typically less publicly
available information concerning small-sized companies than for larger, more
established ones.
Securities of issuers in "special situations" also may be more volatile, since
the market value of these securities may decline in value if the anticipated
benefits do not materialize. Companies in "special situations" include, but are
not limited to, companies involved in an acquisition or consolidation;
reorganization; recapitalization; merger, liquidation or distribution of cash,
securities or other assets; a tender or exchange offer, a breakup or workout of
a holding company; litigation which, if resolved favorably, would improve the
value of the companies' securities; or a change in corporate control.
Although investing in securities of emerging growth companies or "special
situations" offers potential for above-average returns if the companies are
successful, the risk exists that the companies will not succeed and the prices
of the companies' shares could significantly decline in value. Therefore, an
investment in the Fund may involve a greater degree of risk than an investment
in other mutual funds that seek long-term growth of capital by investing in
better-known, larger companies.
FOREIGN SECURITIES AND CURRENCIES - The Fund may invest up to 20% of its total
assets in foreign securities, either directly or indirectly through the use of
depositary receipts. Depositary receipts, including American Depositary
Receipts, European Depository Receipts and American Depository Shares, are
generally issued by banks or trust companies and evidence ownership of
underlying foreign securities. The Fund may also invest in securities of foreign
investment funds or trusts (including passive foreign investment companies).
Foreign investments involve special risks, including the possibility of
expropriation, confiscatory taxation, and withholding taxes on dividends and
interest; less extensive regulation of foreign brokers, securities markets, and
issuers; political, economic or social instability; and less publicly available
information and different accounting standards. When investing in foreign
securities, the Fund may also incur costs in conversions between currencies,
possible delays in settlement in foreign securities markets, limitations on the
use or transfer of assets (including suspension of the ability to transfer
currency from a given country), and difficulty in enforcing obligations in other
countries.
Foreign economies may differ favorably or unfavorably from the U.S. economy in
various respects, including growth of gross domestic product, rates of
inflation, currency depreciation,
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capital reinvestment, resource self-sufficiency, and balance of payments
positions. Many foreign securities are less liquid and their prices more
volatile than comparable U.S. securities. Although the Fund generally invests
only in securities that are regularly traded on recognized exchanges or OTC,
from time to time, foreign securities may be difficult to liquidate rapidly
without adverse price effects. Certain costs attributable to foreign investing,
such as custody charges and brokerage costs, are higher than those attributable
to domestic investing.
Because most foreign securities are denominated in non-U.S. currencies, the
investment performance of the Fund could be significantly affected by changes in
foreign currency exchange rates. The value of the Fund's assets denominated in
foreign currencies will increase or decrease in response to fluctuations in the
value of those foreign currencies relative to the U.S. dollar. Currency exchange
rates can be volatile at times in response to supply and demand in the currency
exchange markets, international balances of payments, governmental intervention,
speculation, and other political and economic conditions.
The Fund may purchase and sell foreign currency on a spot basis and may engage
in forward currency contracts, currency options, and futures transactions for
hedging or risk management purposes. See "--Derivative Instruments" below.
WARRANTS - A warrant is an instrument which gives the holder the right to
subscribe to a specified amount of the issuer's securities at a set price for a
specified period of time or on a specified date. Warrants do not carry the right
to dividends or voting rights with respect to their underlying securities and do
not represent any rights in assets of the issuer. An investment in warrants may
be considered speculative. In addition, the value of a warrant does not
necessarily change with the value of the underlying securities, and a warrant
ceases to have value if it is not exercised prior to its expiration date.
CONVERTIBLE SECURITIES - The Fund may invest in convertible securities, which
are bonds, debentures, notes, preferred stocks or other securities that may be
converted into or exchanged for a specified amount of common stock of the same
or a different issuer within a particular period of time at a specified price or
formula. Convertible securities have general characteristics similar to both
debt obligations and equity securities. Although to a lesser extent than with
debt obligations generally, the market value of convertible securities tends to
decline as interest rates increase and, conversely, tends to increase as
interest rates decline. In addition, because of the conversion feature, the
market value of convertible securities tends to vary with fluctuations in the
market value of the underlying common stock and therefore will react to
variations in the general market for equity securities. A unique feature of
convertible securities is that as the market price of the underlying common
stock declines, convertible securities tend to trade increasingly on a yield
basis, and so may not experience market value declines to the same extent as the
underlying common stock. When the market price of the underlying common stock
increases, the prices of the convertible securities tend to rise as a reflection
of the value of the underlying common stock. While no securities investments are
without risk, investments in convertible securities generally entail less risk
than investments in common stock of the same issuer.
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As debt obligations, convertible securities are investments that provide for a
stable stream of income with generally higher yields than common stocks. Of
course, like all debt obligations, there can be no assurance of current income
because the issuers of convertible securities may default on their obligations.
Convertible securities, however, generally offer lower interest or dividend
yields than non-convertible securities of similar quality because of the
potential for capital appreciation. A convertible security, in addition to
providing fixed income, offers the potential for capital appreciation through
the conversion feature, which enables the holder to benefit from increases in
the market price of the underlying common stock. There can be no assurance of
capital appreciation, however, because the market value of securities will
fluctuate.
Convertible securities generally are subordinated to other similar but
non-convertible securities of the same issuer, although convertible bonds, as
corporate debt obligations, enjoy seniority in right of payment to all equity
securities, and convertible preferred stock is senior to common stock of the
same issuer. Because of the subordination feature, however, convertible
securities typically are rated below investment grade or are not rated.
DEBT OBLIGATIONS - Debt obligations in which the Fund may invest generally will
be investment grade debt obligations. While seeking desirable investments or
when the Subadviser determines that adverse market conditions exist, the Fund
may invest in high quality short-term money market obligations. The Fund's risk
and return potential with respect to the debt portion of its portfolio depends
in part on the maturity and credit-quality characteristics of the underlying
investments in its portfolio. In general, the longer the maturity of a debt
obligation, the greater its sensitivity to changes in interest rates. Similarly,
debt obligations issued by less creditworthy entities tend to carry higher
yields than those with higher credit ratings. The market value of all debt
obligations is also affected by changes in the prevailing interest rates.
Therefore, the market value of such instruments generally reacts inversely to
interest rate changes. If the prevailing interest rates decrease, the market
value of debt obligations generally increases. If the prevailing interest rates
increase, the market value of debt obligations generally decreases.
Debt obligations in which the Fund may invest include: 1) bonds or bank
obligations rated in one of the four highest rating categories by any nationally
recognized statistical rating organization ("NRSRO") (e.g., Moody's Investors
Service, Inc. or Standard & Poor's Ratings Group); 2) securities issued or
guaranteed by the U.S. Government or any agency or instrumentality thereof; 3)
short-term corporate debt securities and commercial paper rated in one of the
two highest ratings categories of any NRSRO; 4) short-term bank obligations that
are rated in one of the two highest categories by any NRSRO, with respect to
obligations maturing in one year or less; 5) repurchase agreements relating to
debt obligations which the Fund could purchase directly; 6) unrated debt
obligations which are determined by the Adviser or the Subadviser to be of
comparable quality; or 7) money market mutual funds.
Medium-quality obligations are obligations rated in the fourth highest rating
category by any NRSRO. Medium-quality securities, although considered
investment-grade, may have some speculative characteristics and may be subject
to greater fluctuations in value than higher-rated securities. In addition, the
issuers of medium-quality securities may be more vulnerable to adverse economic
conditions or changing circumstances than that of higher-rated issuers.
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All ratings are determined at the time of investment. Any subsequent rating
downgrade of a debt obligation will be monitored by the Adviser or the
Subadviser to consider what action, if any, the Fund should take consistent with
its investment objective; such event will not automatically require the sale of
the downgraded securities.
DERIVATIVE INSTRUMENTS - Derivative instruments may be used by the Fund for
hedging or risk management purposes or for any other permissible purposes
consistent with the Fund's investment objective. Derivative instruments are
securities or agreements whose value is based on the value of some underlying
asset (e.g., a security or currency) or the level of a reference index. Options,
futures, and options on futures transactions are considered derivative
transactions. Derivatives generally have investment characteristics that are
based upon either forward contracts (under which one party is obligated to buy
and the other party is obligated to sell an underlying asset at a specific price
on a specified date) or option contracts (under which the holder of the option
has the right but not the obligation to buy or sell an underlying asset at a
specified price on or before a specified date). Consequently, the change in
value of a forward-based derivative generally is roughly proportional to the
change in value of the underlying asset. In contrast, the buyer of an
option-based derivative generally will benefit from favorable movements in the
price of the underlying asset but is not exposed to the corresponding losses
that result from adverse movements in the value of the underlying asset. The
seller of an option-based derivative generally will receive fees or premiums but
generally is exposed to losses resulting from changes in the value of the
underlying asset. Derivative transactions may include elements of leverage and,
accordingly, the fluctuation of the value of the derivative transaction in
relation to the underlying asset may be magnified. Derivative transactions may
also include forward currency contracts and foreign currency exchange-related
securities.
Derivative transactions in which the Fund may engage include the writing of
covered put and call options on securities and the purchase of put and call
options thereon, the purchase of put and call options on securities indices and
exchange-traded options on currencies and the writing of put and call options on
securities indices. The Fund may enter into spread transactions and swap
agreements. The Fund also may buy and sell financial futures contracts, which
may include interest-rate futures, futures on currency exchanges and stock and
bond index futures contracts. The Fund may enter into any futures contracts and
related options without limit for "bona fide hedging" purposes (as defined in
Commodity Futures Trading Commission regulations) and for other permissible
purposes, provided that aggregate initial margin and premiums on positions
engaged in for purposes other than "bona fide hedging" will not exceed 5% of its
net asset value, after taking into account unrealized profits and losses on such
contracts. The Fund may also enter into forward currency contracts to purchase
or sell foreign currencies.
Derivative instruments may be exchange-traded or traded in OTC transactions
between private parties. OTC transactions are subject to the credit risk of the
counterparty to the instrument and are less liquid than exchange-traded
derivatives since they often can only be closed out with the other party to the
transaction. When required by guidelines of the Securities and Exchange
Commission, the Fund will set aside permissible liquid assets in a segregated
account to secure its obligations under derivative transactions. Segregated
assets cannot be sold or transferred
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unless equivalent assets are substituted in their place or it is no longer
necessary to segregate them. As a result, there is a possibility that
segregation of a large percentage of the Fund's assets could impede portfolio
management or the Fund's ability to meet redemption requests or other current
obligations. In order to maintain its required cover for a derivative
transaction, the Fund may need to sell portfolio securities at disadvantageous
prices or times since it may not be possible to liquidate a derivative position.
The successful use of derivative transactions by the Fund is dependent upon the
Subadviser's ability to correctly anticipate trends in the underlying asset.
Hedging transactions are subject to risks; if the Subadviser incorrectly
anticipates trends in the underlying asset, the Fund may be in a worse position
than if no hedging had occurred. In addition, there may be imperfect correlation
between the Fund's derivative transactions and the instruments being hedged.
ILLIQUID SECURITIES - The Fund may invest up to 15% of its net assets in
securities that are illiquid, in that they cannot be expected to be sold within
seven days at approximately the price at which they are valued. Due to the
absence of an active trading market, the Fund may experience difficulty in
valuing or disposing of illiquid securities. The Subadviser will determine the
liquidity of the Fund's securities, under the supervision the Trust's trustees.
RESTRICTED SECURITIES, NON-PUBLICLY TRADED SECURITIES AND RULE 144A SECURITIES -
The Fund may invest in restricted securities and Rule 144A securities.
Restricted securities cannot be sold to the public without registration under
the Securities Act of 1933 ("1933 Act"). Unless registered for sale, these
securities can be sold only in privately negotiated transactions or pursuant to
an exemption from registration. Restricted securities are generally considered
illiquid and are therefore subject to the Fund's 15% limitation on investments
in illiquid securities.
Non-publicly traded securities (including Rule 144A securities) may involve a
high degree of business and financial risk which may result in substantial
losses. The securities may be less liquid than publicly traded securities.
Although these securities may be resold in privately negotiated transactions,
the prices realized from these sales could be less than those originally paid by
the Fund. In particular, Rule 144A securities may be resold only to qualified
institutional buyers in accordance with Rule 144A under the 1933 Act.
Unregistered securities may also be sold abroad pursuant to Regulation S under
the 1933 Act. Companies whose securities are not publicly traded are not subject
to the disclosure and other investor protection requirements that would be
applicable if their securities were publicly traded. Acting pursuant to
guidelines established by the Trustees of the Trust, restricted securities and
Rule 144A securities may be considered liquid.
REPURCHASE AGREEMENTS - The Fund may engage in repurchase agreement transactions
as long as the underlying securities are of the type that the Fund would be
permitted to purchase directly. Under the terms of a typical repurchase
agreement, the Fund would acquire an underlying debt obligation for a relatively
short period (usually not more than one week) subject to an obligation of the
seller to repurchase, and the Fund to resell, the obligation at an agreed upon
price and time, thereby determining the yield during the Fund's holding period.
The Fund
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will enter into repurchase agreements with respect to securities in which it may
invest with member banks of the Federal Reserve System or certain non-bank
dealers. Under each repurchase agreement the selling institution will be
required to maintain the value of the securities subject to the repurchase
agreement at not less than their repurchase price. Repurchase agreements could
involve certain risks in the event of default or insolvency of the other party,
including possible delays or restrictions upon a Fund's ability to dispose of
the underlying securities. The Adviser or the Subadviser, acting under the
supervision of the Board of Trustees, reviews the creditworthiness of those
banks and non-bank dealers with which the Fund enters into repurchase agreements
to evaluate these risks. For additional information, see "Repurchase Agreements"
in the Statement of Additional Information.
REVERSE REPURCHASE AGREEMENTS - The Fund may also enter into reverse repurchase
agreements with the same parties with whom it may enter into repurchase
agreements. Reverse repurchase agreements involve the sale of securities held by
the Fund pursuant to its agreement to repurchase them at a mutually agreed upon
date, price and rate of interest. At the time the Fund enters into a reverse
repurchase agreement, it will establish and maintain a segregated account with
an approved custodian containing liquid securities having a value not less than
the repurchase price (including accrued interest). The assets contained in the
segregated account will be marked-to-market daily and additional assets will be
placed in such account on any day in which the assets fall below the repurchase
price (plus accrued interest). The Fund's liquidity and ability to manage its
assets might be affected when it sets aside cash or portfolio securities to
cover such commitments. Reverse repurchase agreements involve the risk that the
market value of the securities retained in lieu of sale may decline below the
price of the securities the Fund has sold but is obligated to repurchase. In the
event the buyer of securities under a reverse repurchase agreement files for
bankruptcy or becomes insolvent, such buyer or its trustee or receiver may
receive an extension of time to determine whether to enforce the Fund's
obligation to repurchase the securities, and the Portfolio's use of the proceeds
of the reverse repurchase agreement may effectively be restricted pending such
determination. Reverse repurchase agreements are considered to be borrowings
under the Investment Company Act of 1940 (the "1940 Act").
INVESTMENT COMPANIES - As permitted by the 1940 Act, the Fund reserves the right
to invest up to 10% of its total assets, calculated at the time of investment,
in the securities of other open-end or closed-end investment companies. No more
than 5% of the Fund's total assets may be invested in the securities of any one
investment company nor may it acquire more than 3% of the voting securities of
any other investment company. The Fund will indirectly bear its proportionate
share of any management fees paid by an investment company in which it invests
in addition to the advisory fee paid by the Fund.
WHEN-ISSUED SECURITIES - The Fund may invest without limitation in securities
purchased on a when-issued or delayed delivery basis. Although the payment and
interest terms of these securities are established at the time the purchaser
enters into the commitment, these securities may be delivered and paid for at a
future date, generally within 45 days. Purchasing when- issued securities allows
the Fund to lock in a fixed price or yield on a security it intends to
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purchase. However, when the Fund purchases a when-issued security, it
immediately assumes the risk of ownership, including the risk of price
fluctuation until the settlement date.
The greater the Fund's outstanding commitments for these securities, the greater
the exposure to potential fluctuations in the net asset value of a Fund.
Purchasing when-issued securities may involve the additional risk that the yield
available in the market when the delivery occurs may be higher or the market
price lower than that obtained at the time of commitment. Although the Fund may
be able to sell these securities prior to the delivery date, it will purchase
when-issued securities for the purpose of actually acquiring the securities,
unless after entering into the commitment a sale appears desirable for
investment reasons. When required by guidelines issued by the Securities and
Exchange Commission, the Fund will set aside permissible liquid assets in a
segregated account to secure its outstanding commitments for when-issued
securities.
LENDING PORTFOLIO SECURITIES - From time to time, the Fund may lend its
portfolio securities to brokers, dealers and other financial institutions who
need to borrow securities to complete certain transactions. In connection with
such loans, the Fund will receive collateral consisting of cash, U.S. Government
securities or irrevocable letters of credit. Such collateral will be maintained
at all times in an amount equal to at least 100% of the current market value of
the loaned securities. The Fund can increase its income through the investment
of such collateral. The Fund continues to be entitled to payments in amounts
equal to the interest, dividends or other distributions payable on the loaned
security and receives interest on the amount of the loan. Such loans will be
terminable at any time upon specified notice. The Fund might experience risk of
loss if the institution with which it has engaged in a portfolio loan
transaction breaches its agreement with the Fund.
BORROWING MONEY - The Fund may borrow money from banks up to 33 1/3% of its
total assets (including the amount borrowed). However, the Funds currently
intend to borrow money only for temporary or emergency purposes (but not for
leverage or to purchase investments), in an amount equal to a maximum of 5% of
the value of that Fund's total assets (including the amount borrowed) valued at
the time the borrowing is made.
PORTFOLIO TURNOVER
The Fund will attempt to purchase securities with the intent of holding them for
investment but may purchase and sell portfolio securities whenever the Adviser
or the Subadviser believes it to be in the best interests of the Fund. The Fund
will not consider portfolio turnover rate a limiting factor in making investment
decisions consistent with its investment objective and policies.
The annual portfolio turnover rate for the Fund is not expected to exceed 200%.
Higher turnover rates will generally result in higher transaction costs to the
Fund, as well as higher brokerage expenses and higher levels of capital gains.
The portfolio turnover rates of the Fund may vary greatly from year to year and
within a particular year.
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PERFORMANCE INFORMATION DERIVED FROM ANOTHER REGISTERED
INVESTMENT COMPANY
The Fund has not commenced operations and has no investment performance record.
However, the Fund's investment objective and policies and investment strategies
will be substantially similar to those employed by The Dreyfus Corporation with
respect to another registered investment company for which it also serves as
subadviser (the "Other Fund"). The performance of the Other Fund is being
provided for illustrative purposes only and does not represent performance of
the Fund. Nor should the Other Fund's performance be considered indicative of,
or a substitute for, the performance of the Fund.
While the Fund's investment objective and policies and investment strategies
will be substantially similar to the Other Fund, they will differ in the
following respects: (i) the Fund will invest in a portfolio of securities with a
median market capitalization of approximately $1 billion, while the Other Fund
invests in a portfolio of securities with a median market capitalization of
approximately $750 million; (ii) under normal market conditions at least 75% of
the Fund's investments will be in equity securities of companies with
capitalizations at the time of purchase between $200 million and $2.5 billion,
while under normal market conditions at least 75% of the Other Fund's
investments are in equity securities of companies with capitalizations at the
time of purchase between $150 million and $1.5 billion; and (iii) the Fund may
invest up to 20% of its total assets in equity securities of foreign issuers,
while the Other Fund may invest up to 5% of its total assets in equity
securities of foreign issuers.
The investment results of the Other Fund reflect the deduction of the advisory
fee charged to, and all other operating expenses associated with, the Other
Fund, at a total annual rate of .___%. (This fee and expenses are less than the
advisory fee and operating expenses that will be charged to and associated with
investing in the Fund. The performance of the Other Fund would have been lower
if it had been subject to the fees and expenses of the Fund.)
Aggregate Total Return Since Inception*
---------------------------------------
Other Fund
*Inception Date = October __, 1996
MANAGEMENT OF THE TRUST
TRUSTEES AND OFFICERS
The business and affairs of the Trust are managed under the direction of its
Board of Trustees.
The Board of Trustees sets and reviews policies regarding the operation of the
Trust, whereas the officers perform the daily functions of the Trust.
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INVESTMENT MANAGEMENT OF THE FUND
THE ADVISER - Under the terms of the Investment Advisory Agreement, Nationwide
Advisory Services, Inc., Three Nationwide Plaza, Columbus, Ohio 43215, oversees
the investment of the assets for the Fund and supervises the daily business
affairs of the Fund. Subject to the supervision and direction of the Trustees,
the Adviser also evaluates and monitors the performance of the Subadviser. The
Adviser is also authorized to select and place portfolio investments on behalf
of the Fund; however, the Adviser does not intend to do so at this time.
The Adviser and the Trust have applied to the Securities and Exchange Commission
for an exemptive order which, if granted, will allow the Adviser to appoint,
replace or terminate subadvisers without the approval of shareholders; the order
would also allow the Adviser to revise a subadvisory agreement without
shareholder approval. Any change in subadvisers will be communicated to
shareholders within 60 days of such changes and all changes will be approved by
the Trust's Board of Trustees, including a majority of the Trustees who are not
interested persons of the Trust or the Adviser. The order, if granted, is
intended to facilitate the efficient operation of the Fund and afford the Trust
increased management flexibility. Prior to receiving the exemptive order, the
Adviser will not appoint, replace or terminate any subadvisers or materially
amend any subadvisory agreement without obtaining the approval of shareholders.
The Adviser provides to the Fund investment management evaluation services
principally by performing initial due diligence on prospective subadvisers for
the Fund and thereafter monitoring the performance of the subadvisers through
quantitative and qualitative analysis as well as through periodic in-person,
telephonic and written consultations with the subadvisers. The Adviser has
responsibility for communicating performance expectations and evaluations to the
subadvisers and ultimately recommending to the Trust's Board of Trustees whether
a subadviser's contract should be renewed, modified or terminated; however, the
Adviser does not expect to recommend frequent changes of subadvisers. The
Adviser will regularly provide written reports to the Board of Trustees
regarding the results of its evaluation and monitoring functions. Although the
Adviser will monitor the performance of the subadvisers, there is no certainty
that any subadviser or the Fund will obtain favorable results at any given time.
The Adviser, an Ohio corporation, is a wholly owned subsidiary of Nationwide
Life Insurance Company, which is owned by Nationwide Financial Services, Inc.
(NFS). NFS, a holding company, has two classes of common stock outstanding with
different voting rights enabling Nationwide Corporation (the holder of all the
outstanding Class B Common Stock) to control NFS. Nationwide Corporation is also
a holding company in the Nationwide Insurance Enterprise. All of the common
stock of Nationwide Corporation is held by Nationwide Mutual Insurance Company
(95.3%) and Nationwide Mutual Fire Insurance Company (4.7%), each of which is a
mutual company owned by its policyholders. The Fund pays to the Adviser a fee at
the annual rate of 0.90% of the Fund's average daily net assets.
THE SUBADVISERS - Subject to the supervision of the Adviser and the Trustees,
the Subadviser manages the Fund's assets in accordance with the Fund's
investment objective and policies. The
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Subadviser shall make investment decisions for the Fund, and in connection with
such investment decisions shall place purchase and sell orders for securities.
For the investment management services it provides to the Fund, the Subadviser
receives an annual fee from the Adviser in an amount equal to 0.50% of the first
$200 million of the Fund's average daily net assets and 0.45% of the Fund's
average daily net assets in excess of $200 million. Below is a brief description
of the Subadviser.
The Subadviser, located at 200 Park Avenue, New York, New York 10166, was formed
in 1947. The Subadviser is a wholly-owned subsidiary of Mellon Bank, N.A. which
is a wholly-owned subsidiary of Mellon Bank Corporation ("Mellon"). As of June
30, 1997, the Subadviser managed or administered approximately $87 billion in
assets for approximately 1.7 million investor accounts nationwide.
Mellon is publicly owned multibank holding company incorporated under
Pennsylvania law in 1971 and registered under the Federal Bank Holding Company
Act of 1956, as amended. Mellon provides a comprehensive range of financial
products and services in domestic and selected international markets. Mellon is
among the twenty-five largest bank holding companies in the United States based
on total assets. Mellon's principal wholly-owned subsidiaries are Mellon Bank,
N.A., Mellon Bank (DE) National Association, Mellon Bank (MD), The Boston
Company, Inc., AFCO Credit Corporation and a number of companies known as Mellon
Financial Services Corporations. Through its subsidiaries, including the
Subadviser, Mellon managed approximately $259 billion in assets as of March 31,
1997, including approximately $81 billion in proprietary mutual fund assets. As
of March 31, 1997, various subsidiaries of Mellon provided non-investment
services, such as custodial or administration services, for approximately $1.061
trillion in assets including approximately $58 billion in mutual fund assets.
David L. Diamond, CFA, is a Senior Vice President of The Boston Company (a
subsidiary of the Subadviser) and joined The Boston Company in 1991 as an equity
portfolio manager. He will serve as the lead portfolio manager for the Fund. Mr.
Diamond has over 12 years of investment experience. Peter I. Higgins, CFA, is
also a Senior Vice President of The Boston Company and will serve as the
co-manager of the Fund with Mr. Diamond. Mr. Higgins joined The Boston Company
in 1933 and has over 13 years of investment experience.
OTHER SERVICES
Under the terms of a Fund Administration Agreement, the Adviser also provides
various administrative and accounting services, including daily valuation of the
Fund's shares and preparation of financial statements, tax returns, and
regulatory reports. For these services, the Fund pays the Adviser an annual fee
in the amount of 0.07% of the Fund's first $250 million of average daily net
assets, 0.05% on the next $750 million and 0.04% on assets of more than $1
billion.
The Transfer and Dividend Disbursing Agent, Nationwide Investors Services, Inc.,
("NIS"), Three Nationwide Plaza, Columbus, Ohio 43216, serves as transfer agent
and dividend disbursing agent for the Trust. The Fund pays to NIS a fee for such
services at the annual rate
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of 0.01% of the Fund's average daily net assets. NIS is a wholly owned
subsidiary of the Adviser.
INVESTMENT IN FUND SHARES
An insurance company may purchase shares of the Fund using purchase payments
received on Contracts issued by Accounts. These Accounts are funded by shares of
the Fund. Funds of Funds may also purchase shares of the Fund for their
portfolios. There is no sales charge, and all shares are sold at net asset
value.
Shares of the Fund are currently sold only to separate accounts of Nationwide
Life Insurance Company and its wholly owned subsidiary Nationwide Life and
Annuity Insurance Company to fund the benefits under the Contract and to
affiliated Fund of Funds. The address for each of these entities is One
Nationwide Plaza, Columbus, Ohio 43215.
All investments in the Fund are credited to the shareholder's account in the
form of full and fractional shares of the Fund (rounded to the nearest 1/1000 of
a share). The Trust does not issue share certificates. Initial and subsequent
purchase payments allocated to the Fund are subject to the limits applicable to
the Contracts.
SHARE REDEMPTION
Redemptions are processed on any day on which the Trust is open for business and
are effected at net asset value next determined after the redemption order, in
proper form, is received by the Trust's transfer agent, NIS.
The net asset value per share of the Fund is determined once daily, as of the
close of regular trading on the New York Stock Exchange (generally 4:00 P.M.
Eastern Time), on each business day the New York Stock Exchange is open for
regular trading and on such other days as the Board determines and on any other
day during which there is a sufficient degree of trading in the Fund's portfolio
securities that the net asset value of the Fund is materially affected by
changes in the value of portfolio securities. The Trust will not compute net
asset value on customary national business holidays, including the following:
Christmas, New Year's Day, Martin Luther King's Birthday, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, and Thanksgiving Day. The net
asset value per share is calculated by adding the value of all securities and
other assets of the Fund, deducting its liabilities, and dividing by the number
of shares outstanding.
In determining net asset value, portfolio securities listed on national
exchanges are valued at the last sales price on the principal exchange; if the
securities are traded only in the over-the-counter market, they are valued at
the quoted bid prices. Other portfolio securities are valued at the quoted
prices obtained from an independent pricing organization which employs a
combination of methods, including among others, the obtaining and comparison of
market valuations from dealers who make markets and deal in such securities and
the comparison of valuations with those of other comparable securities in a
matrix of such securities. The pricing service activities and results are
reviewed by an officer of the Trust. Securities for which
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<PAGE> 129
market quotations are not readily available are valued at fair value in
accordance with procedures adopted by the Board of Trustees. Expenses and fees
are accrued daily.
The Trust may suspend the right of redemption only under the following unusual
circumstances:
- - when the New York Stock Exchange is closed (other than weekends and
holidays) or trading is restricted;
- - when an emergency exists, making disposal of portfolio securities or the
valuation of net assets not reasonably practicable; or
- - during any period when the Securities and Exchange Commission has by order
permitted a suspension of redemption for the protection of shareholders.
NET INCOME AND DISTRIBUTIONS
Substantially all of the net investment income, if any, of the Fund will be
declared and paid as dividends quarterly. Net realized capital gains of the
Fund, if any, will be distributed at least annually.
ADDITIONAL INFORMATION
DESCRIPTION OF SHARES - The Declaration of Trust permits the Trustees to issue
an unlimited number of full and fractional shares of beneficial interest of the
Fund and to divide or combine such shares into a greater or lesser number of
shares without thereby changing the proportionate beneficial interests in the
Trust. Each share of the Fund represents an equal proportionate interest in the
Fund with each other share. The Trust reserves the right to create and issue
shares of a number of different funds. In that case, the shares of each fund
would participate equally in the earnings, dividends, and assets of the
particular fund, but shares of all funds would vote together in the election of
Trustees. Upon liquidation of a fund, its shareholders are entitled to share pro
rata in the net assets of such fund available for distribution to shareholders.
VOTING RIGHTS - Shareholders are entitled to one vote for each share held.
Shareholders may vote in the election or removal of Trustees and on other
matters submitted to meetings of shareholders. No amendment may be made to the
Declaration of Trust without the affirmative vote of a majority of the
outstanding shares of the Trust. The sole shareholder of the Fund initially will
be Nationwide Life Insurance Company. The Trustees may, however, amend the
Declaration of Trust without the vote or consent of shareholders to:
- - designate series of the Trust;
- - change the name of the Trust; or
- - supply any omission, cure, correct, or supplement any ambiguous, defective,
or inconsistent provision to conform the Declaration of Trust to the
requirements of applicable federal and state laws or regulations if they
deem it necessary.
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<PAGE> 130
Shares have no pre-emptive or conversion rights. Shares are fully paid and
nonassessable. In regard to termination, sale of assets, or changes of
investment restrictions, the right to vote is limited to the holders of shares
of the particular fund affected by the proposal. When a majority is required, it
means the lesser of 67% or more of the shares present at a meeting when the
holders of more than 50% of the outstanding shares are present or represented by
proxy, or more than 50% of the outstanding shares.
SHAREHOLDER INQUIRIES - All inquiries regarding the Fund should be directed to
the Trust at the telephone number or address shown on the cover page of this
Prospectus.
PERFORMANCE ADVERTISING FOR THE FUND
The Fund may use historical performance in advertisements, sales literature, and
the prospectus. Such figures will include quotations of average annual total
return for the most recent one, five, and ten year periods (or the life of the
Fund if less). Average annual total return represents the rate required each
year for an initial investment to equal the redeemable value at the end of the
specific period. Average annual total return reflects reinvestment of all
distributions.
TAX STATUS
The Trust's policy is to cause each fund to qualify as a regulated investment
company and to meet the requirements of Subchapter M of the Internal Revenue
Code (the "Code"). The Fund intends to distribute all its taxable net investment
income and capital gains to shareholders and therefore will not be required to
pay any federal income taxes.
Because each fund of the Trust is treated as a separate entity for purposes of
the regulated investment company provisions of the Code, the assets, income, and
distributions of the Fund are considered separately for purposes of determining
whether or not the Fund qualifies as a regulated investment company. The Fund
intends to comply with the diversification requirements currently imposed by the
Internal Revenue Service on separate accounts of insurance companies as a
condition of maintaining the tax-deferred status of the Contracts. See the
Statement of Additional Information for more specific information.
The tax treatment of payments made by an Account to a Contractholder is
described in the separate account prospectus.
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<PAGE> 131
CONTENTS
Sale of Fund Shares
Investment Objective and Policies
Investment Techniques, Considerations and Risk Factors
Management of the Trust
Investment in Fund Shares
Share Redemption
Net Income and Distributions
Additional Information
Performance Advertising for the Fund
Tax Status
INVESTMENT ADVISER AND ADMINISTRATOR
Nationwide Advisory Services, Inc.
Three Nationwide Plaza
Columbus, Ohio 43215
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Nationwide Investors Services, Inc.
Box 1492
Three Nationwide Plaza
Columbus, Ohio 43216
AUDITORS
KPMG Peat Marwick LLP
Two Nationwide Plaza
Columbus, Ohio 43215
LEGAL COUNSEL
Druen, Dietrich, Koogler & Reynolds
One Nationwide Plaza
Columbus, Ohio 43215
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PROSPECTUS
OCTOBER _____, 1997
SHARES OF BENEFICIAL INTEREST OF
NATIONWIDE MULTI SECTOR BOND FUND
ONE SERIES OF
NATIONWIDE SEPARATE ACCOUNT TRUST
THREE NATIONWIDE PLAZA
COLUMBUS, OHIO 43215
FOR INFORMATION AND ASSISTANCE,
CALL (614) 249-5134
Nationwide Multi Sector Bond Fund (the "Fund") is a diversified portfolio of the
Nationwide Separate Account Trust (the "Trust"). The Trust is an open-end
management investment company organized under the laws of Massachusetts, by a
Declaration of Trust, dated June 30, 1981, as subsequently amended. The Trust
offers shares in 15 separate mutual funds, each with its own investment
objective. This Prospectus relates only to Nationwide Multi Sector Bond Fund.
The shares of the Fund are sold to other open-end investment companies created
by Nationwide Advisory Services, Inc., the Fund's investment adviser, as well as
to life insurance company separate accounts to fund the benefits of variable
life insurance policies and annuity contracts.
The Fund seeks to obtain a high level of income. As a secondary objective, the
Fund seeks capital appreciation. The Fund seeks to achieve its objectives by
investing in a globally diverse portfolio of fixed income investments.
This Prospectus provides you with the basic information you should know before
investing in the Fund. You should read it and keep it for future reference. A
Statement of Additional Information dated October ___, 1997, has been filed with
the Securities and Exchange Commission. You can obtain a copy without charge by
calling (614) 249-5134, or writing Nationwide Life Insurance Company, One
Nationwide Plaza, Columbus, Ohio 43215.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
THE STATEMENT OF ADDITIONAL INFORMATION FOR THE TRUST, DATED
OCTOBER ___, 1997, IS INCORPORATED HEREIN BY REFERENCE.
<PAGE> 133
SALE OF FUND SHARES
Shares of the Fund may be sold to life insurance company separate accounts (the
"Accounts") to fund the benefits of variable life insurance policies or annuity
contracts ("Contracts") issued by life insurance companies, as well as to other
open-end investment companies (each, a "Fund of Funds") created by Nationwide
Advisory Services, Inc. (the "Adviser"), the Fund's investment adviser. The
Accounts purchase shares of the Fund in accordance with variable account
allocation instructions received from owners of the Contracts. The Fund then
uses the proceeds to buy securities for its portfolio. The Adviser, together
with a subadviser, manages the portfolio from day to day to accomplish the
Fund's investment objectives. The types of investments and the way they are
managed depend on what is happening in the economy and the financial
marketplaces. Each Fund of Funds and Account, as a shareholder, has an ownership
in the Fund's investments. The Fund also offers to buy back (redeem) its shares
from the Fund of Funds or the Accounts at any time at net asset value.
SUMMARY OF EXPENSES
Shareholder Transaction Expenses None
Estimated Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees 0.75%
12b-1 Fees None
Other Expenses 0.15%
----
Estimated Total Fund Operating Expenses1 0.90%
====
This summary is provided to assist investors in understanding the various costs
and expenses that an investor in the Fund will bear directly or indirectly. The
amount of "Other Expenses" is based on estimated amounts for the fiscal year
ending December 31, 1997.
Example:
1 year 3 years
------ -------
You would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and
(2) redemption at the end of each time period $9 $29
- --------
(1) The Adviser has agreed with the Trust to waive management fees or
reimburse expenses of the Fund to the extent necessary to limit the
total expense ratio of the Fund to a maximum of 0.90% of the average
net assets of the Fund.
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<PAGE> 134
THE EXAMPLE SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESSER THAN THOSE SHOWN.
For more information on Fund expenses, see "MANAGEMENT OF THE TRUST."
FINANCIAL HIGHLIGHTS
Financial highlights are not available for the Fund, because the Fund has not
yet commenced operations.
INVESTMENT OBJECTIVE AND POLICIES
The primary objective of the Fund is to seek a high level of current income. As
a secondary objective, the Fund will seek capital appreciation. The Fund seeks
to achieve its objectives by investing in a globally diverse portfolio of
fixed-income investments and by giving the subadviser broad discretion to deploy
the Fund's assets among certain segments of the fixed-income market that the
Fund's subadviser believes will best contribute to achievement of the Fund's
investment objectives. In pursuing its investment objectives, the Fund reserves
the right to invest predominantly in securities rated in medium or lower rating
categories or as determined by the subadviser to be of comparable quality.
Although the subadviser has the ability to invest up to 100% of the Fund's
assets in lower-rated securities, the subadviser does not anticipate investing
in excess of 75% of the Fund's assets in such securities.
At any point in time, the subadviser will deploy the Fund's assets based on its
analysis of current economic and market conditions and the relative risks and
opportunities present in the following market segments: U.S. government
obligations, investment grade domestic corporate debt securities, high yield
domestic corporate debt securities, mortgage-backed securities and investment
grade and high yield foreign corporate and sovereign debt securities. The Fund
does not plan to establish a minimum or a maximum percentage of the assets which
it will invest in any particular type of fixed-income security.
The subadviser will determine the amount of assets to be allocated to each type
of security in which the Fund invests based on its assessment of the maximum
level of income and capital appreciation that can be achieved from a portfolio
which is invested in these securities. In making this determination, the
subadviser will rely in part on quantitative analytical techniques that measure
relative risks and opportunities of each type of security based on current and
historical economic, market, political and technical data for each type of
security, as well as on its own assessment of economic and market conditions
both on a global and local (country) basis. In performing quantitative analysis,
the subadviser will employ prepayment analysis and option adjusted spread
technology to evaluate mortgage securities, mean variance optimization models to
evaluate foreign debt securities, and total rate of return analysis to measure
relative risks and opportunities in other fixed-income markets. Economic factors
considered will include current and projected levels of growth and inflation,
balance of payment status and monetary policy. The allocation of assets to
foreign debt securities will further be influenced by current
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<PAGE> 135
and expected currency relationships and political and sovereign factors. The
subadviser will continuously review this allocation of assets and make such
adjustments as it deems appropriate.
In addition, the subadviser will have discretion to select the range of
maturities of the various fixed-income securities in which the Fund invests. It
is anticipated that under current market conditions, the Fund's portfolio
securities will have a weighted average life of 6 to 10 years. However, the
weighted average life of the portfolio securities may vary substantially from
time to time depending on economic and market conditions.
The investment grade corporate debt securities and the investment grade foreign
debt securities to be purchased by the Fund are domestic and foreign debt
securities rated within the four highest bond ratings of either Moody's Investor
Services, Inc. ("Moody's") or Standard & Poor's Corporation ("S&P"), or, if
unrated, deemed by the subadviser to be of equivalent quality. While debt
securities carrying the fourth highest quality rating ("Baa" by Moody's or "BBB"
by S&P) are considered investment grade and are viewed to have adequate capacity
for payment of principal and interest, investments in such securities involve a
higher degree of risk than the risk associated with investments in debt
securities in the higher rating categories, and such debt securities lack
outstanding investment characteristics and in fact have speculative
characteristics as well. For example, changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher grade debt securities.
The U.S. government obligations and mortgage-backed securities that the Fund may
purchase include (1) U.S. Treasury obligations; (2) obligations issued or
guaranteed by agencies or instrumentalities of the U.S. government, whether such
obligations are backed by the full faith and credit of the U.S. government or
only by the credit of the agency or instrumentality itself; (3) mortgage-backed
securities whether or not such securities are backed by the full faith and
credit of the U.S. government; and (4) collateralized mortgage obligations
issued by private issuers for which the underlying mortgage-backed securities
serving as collateral are backed: (i) by the credit alone of the U.S. government
agency or instrumentality which issues or guarantees the mortgage-backed
securities; or (ii) by the full faith and credit of the U.S. government. The
mortgage-backed securities in which the Fund invests represent participative
interests in pools of fixed rate and adjustable rate residential mortgage loans
issued or guaranteed by agencies or instrumentalities of the U.S. government.
Mortgage-backed securities are issued by lenders such as mortgage bankers,
commercial banks and savings and loan associations. The Fund does not currently
intend to invest more than 10% of its total assets in interest-only and
principal-only securities.
The Fund may invest in debt obligations issued or guaranteed by a foreign
sovereign government or by one of its agencies or political subdivisions and in
debt obligations issued or guaranteed by supranational organizations.
Supranational entities include international organizations designated or
supported by governmental entities to promote economic reconstruction or
development and international banking institutions and related government
agencies. Examples include the World Bank, the European Coal and Steel
Community, the Asian Development Bank
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<PAGE> 136
and the Inter-American Development Bank. Such supranational issued instruments
may be denominated in multi-national currency units. The Fund will not invest
more than 10% of its total assets in issuers located in any one country (other
than issuers located in the United States). In pursuing its investment
objectives, the Fund reserves the right to invest predominantly in medium or
lower-rated securities, commonly known as "junk bonds." Investments of this type
involve significantly greater risks, including price volatility and risk of
default in the payment of interest and principal, than higher-quality
securities. Although the subadviser does not anticipate investing in excess of
75% of the Fund's assets in domestic and developing country debt securities that
are rated below investment grade, the Fund may invest a greater percentage in
such securities when, in the subadviser's determination, the yield available
from such securities outweighs their additional risks. The subadviser
anticipates that under current market conditions, a significant portion of the
Fund's assets will be invested in such securities. By investing a portion of the
Fund's assets in securities rated below investment grade as well as through
investments in mortgage securities and foreign debt securities, the subadviser
expects to provide investors with a higher yield than a high-quality domestic
corporate bond fund. Certain of the debt securities in which the Fund may invest
may be rated as low as "C" by Moody's or "D" by S&P or may be considered
comparable to securities having such ratings.
In light of the risks associated with high yield corporate and sovereign debt
securities, the subadviser will take various factors into consideration in
evaluating the creditworthiness of an issuer. For corporate debt securities,
these will typically include the issuer's financial resources, its sensitivity
to economic conditions and trends, the operating history of the issuer, and the
experience and track record of the issuer's management. For sovereign debt
instruments, these will typically include the economic and political conditions
within the issuer's country, the issuer's overall and external debt levels and
debt service ratios, the issuer's access to capital markets and other sources of
funding, and the issuer's debt service payment history. The subadviser will also
review the ratings, if any, assigned to the security by any recognized rating
agencies, although the subadviser's judgment as to the quality of a debt
security may differ from that suggested by the rating published by a rating
service. The Fund's ability to achieve its investment objectives may be more
dependant on the subadviser's credit analysis than would be the case if the Fund
invested in higher quality debt securities.
The high yield sovereign debt securities in which the Fund may invest are U.S.
dollar-denominated and non-dollar denominated debt securities, including Brady
Bonds, that are issued or guaranteed by governments or governmental entities of
developing and emerging market countries. The subadviser expects that these
countries will consist primarily of those which have issued or have announced
plans to issue Brady bonds, but the Fund is not limited to investing in the debt
of such countries. Brady Bonds are debt securities issued under the framework of
the Brady Plan, an initiative announced by former U.S. Treasury Secretary
Nicholas F. Brady in 1989 as a mechanism for debtor nations to restructure their
outstanding external indebtedness. For a description of Brady Bonds, see
"INVESTMENT TECHNIQUES, CONSIDERATIONS AND RISK FACTORS - High Yield Securities"
below. It is anticipated that the Fund's investments in sovereign debt will be
concentrated in Latin American countries, including Central and South American
and Caribbean countries. The subadviser also expects to take
5
<PAGE> 137
advantage of additional opportunities for investment in the debt of North
African countries, such as Nigeria and Morocco, Eastern European countries, such
as Poland and Hungary, and Southeast Asian countries, such as the Philippines.
Sovereign governments may include national, provincial, state, municipal or
other foreign governments with taxing authority. Governmental entities may
include the agencies and instrumentalities of such governments, as well as
state-owned enterprises.
The Fund will be subject to special risks as a result of its ability to invest
up to 100% of its assets in foreign securities (including emerging market
securities). Such securities may be non-U.S. dollar denominated, and there is
no limit on the percentage of the Fund's assets that can be invested in
non-dollar denominated securities. It is anticipated that under current market
conditions, a significant portion of the Fund's assets will be invested in
foreign securities. Moreover, substantial investments in foreign securities may
have adverse tax implications as described below. The ability of the Fund to
spread its investments among the fixed-income markets in a number of different
countries may, however, reduce the overall level of market risk to the extent it
may reduce the Fund's exposure to a single market.
The Fund may invest in zero coupon securities, pay-in-kind bonds, Loan
Participations and Assignments, which are described more fully below under
"INVESTMENT TECHNIQUES, CONSIDERATIONS AND RISK FACTORS -- Loan Participations
and Assignments." The Fund may also invest up to 20% of its assets in common
stock, convertible securities, warrants, preferred stock or other equity
securities when consistent with the Fund's investment objectives. The Fund will
generally hold such equity investments as a result of purchasing unit offerings
of fixed-income securities which include such securities or in connection with
an actual or proposed conversion or exchange of fixed-income securities, but may
also purchase equity securities not associated with fixed-income securities
when, in the subadviser's opinion such purchase is appropriate.
The Fund currently intends to invest substantially all of its assets in
fixed-income securities. In order to maintain liquidity, the Fund may invest up
to 20% of its assets in high-quality short-term money market instruments. If at
some future date, in the opinion of the subadviser, adverse conditions prevail
in the market for fixed-income securities, the Fund for temporary defensive
purposes may invest its assets without limit in high-quality short-term money
market instruments. The types and characteristics of the money market securities
to be purchased by the Fund are set forth below under "INVESTMENT TECHNIQUES,
CONSIDERATIONS AND RISK FACTORS - Money Market Obligations."
The Fund may enter into repurchase agreements and reverse repurchase agreements,
may purchase securities on a firm commitment basis, including when-issued
securities, and may lend portfolio securities. The Fund does not currently
intend to make loans of portfolio securities with a value in excess of 33% of
the value of its total assets. The Fund may also enter into mortgage "dollar
rolls." The Fund may also purchase securities for which there is a limited
trading market or which are subject to restrictions on resale to the public or
which are otherwise illiquid.
6
<PAGE> 138
For a further discussion of the types of securities in which the Fund may invest
and related investment techniques, see "INVESTMENT TECHNIQUES, CONSIDERATIONS
AND RISK FACTORS" below.
At various times the Fund may invest in derivative instruments for hedging or
risk management purposes or for any other permissible purpose. See "INVESTMENT
TECHNIQUES, CONSIDERATIONS AND RISK FACTORS - Derivative Instruments" below.
With the exception of currency transactions, however, it is not presently
anticipated that any of these strategies will be used to a significant degree by
the Fund. The Fund's ability to pursue certain of these strategies may be
limited by applicable regulations of the Securities and Exchange Commission, the
Commodities Futures Trading Commission and the federal income tax requirements
applicable to regulated investment companies.
While there is careful selection of the securities in which the Fund may invest
and constant supervision of the Fund's portfolio, there can be no guarantee that
the Fund's objective will be achieved. The investment objective of the Fund is
not fundamental and may be changed by the Board of Trustees of the Trust without
shareholder approval.
MANAGEMENT OF THE FUND
The Adviser provides investment management evaluation services to the Fund in
initially selecting and monitoring on an ongoing basis the performance of a
subadviser to manage the Fund's portfolio. The Adviser has selected Salomon
Brothers Asset Management Inc to be the subadviser (the "Subadviser") of the
Fund. The Subadviser has entered into a subadvisory agreement with its London
based affiliate, Salomon Brothers Asset Management Limited ("SBAM Limited"),
pursuant to which the Subadviser has delegated to SBAM Limited responsibility
for management of the Fund's investments in non-dollar denominated debt
securities and currency transactions. See "MANAGEMENT OF THE TRUST -- Investment
Management of the Fund" below for further information.
The Subadviser will determine the amount of assets to be allocated to each type
of security in which it invests based on its assessment of the maximum level of
income and capital appreciation that can be achieved from a portfolio which is
invested in these securities. In making this determination, the Subadviser will
rely in part on quantitative analytical techniques that measure relative risks
and opportunities of each type of security based on current and historical
economic market, political and technical data for each type of security, as well
as on its own assessment of economic and market conditions both on a global and
local (country) basis. In performing quantitative analysis, the Subadviser will
employ prepayment analysis and option adjusted spread technology to evaluate
mortgage securities, mean variance optimization models to evaluate foreign debt
securities, and total rate of return analysis to measure relative risks and
opportunities in other fixed-income markets. Economic factors considered will
include current and projected levels of growth and inflation, balance of payment
status and monetary policy. The allocation of assets to foreign debt securities
will further be influenced by current and
7
<PAGE> 139
expected currency relationships and political and sovereign factors. The
Subadviser will continuously review this allocation of assets and make such
adjustments as it deems appropriate.
INVESTMENT TECHNIQUES, CONSIDERATIONS AND RISK FACTORS
An investment in the Fund involves certain risks. As a general matter, an
investment in the Fund involves the risk that the net asset value of the Fund's
shares will fluctuate in response to changes in economic conditions, interest
rates, and the market's perception of the securities held by the Fund. In
addition, because the Fund invests in bonds, an investment in the Fund is
subject to bond market risk, i.e., the risk that the market price of bonds in
general will fluctuate. Bond prices fluctuate largely in response to changes in
the level of interest rates. When interest rates rise, bond prices generally
fall; conversely, when interest rates fall, bond prices generally rise. Although
the fluctuation in the price of bonds is normally less than that of common
stocks, in the recent past there have been extended periods of cyclical
increases in interest rates, causing significant declines in the price of bonds
in general. An investment in the Fund is subject to other risks as well,
depending upon the particular investment techniques employed by the Fund and the
types of securities in which the Fund invests.
The Fund is designed for investors seeking relatively higher yields, seeking to
diversify or add income to a larger portfolio, seeking global diversification
across income markets and long-term investors seeking potential total return.
Investors should be aware that high-yield, lower quality securities involve
comparatively greater risks, including price volatility and the risk of default
in the timely payment of principal and interest, than higher-quality securities.
These and other risks are described in this prospectus.
FOREIGN SECURITIES AND CURRENCIES - The Fund may invest up to 20% of its total
assets in foreign securities, either directly or indirectly through the use of
depositary receipts. Depositary receipts, including ADRs, European Depository
Receipts and American Depository Shares, are generally issued by banks or trust
companies and evidence ownership of underlying foreign securities. The Fund may
also invest in securities of foreign investment funds or trusts (including
passive foreign investment companies).
Foreign investments involve special risks, including the possibility of
expropriation, confiscatory taxation, and withholding taxes on dividends and
interest; less extensive regulation of foreign brokers, securities markets, and
issuers; political, economic or social instability; and less publicly available
information and different accounting standards. When investing in foreign
securities, the Fund may also incur costs in conversions between currencies,
possible delays in settlement in foreign securities markets, limitations on the
use or transfer of assets (including suspension of the ability to transfer
currency from a given country), and difficulty in enforcing obligations in other
countries.
Foreign economies may differ favorably or unfavorably from the U.S. economy in
various respects, including growth of gross domestic product, rates of
inflation, currency depreciation, capital reinvestment, resource
self-sufficiency, and balance of payments positions. Many foreign
8
<PAGE> 140
securities are less liquid and their prices more volatile than comparable U.S.
securities. Although the Fund generally invests only in securities that are
regularly traded on recognized exchanges or OTC, from time to time, foreign
securities may be difficult to liquidate rapidly without adverse price effects.
Certain costs attributable to foreign investing, such as custody charges and
brokerage costs, are higher than those attributable to domestic investing.
The Fund may invest a portion of its assets in securities of issuers in
developing or emerging markets and economies. Investing in securities of issuers
in developing or emerging markets involves special risks, including less social,
political, and economic stability; smaller securities markets and lower trading
volume, which may result in a lack of liquidity and greater price volatility;
certain national policies that may restrict the Fund's investment opportunities,
including restrictions on investments in issuers or industries deemed sensitive
to national interests, or expropriation or confiscation of assets or property,
which could result in a Fund's loss of its entire investment in that market; and
less developed legal structures governing private or foreign investment or
allowing for judicial redress for injury to private property.
In addition, brokerage commissions, custodial services, withholding taxes, and
other costs relating to investment in emerging markets generally are more
expensive than in the U.S. and certain more established foreign markets.
Economies in emerging markets generally are heavily dependent upon international
trade and, accordingly, have been and may continue to be affected adversely by
trade barriers, exchange controls, managed adjustments in relative currency
values, and other protectionist measures negotiated or imposed by the countries
with which they trade.
Because most foreign securities are denominated in non-U.S. currencies, the
investment performance of the Fund could be significantly affected by changes in
foreign currency exchange rates. The value of the Fund's assets denominated in
foreign currencies will increase or decrease in response to fluctuations in the
value of those foreign currencies relative to the U.S. dollar. Currency exchange
rates can be volatile at times in response to supply and demand in the currency
exchange markets, international balances of payments, governmental intervention,
speculation, and other political and economic conditions.
The Fund may purchase and sell foreign currency on a spot basis and may engage
in forward currency contracts, currency options, and futures transactions for
hedging or risk management purposes. See "Derivative Instruments" below.
WARRANTS - A warrant is an instrument which gives the holder the right, but not
the obligation, to subscribe to a specified amount of the issuer's securities at
a set price for a specified period of time or on a specified date. Warrants do
not carry the right to dividends or voting rights with respect to their
underlying securities, and they do not represent any rights in assets of the
issuer. An investment in warrants may be considered speculative. In addition,
the value of a warrant does not necessarily change with the value of the
underlying securities and a warrant ceases to have value if it is not exercised
prior to its expiration date.
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CONVERTIBLE SECURITIES - The Fund may invest in convertible securities, which
are bonds, debentures, notes, preferred stocks or other securities that may be
converted into or exchanged for a specified amount of common stock of the same
or a different issuer within a particular period of time at a specified price or
formula. Convertible securities have general characteristics similar to both
debt obligations and equity securities. Although to a lesser extent than with
debt obligations generally, the market value of convertible securities tends to
decline as interest rates increase and, conversely, tends to increase as
interest rates decline. In addition, because of the conversion feature, the
market value of convertible securities tends to vary with fluctuations in the
market value of the underlying common stock and therefore will react to
variations in the general market for equity securities. A unique feature of
convertible securities is that as the market price of the underlying common
stock declines, convertible securities tend to trade increasingly on a yield
basis, and so may not experience market value declines to the same extent as the
underlying common stock. When the market price of the underlying common stock
increases, the prices of the convertible securities tend to rise as a reflection
of the value of the underlying common stock. While no securities investments are
without risk, investments in convertible securities generally entail less risk
than investments in common stock of the same issuer.
As debt obligations, convertible securities are investments that provide for a
stable stream of income with generally higher yields than common stocks. Of
course, like all debt obligations, there can be no assurance of current income
because the issuers of the convertible securities may default on their
obligations. Convertible securities, however, generally offer lower interest or
dividend yields than non- convertible securities of similar quality because of
the potential for capital appreciation. A convertible security, in addition to
providing fixed income, offers the potential for capital appreciation through
the conversion feature, which enables the holder to benefit from increases in
the market price of the underlying common stock. There can be no assurance of
capital appreciation, however, because the market value of securities will
fluctuate.
Convertible securities generally are subordinated to other similar but
non-convertible securities of the same issuer, although convertible bonds, as
corporate debt obligations, enjoy seniority in right of payment to all equity
securities, and convertible preferred stock is senior to common stock of the
same issuer. Because of the subordination feature, however, convertible
securities typically are rated below investment grade or are not rated.
MONEY MARKET OBLIGATIONS - As described above, debt obligations in which the
Fund may invest generally will be medium and lower grade debt obligations,
although the Fund may invest its assets in high-quality short-term money market
obligations.
Money market obligations in which the Fund may invest include: 1) U.S.
government securities (as described below); 2) commercial paper rated in one of
the two highest ratings categories of any nationally recognized statistical
rating organization ("NRSRO") (e.g., Moody's or S&P); 3) short-term bank
obligations that are rated in one of the two highest categories by any NRSRO,
with respect to obligations maturing in one year or less; 4) repurchase
agreements relating to debt obligations which the Fund could purchase directly;
5) unrated debt obligations
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which are determined by the Adviser or the Subadviser to be of comparable
quality; or 6) money market mutual funds.
MEDIUM QUALITY OBLIGATIONS - Medium-quality obligations are obligations rated in
the fourth highest rating category by any NRSRO. Medium-quality securities,
although considered investment-grade, may have some speculative characteristics
and may be subject to greater fluctuations in value than higher-rated
securities. In addition, the issuers of medium-quality securities may be more
vulnerable to adverse economic conditions or changing circumstances than that of
higher-rated issuers.
All ratings are determined at the time of investment. Any subsequent rating
downgrade of a debt obligation will be monitored by the Adviser or the
Subadviser to consider what action, if any, the Fund should take consistent with
its investment objective; such event will not automatically require the sale of
the downgraded securities.
HIGH YIELD SECURITIES - The Fund may invest without limitation in domestic and
foreign "high yield" convertible securities (commonly known as "junk bonds").
Medium and lower rated securities will usually have higher yields than higher
rated securities. However, there is more risk associated with these investments.
This is because of reduced creditworthiness and increased risk of default. Under
rating agency guidelines, medium and lower rated securities and comparable
unrated securities will likely have some quality and protective characteristics
that are outweighed by large uncertainties or major risk exposures to adverse
conditions. Medium and lower rated securities are considered to have extremely
poor prospects of ever attaining any real investment standing, to have a current
identifiable vulnerability to default or to be in default, to be unlikely to
have the capacity to make required interest payments and repay principal when
due in the event of adverse business, financial or economic conditions, or to be
in default or not current in the payment of interest or principal. Such
securities are considered speculative with respect to the issuer's capacity to
make required interest and principal payments. The foregoing factors may, under
certain circumstances, reduce the value of securities held by the Fund and thus
affect the value of the Fund's shares.
Changes by recognized rating services in their ratings of any fixed-income
security and in the ability of an issuer to make payments of interest and
principal may also affect the value of these investments. The ratings of Moody's
and S&P generally represent the opinions of those organizations as to the
quality of the securities that they rate. Such ratings, however, are relative
and subjective, are not absolute standards of quality, are subject to change and
do not evaluate the market risk or liquidity of the securities. Ratings of a
non-U.S. debt instrument, to the extent that those ratings are undertaken, are
related to evaluations of the country in which the issuer of the instrument is
located. Ratings generally take into account the currency in which a non-U.S.
debt instrument is denominated. Instruments issued by a foreign government in
other than the local currency, for example, typically have a lower rating than
local currency instruments due to the existence of an additional risk that the
government will be unable to obtain the required foreign currency to service its
foreign currency-denominated debt. In
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general, the ratings of debt securities or obligations issued by a non-U.S.
public or private entity will not be higher than the rating of the currency or
the foreign currency debt of the central government of the country in which the
issuer is located, regardless of the intrinsic creditworthiness of the issuer.
The secondary markets for high yield securities are not as liquid as the
secondary markets for higher rated securities. The secondary markets for high
yield securities are concentrated in relatively few market makers and
participants in the market are mostly institutional investors, including
insurance companies, banks, other financial institutions and mutual funds. In
addition, the trading volume for high yield securities is generally lower than
that for higher-rated securities and the secondary markets could contract under
adverse market or economic conditions independent of any specific adverse
changes in the condition of a particular issuer. These factors may have an
adverse effect on the ability of the Fund to dispose of particular portfolio
investments, may adversely affect the Fund's net asset value per share and may
limit the ability of the Fund to obtain accurate market quotations for purposes
of valuing securities and calculating net asset value. If the Fund is not able
to obtain precise or accurate market quotations for a particular security, it
will become more difficult to value the Fund's portfolio securities, and a
greater degree of judgment may be necessary in making such valuations. Less
liquid secondary markets may also affect the ability of the Fund to sell
securities at their fair value. If the secondary markets for high yield
securities contract due to adverse economic conditions or for other reasons,
certain liquid securities in the Fund's portfolio may become illiquid and the
proportion of the Fund's assets invested in illiquid securities may
significantly increase.
Prices for high yield securities may be affected by legislative and regulatory
developments. These laws could adversely affect the Fund's net asset value and
investment practices, the secondary market for high yield securities, the
financial condition of issuers of these securities and the value of outstanding
high yield securities. For example, federal legislation requiring the
divestiture by federally insured savings and loan associations of their
investments in high yield bonds and limiting the deductibility of interest by
certain corporate issuers of high yield bonds adversely affected the market in
recent years.
While the market values of securities rated below investment grade and
comparable unrated securities tend to react less to fluctuations in interest
rate levels than do the market values of higher-rated securities, the market
values of certain of these securities also tend to be more sensitive to
individual corporate developments and changes in economic conditions than are
the market values of higher-rated securities. In addition, such securities
present a higher degree of credit risk. Issuers of these securities are often
highly leveraged and may not have more traditional methods of financing
available to them, so that their ability to service their debt obligations
during an economic downturn or during sustained periods of rising interest rates
may be impaired. The risk of loss due to default by such issuers is
significantly greater than the risk of loss on investment grade securities,
because such securities generally are unsecured and frequently are subordinated
to the prior payment of senior indebtedness. The Fund also may
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incur additional expenses to the extent that it is required to seek recovery
upon a default in the payment of principal or interest on its portfolio
holdings.
The development of a market for high yield non-U.S. corporate securities has
been a relatively recent phenomenon. In contrast, the market for high yield U.S.
corporate debt securities is more established than the market for high yield
non-U.S. corporate securities, although it has undergone significant changes in
the past and may undergo significant changes in the future.
High yield non-U.S. and U.S. corporate securities in which the Fund may invest
include bonds, debentures, notes, commercial paper and preferred stock and will
generally be unsecured. Most of the debt securities will bear interest at fixed
rates. However, the Fund may also invest in corporate debt securities with
variable rates of interest or which involve equity features, such as contingent
interest or participations based on revenues, sales or profits (i.e., interest
or other payments, often in addition to a fixed rate of return, that are based
on the borrower's attainment of specified levels of revenues, sales or profits
and thus enable the holder of the security to share in the potential success of
the venture).
Investing in fixed and floating rate high yield foreign sovereign debt
securities will expose the Fund to the direct or indirect consequences of
political, social or economic changes in the countries that issue the
securities. The ability and willingness of sovereign obligors in developing and
emerging market countries or the governmental authorities that control repayment
of their external debt to pay principal and interest on such debts when due may
depend on general economic and political conditions within the relevant country.
Countries such as those in which the Fund may invest have historically
experienced, and may continue to experience, high rates of inflation, high
interest rates, exchange rate trade difficulties and extreme poverty and
unemployment. Many of these countries are also characterized by political
uncertainty or instability. Additional factors which may influence the ability
or willingness to service debt include, but are not limited to, a country's cash
flow situation, the availability of sufficient foreign exchange on the date a
payment is due, the relative size of its debt service burden to the economy as a
whole, and its government's policy towards the International Monetary Fund, the
World Bank and other international agencies.
The ability of a foreign sovereign obligor to make timely payments on its
external debt obligations will also be strongly influenced by the obligor's
balance of payments, including export performance, its access to international
credits and investments, fluctuations in interest rates and the extent of its
foreign reserves. A country whose exports are concentrated in a few commodities
or whose economy depends on certain strategic imports could be vulnerable to
fluctuations in international prices of these commodities or imports. To the
extent that a country receives payment for its exports in currencies other than
U.S. dollars, its ability to make debt payments denominated in U.S. dollars
could be adversely affected. If a foreign sovereign obligor cannot generate
sufficient earnings from foreign trade to service its external debt, it may need
to depend on continuing loans and aid from foreign governments, commercial banks
and multilateral organizations, and inflows of foreign investment. The
commitment on the part of these foreign governments, multilateral organizations
and others to make such disbursements
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may be conditioned on the government's implementation of economic reforms and/or
economic performance and the timely service of its obligations. Failure to
implement such reforms, achieve such levels of economic performance or repay
principal or interest when due may result in the cancellation of such third
parties' commitments to lend funds, which may further impair the obligor's
ability or willingness to timely service its debts. The cost of servicing
external debt will also generally be adversely affected by rising international
interest rates, because many external debt obligations bear interest at rates
which are adjusted based upon international interest rates. The ability to
service external debt will also depend on the level of the relevant government's
international currency reserves and its access to foreign exchange. Currency
devaluations may affect the ability of a sovereign obligor to obtain sufficient
foreign exchange to service its external debt.
As a result of the foregoing, a governmental obligor may default on its
obligations. If such an event occurs, the Fund may have limited legal recourse
against the issuer and/or guarantor. Remedies must, in come cases, be pursued in
the courts of the defaulting party itself, and the ability of the holder of
foreign sovereign debt securities to obtain recourse may be subject to the
political climate in the relevant country. In addition, no assurance can be
given that the holders of commercial bank debt will not contest payments to the
holders of other foreign debt obligations in the event of default under their
commercial bank loan agreements.
Certain debt obligations, customarily referred to as "Brady Bonds," are created
through the exchange of existing commercial bank loans to foreign entities for
new obligations in connection with debt restructuring under a plan introduced by
former U.S. Secretary of the Treasury, Nicholas F. Brady (the "Brady Plan").
Brady Bonds have been issued only recently, and, accordingly, do not have a long
payment history. They may be collateralized or uncollateralized and issued in
various currencies (although most are dollar-dominated) and they are actively
traded in the over-the-counter secondary market. Dollar-denominated,
collateralized Brady Bonds, which may be fixed rate par bonds or floating rate
discount bonds, are generally collateralized in full as to principal due at
maturity by U.S. Treasury zero coupon obligations which have the same maturity
as the Brady Bonds. Certain interest payments on these Brady Bonds may be
collateralized by cash or securities in an amount that, in the case of fixed
rate bonds, is typically equal to between 12 and 18 months of rolling interest
payments or, in the case of floating rate bonds, initially is typically equal to
between 12 and 18 months rolling interest payments based on the applicable
interest rate at the time and is adjusted at regular intervals thereafter with
the balance of interest accruals in each case being uncollateralized. The Fund
may purchase Brady Bonds with no or limited collateralization, and will be
relying for payment of interest and (except in the case of principal
collateralized Brady Bonds) principal primarily on the willingness and ability
of the foreign government to make payment in accordance with the terms of the
Brady Bonds. In the event of a default with respect to collateralized Brady
Bonds as a result of which the payment obligations of the issuer are
accelerated, the U.S. Treasury zero coupon obligations held as collateral for
the payment of principal will not be distributed to investors, nor will such
obligations be sold and the proceeds distributed. The collateral will be held by
the collateral agent to the scheduled maturity of the defaulted Brady Bonds,
which will continue to be outstanding, at which time the face amount
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of the collateral will equal the principal payments which would have then been
due on the Brady Bonds in the normal course. Based upon current market
conditions, the Fund would not intend to purchase Brady Bonds which, at the time
of investment, are in default as to payments. However, in light of the residual
risk of the Brady Bonds and, among other factors, the history of default with
respect to commercial bank loans by public and private entities of countries
issuing Brady Bonds, investments in Brady Bonds are to be viewed as speculative.
A substantial portion of the Brady Bonds and other sovereign debt securities in
which the Fund invests are likely to be acquired at a discount, which involves
certain considerations discussed below under "Tax Status."
Sovereign obligors in developing and emerging market countries are among the
world's largest debtors to commercial banks, other governments, international
financial organizations and other financial institutions. These obligors have in
the past experienced substantial difficulties in servicing their external debt
obligations, which led to defaults on certain obligations and the restructuring
of certain indebtedness. Restructuring arrangements have included, among other
things, reducing and rescheduling interest and principal payments by negotiating
new or amended credit agreements or converting outstanding principal and unpaid
interest to Brady Bonds, and obtaining new credit to finance interest payments.
Holders of certain foreign sovereign debt securities may be requested to
participate in the restructuring of such obligations and to extend further loans
to their issuers. There can be no assurance that the Brady Bonds and other
foreign sovereign debt securities in which the Fund may invest will not be
subject to similar restructuring arrangements or to requests for new credit
which may adversely affect the Fund's holdings. Furthermore, certain
participants in the secondary market for such debt may be directly involved in
negotiating the terms of these arrangements and may therefore have access to
information not available to other market participants.
U.S. GOVERNMENT SECURITIES - U.S. government securities are issued or guaranteed
by the U.S. government or its agencies or instrumentalities. Securities issued
by the U.S. government include U.S. Treasury obligations, such as Treasury
bills, notes, and bonds. Securities issued by government agencies or
instrumentalities include, but are not limited to, obligations of the following:
- - the Federal Housing Administration, Farmers Home Administration, and the
Government National Mortgage Association ("GNMA"), including GNMA
pass-through certificates, whose securities are supported by the full faith
and credit of the United States;
- - the Federal Home Loan Banks, whose securities are supported by the right of
the agency to borrow from the U.S. Treasury;
- - the Federal National Mortgage Association, whose securities are supported
by the discretionary authority of the U.S. government to purchase certain
obligations of the agency or instrumentality; and
- - the Student Loan Marketing Association, Federal Home Loan Mortgage
Corporation ("FHLMC"), and the International Bank for Reconstruction and
Development, whose securities are supported only by the credit of such
agencies.
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Although the U.S. government provides financial support to such U.S.
government-sponsored agencies or instrumentalities, no assurance can be given
that it will always do so. The U.S. government and its agencies and
instrumentalities do not guarantee the market value of their securities;
consequently, the value of such securities will fluctuate.
MORTGAGE- AND ASSET-BACKED SECURITIES - The Fund may purchase both mortgage- and
asset-backed securities. Mortgage-backed securities represent direct or
indirect participation in, or are secured by and payable from, mortgage loans
secured by real property, and include single- and multi-class pass-through
securities and collateralized mortgage obligations. Such securities may be
issued or guaranteed by U.S. government agencies or instrumentalities or by
private issuers, generally originators of or investors in mortgage loans,
including savings and loan associations, mortgage bankers, commercial banks,
investment banks, and special purpose entities (collectively, "private
lenders"). Mortgage-backed securities issued by private lenders may be supported
by pools of mortgage loans or other mortgage-backed securities that are
guaranteed, directly or indirectly, by the U.S. government or one of its
agencies or instrumentalities, or they may be issued without any governmental
guarantee of the underlying mortgage assets but with some form of
non-governmental credit enhancement. The underlying mortgage assets may have
fixed rates or adjustable rates of interest.
Asset-backed securities have structural characteristics similar to
mortgage-backed securities. However, the underlying assets are not first-lien
mortgage loans or interests therein; rather they include assets such as motor
vehicle installment sales contracts, other installment loan contracts, home
equity loans, leases of various types of property and receivables from credit
card and other revolving credit arrangements. Payments or distributions of
principal and interest on asset-backed securities may be supported by
non-governmental credit enhancements similar to those utilized in connection
with mortgage-backed securities.
The yield characteristics of mortgage- and asset-backed securities differ from
those of traditional debt obligations. Among the principal differences are that
interest and principal payments are made more frequently on mortgage- and
asset-backed securities, usually monthly, and that principal may be prepaid at
any time because the underlying mortgage loans or other assets generally may be
prepaid at any time. As a result, if the Fund purchases these securities at a
premium, a prepayment rate that is higher than expected will reduce yield to
maturity, while a prepayment rate that is lower than expected will have the
opposite effect of increasing the yield to maturity. Conversely, if the Fund
purchases these securities at a discount, a prepayment rate that is faster than
expected will increase yield to maturity, while a prepayment rate that is slower
than expected will reduce yield to maturity. Accelerated prepayments on
securities purchased by the Fund at a premium also impose a risk of loss of
principal because the premium may not have been fully amortized at the time the
principal is prepaid in full. The market for privately issued mortgage- and
asset-backed securities is smaller and less liquid than the market for
government sponsored mortgage-backed securities.
Unlike fixed rate mortgage securities, adjustable rate mortgage securities are
collateralized by or represent interests in mortgage loans with variable rates
of interest. These variable rates of
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interest reset periodically to align themselves with market rates. The Fund will
not benefit from increases in interest rates to the extent that interest rates
rise to the point where they cause the current coupon of the underlying
adjustable rate mortgages to exceed any maximum allowable annual or lifetime
reset limits (or "cap rates") for a particular mortgage. In this event, the
value of the mortgage securities in the Fund would likely decrease. Also, the
Fund's net asset value could vary to the extent that current yields on
adjustable rate mortgage securities are different than market yields during
interim periods between coupon reset dates or if the timing of changes to the
index upon which the rate for the underlying mortgages is based lags behind
changes in market rates. During periods of declining interest rates, income to
the Fund derived from adjustable rate mortgages which remain in a mortgage pool
will decrease in contrast to the income on fixed rate mortgages, which will
remain constant. Adjustable rate mortgages also have less potential for
appreciation in value as interest rates decline than do fixed rate investments.
The Fund may also purchase mortgage-backed securities issued by private issuers
which may entail greater risk than mortgage-backed securities that are
guaranteed by the U.S. government, its agencies or instrumentalities. Since
privately-issued mortgage certificates are not guaranteed by an entity having
the credit status of GNMA or FHLMC, such securities generally are structured
with one or more types of credit enhancement. Such credit support falls into two
categories: (i) liquidity protection; and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provisions of advances, generally by the
entity administering the pool of assets, to ensure that the pass-through of
payments due on the underlying pool occurs in a timely fashion. Protection
against losses resulting from ultimate default enhances the likelihood of
ultimate payment of the obligations on at least a portion of the assets in the
pool. Such protection may be provided through guarantees, insurance policies or
letters of credit obtained by the issuer or sponsor from third parties, through
various means of structuring the transaction or through a combination of such
approaches.
The ratings of mortgage securities for which third-party credit enhancement
provides liquidity protection or protection against losses from default are
generally dependent upon the continued creditworthiness of the provider of the
credit enhancement. The ratings of such securities could be subject to reduction
in the event of deterioration in the creditworthiness of the credit enhancement
provider even in cases where the delinquency loss experience on the underlying
pool of assets is better than expected. There can be no assurance that the
private issuers or credit enhancers of mortgage-backed securities can meet their
obligations under the relevant policies or other forms of credit enhancement.
Examples of credit support arising out of the structure of the transaction
include "senior- subordinated securities" (multiple class securities with one or
more classes subordinate to other classes as to the payment of principal thereof
and interest thereon, with the result that defaults on the underlying assets are
borne first by the holders of the subordinated class), creation of "reserve
funds" (where cash or investments sometimes funded from a portion of the
payments on the underlying assets are held in reserve against future losses) and
"over-collateralization"
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(where the scheduled payments on, or the principal amount of, the underlying
assets exceed those required to make payment of the securities and pay any
servicing or other fees). The degree of credit support provided for each issue
is generally based on historical information with respect to the level of credit
risk associated with the underlying assets. Delinquency or loss in excess of
that which is anticipated could adversely affect the return on an investment in
such security.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-THROUGH SECURITIES - The
Fund may invest in collateralized mortgage obligations ("CMOs"). CMOs are debt
obligations collateralized by mortgage loans or mortgage pass-through
securities. Typically, CMOs are collateralized by GNMA, Fannie Mae or Freddie
Mae Certificates, but also may be collateralized by whole loans or private
pass-throughs (such collateral collectively hereinafter referred to as "Mortgage
Assets"). Multiclass pass-through securities are interests in a trust composed
of Mortgage Assets. Unless the context indicates otherwise, all references
herein to CMOs include multiclass pass-through securities. Payments of principal
and of interest on the Mortgage Assets, and any reinvestment income thereon,
provide the funds to pay debt service on the CMOs or make scheduled
distributions on the multiclass pass-through securities. CMOs may be issued by
agencies or instrumentalities of the U.S. government, or by private originators
of, or investors in, mortgage loans, including savings and loan associations,
mortgage banks, commercial banks, investment banks and special purpose
subsidiaries of the foregoing.
In a CMO, a series of bonds or certificates is issued in multiple classes. Each
class of CMOs, often referred to as a "tranche," is issued at a specified fixed
or floating coupon rate and has a stated maturity or final distribution date.
Principal prepayments on the Mortgage Assets may cause the CMOs to be retired
substantially earlier than their stated maturities or final distribution dates.
Interest is paid or accrues on all classes of the CMOs on a monthly, quarterly
or semi-annual basis. The principal of and interest on the Mortgage Assets may
be allocated among the several classes of a series of a CMO in innumerable ways.
In one structure, payments of principal, including any principal prepayments, on
the Mortgage Assets are applied to the classes of a CMO in the order of their
respective stated maturities or final distribution dates, so that no payment of
principal will be made on any class of CMOs until all other classes having an
earlier stated maturity or final distribution date have been paid in full. The
Fund has no present intention to invest in CMO residuals. As market conditions
change, and particularly during periods of rapid or unanticipated changes in
market interest rates, the attractiveness of the CMO classes and the ability of
the structure to provide the anticipated investment characteristics may be
significantly reduced. Such changes can result in volatility in the market
value, and in some instances reduced liquidity, of the CMO class.
The Fund may also invest in, among others, parallel pay CMOs and Planned
Amortization Class CMOs ("PAC Bonds"). Parallel pay CMOs are structured to
provide payments of principal on each payment date to more than one class. These
simultaneous payments are taken into account in calculating the stated maturity
date or final distribution date of each class, which, as with other CMO
structures, must be retires by its stated maturity date or a final distribution
date but may be retired earlier. PAC Bonds are a type of CMO tranche or series
designed to provide
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relatively predictable payments of principal provided that, among other things,
the actual prepayment experience on the underlying mortgage loans falls within a
predefined range. If the actual prepayment experience on the underlying mortgage
loans is at a rate faster or slower than the predefined range or if deviations
from other assumptions occur, principal payments on the PAC Bond may be earlier
or later than predicted. The magnitude of the predefined range varies from one
PAC Bond to another; a narrower range increases the risk that prepayments on the
PAC Bond will be greater or smaller than predicted. Because of these features,
PAC Bonds generally are less subject to the risks of prepayment than are other
types of mortgage-backed securities.
STRIPPED MORTGAGE SECURITIES - The Fund may purchase stripped mortgage
securities which are derivative multiclass mortgage securities. Stripped
mortgage securities may be issued by agencies or instrumentalities of the U.S.
government, or by private originators of, or investors in, mortgage loans,
including savings and loan associations, mortgage banks, commercial banks,
investment banks and special purpose subsidiaries of the foregoing. Stripped
mortgage securities have greater volatility than other types of mortgage
securities. Although stripped mortgage securities are purchased and sold by
institutional investors through several investment banking firms acting as
brokers or dealers, the market for such securities has not yet been fully
developed. Accordingly, stripped mortgage securities are generally illiquid.
Stripped mortgage securities are structured with two or more classes of
securities that receive different proportions of the interest and principal
distributions on a pool of mortgage assets. A common type of stripped mortgage
security will have at least one class receiving only a small portion of the
interest and a larger portion of the principal from the mortgage assets, while
the other class will receive primarily interest and only a small portion of the
principal. In the most extreme case, one class will receive all of the interest
("IO" or interest-only), while the other class will receive all of the principal
("PO" or principal-only class). The yield to maturity on IOs, POs and other
mortgage-backed securities that are purchased at a substantial premium or
discount generally are extremely sensitive not only to changes in prevailing
interest rates but also to the rate of principal payments (including
prepayments) on the related underlying mortgage assets, and a rapid rate of
principal payments may have a material adverse effect on such securities' yield
to maturity. If the underlying mortgage assets experience greater than
anticipated prepayments of principal, the Fund may fail to fully recoup its
initial investment in these securities even if the securities have received the
highest rating by a nationally recognized statistical rating organization.
In addition to the stripped mortgage securities described above, the Fund may
invest in similar securities such as Super POs and Levered IOs which are more
volatile than POs, IOs and IOettes. Risks associated with instruments such as
Super POs are similar in nature to those risks related to investments in POs.
Risks connected with Levered IOs and IOettes are similar in nature to those
associated with IOs. The Fund may also invest in other similar instruments
developed in the future that are deemed consistent with its investment
objective, policies and restrictions. POs may generate taxable income from the
current accrual of original issue discount, without a corresponding distribution
of cash to the Fund. See "Tax Status" in this
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<PAGE> 151
Prospectus and ["Additional Information Concerning Taxes"] in the Statement of
Additional Information.
MORTGAGE ROLLS - The Fund may enter into mortgage "dollar rolls" in which the
Fund sells mortgage-backed securities for delivery in the current month and
simultaneously contracts to repurchase substantially similar (same type, coupon
and maturity) securities on a specified future date. During the roll period, the
Fund forgoes principal and interest paid on the mortgage-backed securities. The
Fund is compensated by the difference between the current sales price and the
lower forward price for the future purchase (often referred to as the "drop") as
well as by the interest earned on the cash proceeds of the initial sale. The
Fund may only enter into covered rolls. A "covered roll" is a specific type of
dollar roll for which there is an offsetting cash position which matures on or
before the forward settlement date of the dollar roll transaction. At the time
the Fund enters into a mortgage "dollar roll," it will establish a segregated
account with its custodian bank in which it will maintain cash, U.S. government
securities or other liquid securities equal in value to its obligations in
respect of dollar rolls, and accordingly, such dollar rolls will not be
considered borrowings. Mortgage dollar rolls involve the risk that the market
value of the securities the Fund is obligated to repurchase under the agreement
may decline below the repurchase price. In the event the buyer of securities
under a mortgage dollar roll files for bankruptcy or becomes insolvent, the
Fund's use of proceeds of the dollar roll may be restricted pending a
determination by the other party, or its trustee or receiver, whether to enforce
the Fund's obligation to repurchase the securities.
FLOATING AND VARIABLE RATE INSTRUMENTS - The Fund may invest in floating and
variable rate obligations. Floating or variable rate obligations bear interest
at rates that are not fixed, but vary with changes in specified market rates or
indices, such as the prime rate, and at specified intervals. Certain of the
floating or variable rate obligations that may be purchased by the Fund may
carry a demand feature that would permit the holder to tender them back to the
issuer at par value prior to maturity. Such obligations include variable rate
master demand notes, which are unsecured instruments issued pursuant to an
agreement between the issuer and the holder that permit the indebtedness
thereunder to vary and provide for periodic adjustments in the interest rate.
The Fund will limit its purchases of floating and variable rate obligations to
those of the same quality as it otherwise is allowed to purchase. The Subadviser
will monitor on an ongoing basis the ability of an issuer of a demand instrument
to pay principal and interest on demand. For a further discussion of floating
and variable rate obligations, see "Additional Information on Portfolio
Instruments and Investment Policies--Floating and Variable Rate Instruments" in
the Statement of Additional Information.
ZERO COUPON SECURITIES, PIK BONDS AND DEFERRED PAYMENT SECURITIES - The Fund may
invest in zero coupon securities, PIK bonds and deferred payment securities.
Zero coupon securities are debt securities that pay no cash income but are sold
at substantial discounts from their value at maturity. When a zero coupon
security is held to maturity, its entire return, which consists of the
amortization of discount, comes from the difference between its purchase price
and its maturity value. This difference is known at the time of purchase, so
20
<PAGE> 152
that investors holding zero coupon securities until maturity know at the time of
their investment what the expected return on their investment will be. Certain
zero coupon securities also are sold at substantial discounts from their
maturity value and provide for the commencement of regular interest payments at
a deferred date. Zero coupon securities may have conversion features. The Fund
also may purchase PIK bonds. PIK bonds pay all or a portion of their interest in
the form of debt or equity securities. Deferred payment securities are
securities that remain zero coupon securities until a predetermined date, at
which time the stated coupon rate becomes effective and interest becomes payable
at regular intervals.
Zero coupon securities, PIK bonds and deferred payment securities tend to be
subject to greater price fluctuations in response to changes in interest rates
than are ordinary interest-paying debt securities with similar maturities. The
value of zero coupon securities appreciates more during periods of declining
interest rates and depreciates more during periods of rising interest rates than
ordinary interest-paying debt securities with similar maturities. Zero coupon
securities, PIK bonds and deferred payment securities may be issued by a wide
variety of corporate and governmental issuers. Although these instruments are
generally not traded on a national securities exchange, they are widely traded
by brokers and dealers and, to such extent, will not be considered illiquid for
the purposes of the Fund's limitation on investments in illiquid securities.
Current federal income tax law requires the holder of a zero coupon security,
certain PIK bonds, deferred payment securities and certain other securities
acquired at a discount (such as Brady Bonds) to accrue income with respect to
these securities prior to the receipt of cash payments. Accordingly, to avoid
liability for federal income and excise taxes, the Fund may be required to
distribute income accrued with respect to these securities and may have to
dispose of portfolio securities under disadvantageous circumstances in order to
generate cash to satisfy these distribution requirements.
LOAN PARTICIPATIONS AND ASSIGNMENTS - The Fund may invest in Loan Participations
and Assignments. The Fund considers these investments to be investments in debt
securities for purposes of this Prospectus. Loan Participations typically will
result in the Fund having a contractual relationship only with the Lender, not
with the borrower. The Fund will have the right to receive payments of
principal, interest and any fees to which it is entitled only from the Lender
selling the Participation and only upon receipt by the Lender of the payments
from the borrower. In connection with purchasing Loan Participations, the Fund
generally will have no right to enforce compliance by the borrower with the
terms of the Loan agreement relating to the Loan, nor any rights of set-off
against the borrower, and the Fund may not benefit directly from any collateral
supporting the Loan in which it has purchased the Participation. As a result,
the Fund will assume the credit risk of both the borrower and the Lender that is
selling the Participation. In the event of the insolvency of the Lender selling
a Participation, the Fund may be treated as a general creditor of the Lender and
may not benefit from any set-off between the Lender and the borrower. The Fund
will acquire Loan Participations only if the Lender interpositioned between the
Fund and the borrower is determined by the Subadviser to be creditworthy. When
the Fund purchases Assignments from Lenders, the Fund will acquire
21
<PAGE> 153
direct rights against the borrower on the Loan, except that under certain
circumstances such rights may be more limited than those held by the assigning
Lender.
The Fund may have difficulty disposing of Assignments and Loan Participations.
Because the market for such instruments is not highly liquid, the Fund
anticipates that such instruments could be sold only to a limited number of
institutional investors. The lack of a highly liquid secondary market may have
an adverse impact on the value of such instruments and will have an adverse
impact on the Fund's ability to dispose of particular Assignments or Loan
Participations in response to a specific economic event, such as deterioration
in the creditworthiness of the borrower.
The Board of Trustees has adopted policies and procedures for the purpose of
determining whether Assignments and Loan Participations are liquid or illiquid.
Pursuant to those policies and procedures, the Board of Trustees has delegated
to the Subadviser the determination as to whether a particular Loan
Participation or Assignment is liquid or illiquid, requiring that consideration
be given to, among other things, the frequency of quotes, the number of dealers
willing to sell and the number of potential purchasers, the nature of the Loan
Participation or Assignment and the time needed to dispose of it and the
contractual provisions of the relevant documentation. The Board of Trustees
periodically reviews purchases and sales of Assignments and Loan Participations.
To the extent that liquid Assignments and Loan Participation that the Fund holds
become illiquid, due to the lack of sufficient buyers or market or other
conditions, the percentage of the Fund's assets invested in illiquid assets
would increase. The Subadviser, under the supervision of the Board of Trustees,
monitors Fund investments in Assignments and Loan Participations and will
consider appropriate measures to enable the Fund to maintain sufficient
liquidity for operating purposes and to meet redemption requests.
In valuing a Loan Participation or Assignment held by the Fund for which a
secondary trading market exists, the Fund will rely upon prices or quotations
provided by banks, dealers or pricing services. To the extent a secondary
trading market does not exist, the Fund's Loan Participations and Assignments
will be valued in accordance with procedures adopted by the Board of Trustees,
taking into consideration, among other factors: (i) the creditworthiness of the
borrower under the Loan and the Lender; (ii) the current interest rate; period
until next rate reset and maturity of the Loan; (iii) recent prices in the
market for similar Loans; and (iv) recent prices in the market for instruments
of similar quality, rate, period until next interest rate reset and maturity.
DERIVATIVE INSTRUMENTS - Derivative instruments may be used by the Fund for
hedging or risk management purposes or for any other permissible purposes
consistent with the Fund's investment objective. Derivative instruments are
securities or agreements whose value is based on the value of some underlying
asset (e.g., a security or currency) or the level of a reference index. Options,
futures, and options on futures transactions are considered derivative
transactions. Derivatives generally have investment characteristics that are
based upon either forward contracts (under which one party is obligated to buy
and the other party is obligated to sell an underlying asset at a specific price
on a specified date) or option contracts (under which
22
<PAGE> 154
the holder of the option has the right but not the obligation to buy or sell an
underlying asset at a specified price on or before a specified date).
Consequently, the change in value of a forward-based derivative generally is
roughly proportional to the change in value of the underlying asset. In
contrast, the buyer of an option-based derivative generally will benefit from
favorable movements in the price of the underlying asset but is not exposed to
the corresponding losses that result from adverse movements in the value of the
underlying asset. The seller of an option-based derivative generally will
receive fees or premiums but generally is exposed to losses resulting from
changes in the value of the underlying asset. Derivative transactions may
include elements of leverage and, accordingly, the fluctuation of the value of
the derivative transaction in relation to the underlying asset may be magnified.
Derivative transactions may also include forward currency contracts and foreign
currency exchange-related securities.
Derivative transactions in which the Fund may engage include the writing of
covered put and call options on securities and the purchase of put and call
options thereon, the purchase of put and call options on securities indices and
exchange-traded options on currencies and the writing of put and call options on
securities indices. The Fund may enter into spread transactions and swap
agreements. The Fund also may buy and sell financial futures contracts, which
may include interest-rate futures, futures on currency exchanges and stock and
bond index futures contracts. The Fund may enter into any futures contracts and
related options without limit for "bona fide hedging" purposes (as defined in
Commodity Futures Trading Commission regulations) and for other permissible
purposes, provided that aggregate initial margin and premiums on positions
engaged in for purposes other than "bona fide hedging" will not exceed 5% of its
net asset value, after taking into account unrealized profits and losses on such
contracts. The Fund may also enter into forward currency contracts to purchase
or sell foreign currencies.
Derivative instruments may be exchange-traded or traded in OTC transactions
between private parties. OTC transactions are subject to the credit risk of the
counterparty to the instrument and are less liquid than exchange-traded
derivatives since they often can only be closed out with the other party to the
transaction. When required by guidelines of the Securities and Exchange
Commission, the Fund will set aside permissible liquid assets in a segregated
account to secure its obligations under derivative transactions. Segregated
assets cannot be sold or transferred unless equivalent assets are substituted in
their place or it is no longer necessary to segregate them. As a result, there
is a possibility that segregation of a large percentage of the Fund's assets
could impede portfolio management or the Fund's ability to meet redemption
requests or other current obligations. In order to maintain its required cover
for a derivative transaction, the Fund may need to sell portfolio securities at
disadvantageous prices or times since it may not be possible to liquidate a
derivative position.
The successful use of derivative transactions by the Fund is dependent upon the
Subadviser's ability to correctly anticipate trends in the underlying asset.
Hedging transactions are subject to risks; if the Subadviser incorrectly
anticipates trends in the underlying asset, the Fund may be in a worse position
than if no hedging had occurred. In addition, there may be imperfect correlation
between the Fund's derivative transactions and the instruments being hedged.
23
<PAGE> 155
ILLIQUID SECURITIES - The Fund may invest up to 15% of its net assets in
securities that are illiquid, in that they cannot be expected to be sold within
seven days at approximately the price at which they are valued. Due to the
absence of an active trading market, the Fund may experience difficulty in
valuing or disposing of illiquid securities. The Subadviser will determine the
liquidity of the Fund's securities, under the supervision the Trust's trustees.
RESTRICTED SECURITIES, NON-PUBLICLY TRADED SECURITIES AND RULE 144A SECURITIES -
The Fund may invest in restricted securities and Rule 144A securities.
Restricted securities cannot be sold to the public without registration under
the Securities Act of 1933 ("1933 Act"). Unless registered for sale, these
securities can be sold only in privately negotiated transactions or pursuant to
an exemption from registration. Restricted securities are generally considered
illiquid and are therefore subject to the Fund's 15% limitation on investments
in illiquid securities.
Non-publicly traded securities (including Rule 144A securities) may involve a
high degree of business and financial risk which may result in substantial
losses. The securities may be less liquid than publicly traded securities.
Although these securities may be resold in privately negotiated transactions,
the prices realized from these sales could be less than those originally paid by
the Fund. In particular, Rule 144A securities may be resold only to qualified
institutional buyers in accordance with Rule 144A under the 1933 Act.
Unregistered securities may also be sold abroad pursuant to Regulation S under
the 1933 Act. Companies whose securities are not publicly traded are not subject
to the disclosure and other investor protection requirements that would be
applicable if their securities were publicly traded. Acting pursuant to
guidelines established by the Trustees of the Trust, restricted securities and
Rule 144A securities may be considered liquid.
REPURCHASE AGREEMENTS - The Fund may engage in repurchase agreement transactions
as long as the underlying securities are of the type that the Fund would be
permitted to purchase directly. Under the terms of a typical repurchase
agreement, the Fund would acquire an underlying debt obligation for a relatively
short period (usually not more than one week) subject to an obligation of the
seller to repurchase, and the Fund to resell, the obligation at an agreed upon
price and time, thereby determining the yield during the Fund's holding period.
The Fund will enter into repurchase agreements with respect to securities in
which it may invest with member banks of the Federal Reserve System or certain
non-bank dealers. Under each repurchase agreement the selling institution will
be required to maintain the value of the securities subject to the repurchase
agreement at not less than their repurchase price. Repurchase agreements could
involve certain risks in the event of default or insolvency of the other party,
including possible delays or restrictions upon a Fund's ability to dispose of
the underlying securities. The Adviser or the Subadviser, acting under the
supervision of the Board of Trustees, reviews the creditworthiness of those
banks and non-bank dealers with which the Fund enters into repurchase agreements
to evaluate these risks. For additional information, see "Repurchase Agreements"
in the Statement of Additional Information.
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<PAGE> 156
REVERSE REPURCHASE AGREEMENTS - The Fund may also enter into reverse repurchase
agreements with the same parties with whom it may enter into repurchase
agreements. Reverse repurchase agreements involve the sale of securities held by
the Fund pursuant to its agreement to repurchase them at a mutually agreed upon
date, price and rate of interest. At the time the Fund enters into a reverse
repurchase agreement, it will establish and maintain a segregated account with
an approved custodian containing liquid securities having a value not less than
the repurchase price (including accrued interest). The assets contained in the
segregated account will be marked-to-market daily and additional assets will be
placed in such account on any day in which the assets fall below the repurchase
price (plus accrued interest). The Fund's liquidity and ability to manage its
assets might be affected when it sets aside cash or portfolio securities to
cover such commitments. Reverse repurchase agreements involve the risk that the
market value of the securities retained in lieu of sale may decline below the
price of the securities the Fund has sold but is obligated to repurchase. In the
event the buyer of securities under a reverse repurchase agreement files for
bankruptcy or becomes insolvent, such buyer or its trustee or receiver may
receive an extension of time to determine whether to enforce the Fund's
obligation to repurchase the securities, and the Portfolio's use of the proceeds
of the reverse repurchase agreement may effectively be restricted pending such
determination. Reverse repurchase agreements are considered to be borrowings
under the Investment Company Act of 1940 (the "1940 Act").
BANK OBLIGATIONS - The Fund may invest in bank obligations, such as certificates
of deposit, banker's acceptances, and time deposits of domestic or foreign banks
and their subsidiaries and branches (only if the time deposits are denominated
in U.S. dollars), and domestic savings and loan associations. While these bank
obligations will be issued by institutions whose accounts are insured by the
Federal Deposit Insurance Corporation ("FDIC"), the Fund may invest in the
obligations in amounts in excess of the FDIC insurance coverage (currently
$100,000 per account).
Banks are subject to extensive governmental regulations which may limit both the
amounts and types of loans and other financial commitments which may be made and
interest rates and fees which may be charged. The profitability of this industry
is largely dependent upon the availability and cost of capital funds for the
purpose of financing lending operations under prevailing money market
conditions. Also, general economic conditions play an important part in the
operations of this industry and exposure to credit losses arising from possible
financial difficulties of borrowers might affect a bank's ability to meet its
obligations.
Investors should also be aware that securities issued or guaranteed by foreign
banks, foreign branches of U.S. banks, and foreign government and private
issuers may involve investment risks in addition to those relating to domestic
obligations. See " -- Foreign Securities and Currencies" above. None of the
Funds will purchase bank obligations which SBAM Limited believes, at the time of
purchase, will be subject to exchange controls or foreign withholding taxes;
however, there can be no assurance that such laws may not become applicable to
certain of the Funds' investments. In the event unforeseen exchange controls or
foreign withholding
25
<PAGE> 157
taxes are imposed with respect to a Fund's investments, the effect may be to
reduce the income received by the Fund on such investments.
INVESTMENT COMPANIES - As permitted by the 1940 Act, the Fund reserves the right
to invest up to 10% of its total assets, calculated at the time of investment,
in the securities of other open-end or closed-end investment companies. No more
than 5% of the Fund's total assets may be invested in the securities of any one
investment company nor may it acquire more than 3% of the voting securities of
any other investment company. The Fund will indirectly bear its proportionate
share of any management fees paid by an investment company in which it invests
in addition to the advisory fee paid by the Fund.
WHEN-ISSUED SECURITIES - The Fund may invest without limitation in securities
purchased on a when-issued or delayed delivery basis. Although the payment and
interest terms of these securities are established at the time the purchaser
enters into the commitment, these securities may be delivered and paid for at a
future date, generally within 45 days (for mortgage-backed securities, the
delivery date may extend to as long as 120 days). Purchasing when-issued
securities allows the Fund to lock in a fixed price or yield on a security it
intends to purchase. However, when the Fund purchases a when-issued security, it
immediately assumes the risk of ownership, including the risk of price
fluctuation until the settlement date.
The greater the Fund's outstanding commitments for these securities, the greater
the exposure to potential fluctuations in the net asset value of a Fund.
Purchasing when-issued securities may involve the additional risk that the yield
available in the market when the delivery occurs may be higher or the market
price lower than that obtained at the time of commitment. Although the Fund may
be able to sell these securities prior to the delivery date, it will purchase
when-issued securities for the purpose of actually acquiring the securities,
unless after entering into the commitment a sale appears desirable for
investment reasons. When required by guidelines issued by the Securities and
Exchange Commission, the Fund will set aside permissible liquid assets in a
segregated account to secure its outstanding commitments for when-issued
securities.
LENDING PORTFOLIO SECURITIES - From time to time, the Fund may lend its
portfolio securities to brokers, dealers and other financial institutions who
need to borrow securities to complete certain transactions. In connection with
such loans, the Fund will receive collateral consisting of cash, U.S. Government
securities or irrevocable letters of credit. Such collateral will be maintained
at all times in an amount equal to at least 100% of the current market value of
the loaned securities. The Fund can increase its income through the investment
of such collateral. The Fund continues to be entitled to payments in amounts
equal to the interest, dividends or other distributions payable on the loaned
security and receives interest on the amount of the loan. Such loans will be
terminable at any time upon specified notice. The Fund might experience risk of
loss if the institution with which it has engaged in a portfolio loan
transaction breaches its agreement with the Fund.
BORROWING MONEY - The Fund may borrow money from banks up to 33 1/3% of its
total assets (including the amount borrowed). However, the Fund currently
intends to borrow money only
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<PAGE> 158
for temporary or emergency purposes (but not for leverage or to purchase
investments) up to 5% of the value of the Fund's total assets (including the
amount borrowed) valued at the time the borrowing is made.
PORTFOLIO TURNOVER
The Fund will attempt to purchase securities with the intent of holding them for
investment but may purchase and sell portfolio securities whenever the Adviser
or the Subadviser believes it to be in the best interests of the Fund. The Fund
will not consider portfolio turnover rate a limiting factor in making investment
decisions consistent with its investment objective and policies.
The annual portfolio turnover rate for the Fund is not expected to exceed 125%.
Higher turnover rates will generally result in higher transaction costs to the
Fund, as well as higher brokerage expenses and higher levels of capital gains.
The portfolio turnover rates of the Fund may vary greatly from year to year and
within a particular year.
HISTORICAL PERFORMANCE INFORMATION
The Fund has not commenced operations and has no investment performance record.
However, the Fund's portfolio managers are the same as, and its investment
objective, policies and strategies will be substantially similar to, those
employed by the Subadviser with respect to certain other open-end U.S.
registered investment companies or portfolios thereof (the "SBAM Funds"). Set
forth in Chart A below is performance data provided by the Subadviser relating
to a composite (the "SBAM Composite") consisting of the SBAM Funds. Chart B
below indicates the number of SBAM Funds in the SBAM Composite for different
periods of time as well as the approximate range of assets held in the aggregate
by the SBAM Funds in the SBAM Composite for those periods.
The investment performance of the SBAM Composite does not represent the Fund's
performance and should not be construed as a substitute for the Fund's
performance, nor should it be interpreted as indicative of the Fund's future
performance. The results shown below should not be deemed to be indicative of
future results for the Fund owing to differences in brokerage commissions and
dealer spreads, expenses, including investment advisory fees, the size of
positions taken in relation to fund size, timing of purchases and sales and
market conditions at the time of a transaction, timing of cash flows and
availability of cash for new investments.
The Benchmark in Chart A is The Lehman Brothers Aggregate Bond Index (the
"Lehman Index"). The Lehman Index is an unmanaged index composed of securities
from the Lehman Brothers Government/Corporate Bond Index, Mortgage-Backed
Securities Index , and the Asset-Backed Securities Index. Total return comprises
price appreciation/depreciation and income as a percentage of the original
investment. Indexes are rebalanced monthly by market capitalization. The Lehman
Index results are based on the historical performance of this unmanaged index
and do not reflect the deduction of advisory fees or transaction costs.
The performance data shown below should be read in conjunction with the
information that follows the charts.
CHART A
<TABLE>
<CAPTION>
SBAM Composite Lehman Index
Annualized Return Annualized Return
----------------- -----------------
<S> <C> <C>
Year Ending 14.19% 8.15%
June 30, 1997
Three Years Ending 12.33% 8.53%
June 30, 1997
Since SBAM 9.32% 6.27%
Composite Inception
(April 1, 1993)
</TABLE>
CHART B
<TABLE>
<CAPTION>
Number of SBAM Funds in Approximate Range of Assets
Time Period SBAM Composite Held by SBAM Composite
----------- -------------- ----------------------
<S> <C> <C>
04/01/93 - 12/31/93 1 $12.9 million
to
$53.6 million
01/01/94 - 12/31/94 2 $64.1 million
to
$114.2 million
01/01/95 - 04/30/95 2 $111.4 million
to
$125.9 million
05/01/95 - 01/31/96 3 $136.1 million
to
$202.1 million
02/01/96 - 08/31/96 4 $213.1 million
to
$285.5 million
09/01/96 - 06/30/97 5 $296.1 million
to
$497.4 million
</TABLE>
The performance results shown above for the SBAM Composite are based on total
returns reflecting realized and unrealized gains and losses and income,
including that derived from cash positions. Returns are calculated monthly and
are compounded monthly. The performance results are time-weighted on a daily
basis and market-weighted based on market values determined as of the first
business day of each month. The performance results are net of transaction costs
and advisory and other fees incurred and reflect reinvestment of dividends and
capital gains distributions, if any.
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS. INVESTORS SHOULD
ALSO BE AWARE THAT THE USE OF METHODS OF DETERMINING PERFORMANCE
DIFFERENT THAN THAT USED BY THE SUBADVISER WOULD RESULT IN DIFFERENT
PERFORMANCE DATA.
MANAGEMENT OF THE TRUST
TRUSTEES AND OFFICERS
The business and affairs of the Trust are managed under the direction of its
Board of Trustees.
The Board of Trustees sets and reviews policies regarding the operation of the
Trust, whereas the officers perform the daily functions of the Trust.
INVESTMENT MANAGEMENT OF THE FUND
THE ADVISER - Under the terms of the Investment Advisory Agreement, Nationwide
Advisory Services, Inc., Three Nationwide Plaza, Columbus, Ohio 43215, oversees
the investment of the assets for the Fund and supervises the daily business
affairs of the Fund. Subject to the supervision and direction of the Trustees,
the Adviser also evaluates and monitors the performance of the Subadviser. The
Adviser is also authorized to select and place portfolio investments on behalf
of the Fund; however, the Adviser does not intend to do so at this time.
The Adviser and the Trust have applied to the Securities and Exchange Commission
for an exemptive order which, if granted, will allow the Adviser to appoint,
replace or terminate subadvisers without the approval of shareholders; the order
would also allow the Adviser to revise a subadvisory agreement without
shareholder approval. Any change in subadvisers will be communicated to
shareholders within 60 days of such changes and all changes will be approved by
the Trust's Board of Trustees, including a majority of the Trustees who are not
interested persons of the Trust or the Adviser. The order, if granted, is
intended to facilitate the efficient operation of the Fund and afford the Trust
increased management flexibility. Prior to receiving the exemptive order, the
Adviser will not appoint, replace or terminate any
27
<PAGE> 159
subadvisers or materially amend any subadvisory agreement without obtaining the
approval of shareholders.
The Adviser provides to the Fund investment management evaluation services
principally by performing initial due diligence on prospective subadvisers for
the Fund and thereafter monitoring the performance of the subadviser through
quantitative and qualitative analysis as well as through periodic in-person,
telephonic and written consultations with the subadviser. The Adviser has
responsibility for communicating performance expectations and evaluations to the
subadviser and ultimately recommending to the Trust's Board of Trustees whether
the subadviser's contract should be renewed, modified or terminated; however,
the Adviser does not expect to recommend frequent changes of subadvisers. The
Adviser will regularly provide written reports to the Board of Trustees
regarding the results of its evaluation and monitoring functions. Although the
Adviser will monitor the performance of the subadviser, there is no certainty
that the subadviser or the Fund will obtain favorable results at any given time.
The Adviser, an Ohio corporation, is a wholly owned subsidiary of Nationwide
Life Insurance Company, which is owned by Nationwide Financial Services, Inc.
(NFS). NFS, a holding company, has two classes of common stock outstanding with
different voting rights enabling Nationwide Corporation (the holder of all the
outstanding Class B Common Stock) to control NFS. Nationwide Corporation is also
a holding company in the Nationwide Insurance Enterprise. All of the common
stock of Nationwide Corporation is held by Nationwide Mutual Insurance Company
(95.3%) and Nationwide Mutual Fire Insurance Company (4.7%), each of which is a
mutual company owned by its policyholders. The Fund pays to the Adviser a fee at
the annual rate of 0.75% of the Fund's average daily net assets.
THE SUBADVISER - Subject to the supervision of the Adviser and the Trustees, the
Subadviser manages the Fund's assets in accordance with the Fund's investment
objectives and policies. The Subadviser shall make investment decisions for the
Fund, and in connection with such investment decisions shall place purchase and
sell orders for securities. For the investment management services it provides
to the Fund, the Subadviser receives an annual fee from the Adviser in the
amount of 0.35% of the Fund's first $50 million of average daily net assets,
0.30% of the Fund's next $150 million of average daily net assets, 0.25% of the
Fund's next $300 million of average daily net assets, and 0.20% of the Fund's
average daily net assets in excess of $500 million. Below is a brief description
of the Subadviser and SBAM Limited.
The Subadviser is a wholly owned subsidiary of Salomon Brothers Holding Company
Inc, which is in turn wholly owned by Salomon Inc. The Subadviser was
incorporated in 1987 and together with affiliates in London, Frankfurt, Tokyo
and Hong Kong, provides a broad range of fixed-income and equity investment
advisory services to various individuals and institutional clients located
throughout the world, and serves as investment adviser to various investment
companies. In providing such services, the Subadviser has access to Salomon
Inc's more than 400 economists and mortgage, bond, sovereign and equity
analysts. As of __________, 1997, the Subadviser and its worldwide investment
advisory affiliates managed approximately $_____
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billion of assets. Michael S. Hyland serves as President of the Subadviser. The
Subadviser's business offices are located at 7 World Trade Center, New York, New
York 10048.
The Subadviser has delegated to SBAM Limited, whose business address is Victoria
Plaza, 111 Buckingham Palace Road, London SW1W OSB, England, responsibility for
management of the Fund's currency transactions and investments in
non-dollar-denominated debt securities. SBAM Limited is compensated by the
Subadviser at no additional expense to the Fund. Like the Subadviser, SBAM
Limited is a direct, wholly-owned subsidiary of Salomon Brothers Holding Company
Inc. SBAM Limited is a member of the Investment Management Regulatory
Organization Limited in the United Kingdom and is registered as an investment
adviser in the United States pursuant to the Investment Advisers Act of 1940, as
amended.
Steven Guterman is primarily responsible for mortgage-backed securities and U.S.
government securities portions of the Fund. Mr. Guterman is assisted by Roger
Lavan. Mr. Guterman joined the Subadviser in 1990 and is currently a Managing
Director of Salomon Brothers and the Subadviser and a Senior Portfolio Manager
of the Subadviser, responsible for the Subadviser's investment company and
institutional portfolios which invest primarily in mortgage-backed securities
and U.S. government issues. Mr. Guterman also serves as portfolio manager for
two offshore mortgage funds. In addition, Mr. Guterman serves as portfolio
manager for a number of the Subadviser's institutional clients. Mr. Guterman
joined Salomon Brothers in 1983. He initially worked in the mortgage research
group where he became a Research Director and later traded derivative
mortgage-backed securities for Salomon Brothers. Mr. Lavan joined the Subadviser
in 1990 and is a Portfolio Manager and Quantitative Fixed Income Analyst. He is
responsible for working with senior portfolio managers to monitor and analyze
market relationships and identify and implement relative value transactions in
the Subadviser's investment company and institutional portfolios which invest in
mortgage-backed securities and U.S. Government securities. Prior to joining the
Subadviser, Mr. Lavan spent four years analyzing portfolios for Salomon
Brothers' Fixed Income Sales Group and Product Support Divisions. David J. Scott
is primarily responsible for a portion of the Fund relating to currency
transactions and investments in non-dollar denominated debt securities. Prior to
joining SBAM Limited in April, 1994, Mr. Scott worked for four years at JP
Morgan Investment Management where he was responsible for global and non-dollar
portfolios. Before joining JP Morgan Investment Management, Mr. Scott worked for
three years at Mercury Asset Management where he was responsible for captive
insurance portfolios and products.
Peter J. Wilby is primarily responsible for the high yield and sovereign bond
portions of the Fund. Mr. Wilby, who joined the Subadviser in 1989, is a
Managing Director of Salomon Brothers and the Subadviser and a Senior Portfolio
Manager of the Subadviser, responsible for the Subadviser's investment company
and institutional portfolios which invest in high yield non-U.S. and U.S.
corporate debt securities and high yield foreign sovereign debt securities.
With respect to the Fund and in connection with the subadvisory agreement
between the Subadviser and SBAM Limited, the Subadviser pays SBAM Limited, as
full compensation for all services provided under the subadvisory agreement, a
portion of its subadvisory fee. The
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amount payable to SBAM Limited is equal to the fee payable under the
Subadviser's subadvisory agreement multiplied by the portion of the assets of
the Fund that SBAM Limited has been delegated to manage divided by the current
value of the net assets of the Fund.
OTHER SERVICES
Under the terms of a Fund Administration Agreement, the Adviser also provides
various administrative and accounting services, including daily valuation of the
Fund's shares and preparation of financial statements, tax returns, and
regulatory reports. For these services, the Fund pays the Adviser an annual fee
in the amount of 0.07% of the Fund's first $250 million of average daily net
assets, 0.05% on the next $750 million and 0.04% on assets of more than $1
billion.
The Transfer and Dividend Disbursing Agent, Nationwide Investors Services, Inc.,
("NIS"), Three Nationwide Plaza, Columbus, Ohio 43216, serves as transfer agent
and dividend disbursing agent for the Trust. The Fund pays to NIS a fee for such
services at the annual rate of 0.01% of the Fund's average daily net assets. NIS
is a wholly owned subsidiary of the Adviser.
INVESTMENT IN FUND SHARES
An insurance company may purchase shares of the Fund using purchase payments
received on Contracts issued by Accounts. These Accounts are funded by shares of
the Fund. Funds of Funds may also purchase shares of the Fund for their
portfolios. There is no sales charge, and all shares are sold at net asset
value.
Shares of the Fund are currently sold only to separate accounts of Nationwide
Life Insurance Company and its wholly owned subsidiary Nationwide Life and
Annuity Insurance Company to fund the benefits under the Contract and to
affiliated Fund of Funds. The address for each of these entities is One
Nationwide Plaza, Columbus, Ohio 43215.
All investments in the Fund are credited to the shareholder's account in the
form of full and fractional shares of the Fund (rounded to the nearest 1/1000 of
a share). The Trust does not issue share certificates. Initial and subsequent
purchase payments allocated to the Fund are subject to the limits applicable to
the Contracts.
SHARE REDEMPTION
Redemptions are processed on any day on which the Trust is open for business and
are effected at net asset value next determined after the redemption order, in
proper form, is received by the Trust's transfer agent, NIS.
The net asset value per share of the Fund is determined once daily, as of the
close of regular trading on the New York Stock Exchange (generally 4:00 P.M.
Eastern Time) on each business
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day the New York Stock Exchange is open for regular trading and on such other
days as the Board determines and on any other day during which there is a
sufficient degree of trading in the Fund's portfolio securities that the net
asset value of the Fund is materially affected by changes in the value of
portfolio securities. The Trust will not compute net asset value on customary
national business holidays, including the following: Christmas, New Year's Day,
Martin Luther King's Birthday, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, and Thanksgiving Day. The net asset value per share
is calculated by adding the value of all securities and other assets of the
Fund, deducting its liabilities, and dividing by the number of shares
outstanding.
In determining net asset value, portfolio securities listed on national
exchanges are valued at the last sales price on the principal exchange; if the
securities are traded only in the over-the-counter market, they are valued at
the quoted bid prices. Other portfolio securities are valued at the quoted
prices obtained from an independent pricing organization which employs a
combination of methods, including among others, the obtaining and comparison of
market valuations from dealers who make markets and deal in such securities and
the comparison of valuations with those of other comparable securities in a
matrix of such securities. The pricing service activities and results are
reviewed by an officer of the Trust. Securities for which market quotations are
not readily available are valued at fair value in accordance with procedures
adopted by the Board of Trustees. Expenses and fees are accrued daily.
The Trust may suspend the right of redemption only under the following unusual
circumstances:
- - when the New York Stock Exchange is closed (other than weekends and
holidays) or trading is restricted;
- - when an emergency exists, making disposal of portfolio securities or the
valuation of net assets not reasonably practicable; or
- - during any period when the Securities and Exchange Commission has by order
permitted a suspension of redemption for the protection of shareholders.
NET INCOME AND DISTRIBUTIONS
Substantially all of the net investment income, if any, of the Fund will be
declared and paid as dividends quarterly Net realized capital gains of the Fund,
if any, will be distributed at least annually.
ADDITIONAL INFORMATION
DESCRIPTION OF SHARES - The Declaration of Trust permits the Trustees to issue
an unlimited number of full and fractional shares of beneficial interest of the
Fund and to divide or combine such shares into a greater or lesser number of
shares without thereby changing the proportionate
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beneficial interests in the Trust. Each share of the Fund represents an equal
proportionate interest in the Fund with each other share. The Trust reserves the
right to create and issue shares of a number of different funds. In that case,
the shares of each fund would participate equally in the earnings, dividends,
and assets of the particular fund, but shares of all funds would vote together
in the election of Trustees. Upon liquidation of a fund, its shareholders are
entitled to share pro rata in the net assets of such fund available for
distribution to shareholders.
VOTING RIGHTS - Shareholders are entitled to one vote for each share held.
Shareholders may vote in the election or removal of Trustees and on other
matters submitted to meetings of shareholders. No amendment may be made to the
Declaration of Trust without the affirmative vote of a majority of the
outstanding shares of the Trust. The sole shareholder of the Fund initially will
be Nationwide Life Insurance Company. The Trustees may, however, amend the
Declaration of Trust without the vote or consent of shareholders to:
- - designate series of the Trust;
- - change the name of the Trust; or
- - supply any omission, cure, correct, or supplement any ambiguous,
defective, or inconsistent provision to conform the Declaration of
Trust to the requirements of applicable federal and state laws or
regulations if they deem it necessary.
Shares have no pre-emptive or conversion rights. Shares are fully paid and
nonassessable. In regard to termination, sale of assets, or changes of
investment restrictions, the right to vote is limited to the holders of shares
of the particular fund affected by the proposal. When a majority is required, it
means the lesser of 67% or more of the shares present at a meeting when the
holders of more than 50% of the outstanding shares are present or represented by
proxy, or more than 50% of the outstanding shares.
SHAREHOLDER INQUIRIES - All inquiries regarding the Fund should be directed to
the Trust at the telephone number or address shown on the cover page of this
Prospectus.
PERFORMANCE ADVERTISING FOR THE FUND
The Fund may use historical performance in advertisements, sales literature, and
the prospectus. Such figures will include quotations of average annual total
return for the most recent one, five, and ten year periods (or the life of the
Fund if less). Average annual total return represents the rate required each
year for an initial investment to equal the redeemable value at the end of the
specific period. Average annual total return reflects reinvestment of all
distributions.
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<PAGE> 164
TAX STATUS
The Trust's policy is to cause each fund to qualify as a regulated investment
company and to meet the requirements of Subchapter M of the Internal Revenue
Code (the "Code"). The Fund intends to distribute all its taxable net investment
income and capital gains to shareholders and therefore will not be required to
pay any federal income taxes.
Because each fund of the Trust is treated as a separate entity for purposes of
the regulated investment company provisions of the Code, the assets, income, and
distributions of the Fund are considered separately for purposes of determining
whether or not the Fund qualifies as a regulated investment company. The Fund
intends to comply with the diversification requirements currently imposed by the
Internal Revenue Service on separate accounts of insurance companies as a
condition of maintaining the tax-deferred status of the Contracts. See the
Statement of Additional Information for more specific information.
The Fund may make investments that produce income that is not matched by a
corresponding cash distribution to the Fund, such as investments in PIK bonds or
in obligations such as certain Brady Bonds or zero coupon securities having
original issue discount (i.e., an amount equal to the excess of the stated
redemption price of the security at maturity over its issue price), or market
discount (i.e., an amount equal to the excess of the stated redemption price of
the security over the basis of such bond immediately after it was acquired) if
the Fund elects to accrue market discount on a current basis. In addition,
income may continue to accrue for federal income tax purposes with respect to a
non-performing investment. Any such income would be treated as income earned by
the Fund and therefore would be subject to the distribution requirements of the
Code. Because such income may not be matched by a corresponding cash
distribution to the Fund, the Fund may be required to borrow money or dispose of
other securities to be able to make distributions to its investors. The extent
to which the Fund may liquidate securities at a gain may be limited by the
requirement that less than 30% of its annual gross income be derived from the
sale or other disposition of securities and certain other investments held for
less than three months (the "short-short test"). In addition, if an election is
not made to currently accrue market discount with respect to a market discount
bond, all or a portion of any deduction or any interest expense incurred to
purchase or hold such bond may be deferred until such bond is sold or otherwise
disposed of.
The tax treatment of payments made by an Account to a Contractholder is
described in the separate account prospectus.
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CONTENTS
Sale of Fund Shares
Investment Objective and Policies
Investment Techniques, Considerations and Risk Factors
Management of the Trust
Investment in Fund Shares
Share Redemption
Net Income and Distributions
Additional Information
Performance Advertising for the Fund
Tax Status
INVESTMENT ADVISER AND ADMINISTRATOR
Nationwide Advisory Services, Inc.
One Nationwide Plaza
Columbus, Ohio 43215
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Nationwide Investors Services, Inc.
Box 1492
Three Nationwide Plaza
Columbus, Ohio 43216
AUDITORS
KPMG Peat Marwick LLP
Two Nationwide Plaza
Columbus, Ohio 43215
LEGAL COUNSEL
Druen, Dietrich, Koogler, & Reynolds
One Nationwide Plaza
Columbus, Ohio 43216
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PROSPECTUS
OCTOBER ___, 1997
SHARES OF BENEFICIAL INTEREST OF
NATIONWIDE SELECT ADVISERS MID CAP FUND
ONE SERIES OF
NATIONWIDE SEPARATE ACCOUNT TRUST
THREE NATIONWIDE PLAZA
COLUMBUS, OHIO 43215
FOR INFORMATION AND ASSISTANCE,
CALL (614) 249-5134
Nationwide Select Advisers Mid Cap Fund (the "Fund") is a non-diversified
portfolio of the Nationwide Separate Account Trust (the "Trust"). The Trust is
an open-end management investment company organized under the laws of
Massachusetts, by a Declaration of Trust, dated June 30, 1981, as subsequently
amended. The Trust offers shares in 15 separate mutual funds, each with its own
investment objective. This Prospectus relates only to Nationwide Select Advisers
Mid Cap Fund. The shares of the Fund are sold to other open-end investment
companies created by Nationwide Advisory Services, Inc., the Fund's investment
adviser, as well as to life insurance company separate accounts to fund the
benefits of variable life insurance policies and annuity contracts.
The Fund has as its investment objective capital appreciation. The Fund intends
to pursue its investment objective by investing primarily in equity securities
of medium-sized companies (market capitalization between $500 million and $7
billion).
This Prospectus provides you with the basic information you should know before
investing in the Fund. You should read it and keep it for future reference. A
Statement of Additional Information dated October ___, 1997, has been filed with
the Securities and Exchange Commission. You can obtain a copy without charge by
calling (614) 249-5134, or writing Nationwide Life Insurance Company, One
Nationwide Plaza, Columbus, Ohio 43215.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
THE STATEMENT OF ADDITIONAL INFORMATION FOR THE TRUST, DATED OCTOBER ___, 1997,
IS INCORPORATED HEREIN BY REFERENCE.
<PAGE> 167
SALE OF FUND SHARES
Shares of the Fund may be sold to life insurance company separate accounts (the
"Accounts") to fund the benefits of variable life insurance policies or annuity
contracts ("Contracts") issued by life insurance companies, as well as to other
open-end investment companies (each, a "Fund of Funds") created by Nationwide
Advisory Services, Inc. (the "Adviser"), the Fund's investment adviser. The
Accounts purchase shares of the Fund in accordance with variable account
allocation instructions received from owners of the Contracts. The Fund then
uses the proceeds to buy securities for its portfolio. The Adviser, together
with a group of subadvisers, manages the portfolio from day to day to accomplish
the Fund's investment objectives. The types of investments and the way they are
managed depend on what is happening in the economy and the financial
marketplaces. Each Fund of Funds and Account, as a shareholder, has an ownership
interest in the Fund's investments. The Fund also offers to buy back (redeem)
its shares from the Funds of Funds or the Accounts at any time at net asset
value.
SUMMARY OF EXPENSES
Shareholder Transaction Expenses None
Estimated Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees 1.05%
12b-1 Fees None
Other Expenses 0.15%
----
Estimated Total Fund Operating Expenses(1) 1.20%
====
This summary is provided to assist investors in understanding the various costs
and expenses that an investor in the Fund will bear directly or indirectly. The
amount of "Other Expenses" is based on estimated amounts for the fiscal year
ending December 31, 1997.
Example:
1 year 3 years
------ -------
You would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and
(2) redemption at the end of each time period $12 $38
THE EXAMPLE SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESSER THAN THOSE SHOWN.
- --------
(1) The Adviser has agreed with the Trust to waive management fees or to
reimburse expenses incurred by the Fund to the extent necessary to
limit the total expense ratio of the Fund to a maximum of 1.20% of the
average net assets of the Fund.
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<PAGE> 168
For more information on Fund expenses, see "MANAGEMENT OF THE TRUST" below.
FINANCIAL HIGHLIGHTS
Financial highlights are not available for the Fund, because the Fund has not
yet commenced operations.
INVESTMENT OBJECTIVE AND POLICIES
Nationwide select Advisers Mid Cap Fund (the "Fund") has as its investment
objective capital appreciation.
The Fund invests primarily in equity securities of medium-sized companies
(market capitalization between $500 million and $7 billion). The equity
securities in which the Fund will invest consist of common stock, preferred
stock and securities convertible into common stocks, including convertible
preferred stock and convertible bonds. Under normal market conditions, the Fund
will invest at least 65% of its total assets in equity securities of companies
with market capitalizations between $500 million and $7 billion. The average
market capitalizations of holdings in the Fund may, however, fluctuate over time
as a result of market valuation levels and the availability of specific
investment opportunities. In addition, the Fund may continue to hold securities
of companies whose market capitalizations grow above $7 billion subsequent to
purchase, if the company continues to satisfy the other investment policies of
the Fund. Although the Fund will normally be invested primarily in equity
securities as described above, it may also invest up to 5% of its assets in
warrants and rights to purchase common stocks.
The Fund will normally purchase securities traded in the United States or Canada
on registered exchanges or in the over-the-counter market ("OTC"). The Fund may,
however, invest in shares of foreign-based companies if they meet the Fund's
investment criteria. Under normal circumstances, investments in securities of
foreign issuers, including American Depository Receipts ("ADRs"), will comprise
no more than 20% of the Fund's total assets.
The Fund is also permitted to invest up to 35% of its total assets in debt
securities, including up to 15% of its assets in debt securities that are rated
below investment grade, and high-quality domestic and foreign money market
instruments, including bankers acceptances, certificates of deposit, commercial
paper, securities of the U.S. Government or any of its agencies or
instrumentalities, as well as repurchase agreements collateralized by these
types of securities. In addition, for temporary or emergency purposes, the Fund
can invest up to 100% of its total assets in cash, cash equivalents, and such
money market instruments.
For a further discussion of the types of securities in which the Fund may invest
and related investment techniques, see "INVESTMENT TECHNIQUES, CONSIDERATIONS
AND RISK FACTORS" below.
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<PAGE> 169
At various times the Fund may invest in derivative instruments for hedging or
risk management purposes or for any other permissible purpose. See "INVESTMENT
TECHNIQUES, CONSIDERATIONS AND RISK FACTORS - Derivative Instruments" below.
While there is careful selection of the securities in which the Fund may invest
and constant supervision of the Fund's portfolio by a group of professional
investment managers, there can be no guarantee that the Fund's investment
objective will be achieved. The investment objective of the Fund is not
fundamental and shareholder approval is not required to change the Fund's
investment objective.
MANAGEMENT OF THE FUND
Nationwide Advisory Services, Inc. (the "Adviser") provides investment
management evaluation services to the Fund in initially selecting and monitoring
on an ongoing basis the performance of subadvisers to manage the Fund's
portfolio. The Adviser has selected three subadvisers (each, a "Subadviser") to
be subadvisers of the Fund, each of whom will manage part of the Fund's
portfolio. Although the Adviser reserves the right to allocate and reallocate
the assets among the Subadvisers at any time, it is anticipated that each of the
Subadvisers will receive a substantially equal proportion of the funds that are
invested in the Fund and will generally retain the management of such assets and
any capital appreciation attributable to them. See "MANAGEMENT OF THE TRUST --
Investment Management of the Fund" below for further information.
The Adviser has chosen the Subadvisers because they approach investing in equity
securities of small and medium sized companies in different ways. The Adviser
has decided to employ a number of Subadvisers because even successful investment
managers may experience fluctuations in performance which may be caused by
factors or conditions that affect the particular securities emphasized by that
Subadviser or that may impact its particular investment style. As a result of
the diversification among securities and styles, the Adviser expects to increase
prospects for investment return and to reduce market risk and volatility.
The following is a brief description of the investment strategies of each of the
Subadvisers:
FIRST PACIFIC ADVISORS, INC.
First Pacific Advisors, Inc. ("First Pacific") seeks value in all parts of a
company's capital structure, including common and preferred stocks as well as
corporate and convertible bonds. First Pacific utilizes a contrarian investment
style, which often leads First Pacific to invest in "what other people do not
wish to own." First Pacific searches for common stocks, preferred stocks,
warrants and convertible securities that reflect low price/earnings ratios
(P/Es) and trade at discounts to private market value.
First Pacific selects equity securities for the Fund which it believes offer
superior investment value. First Pacific deems the following important in its
stock selection process:
- - High return on capital
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<PAGE> 170
- - Solid balance sheet
- - Meaningful cash flow
- - Active share repurchase program
- - Insider buying
- - Superior management seeking to maximize shareholder value
- - Projected earnings growth exceeding the stock market average
In First Pacific's view, the stock market prices securities efficiently in the
long term, rewarding companies which successfully grow their earnings and
penalizing those which do not. First Pacific's investment philosophy is based on
the conviction that the market valuation of securities is often inefficient in
the short term, causing a particular security, industry group or the entire
market to become underpriced or overpriced in the short term thereby creating an
excellent opportunity to buy or sell. This contrarian style leads to those
investments that offer absolute, rather than relative value. Attention is
directed toward those companies offering the best combination of such quality
criteria as strong market share, good management and high normalized return on
capital.
First Pacific seeks a reliable and recurring stream of income for the Fund
through fixed-income investments. First Pacific attempts to identify current
interest rate trends. Usually, a defensive interest rate strategy is employed,
with investments made at different points along the yield curve in an attempt to
keep the average maturity of fixed-income investments less than or equal to ten
years. When combined with equity securities, the ownership of fixed-income
securities not only broadens the universe of opportunities, but offers
additional diversification and can help lower portfolio volatility.
Intensive research identifies these opportunities through review of stock price
or industry group under-performance, insider purchases, management changes and
corporate spin-offs. Fundamental analysis is the foundation of First Pacific's
investment approach and provides a thorough view of financial and business
characteristics, allowing for the determination of absolute value. Research
involves communicating directly with company management, suppliers, and
customers, better defining future potential, financial strength and the
company's competitive position.
PILGRIM BAXTER & ASSOCIATES, LTD.
Pilgrim Baxter & Associates, Ltd. ("Pilgrim Baxter") invests in companies
believed by Pilgrim Baxter to have an outlook for strong earnings growth and the
potential for significant capital appreciation. Securities will be sold when
Pilgrim Baxter believes that anticipated appreciation is no longer probable due
to a change in the company's fundamental characteristics. Because of its policy
with respect to the sales of investments, the portion of the Fund's portfolio
managed by Pilgrim Baxter may from time to time realize short-term gains or
losses and will likely have greater volatility than the stock market in general,
as measured by the Standard & Poor's 500 Composite Stock Price Index.
Pilgrim Baxter's investment process in managing the assets of the Fund is both
quantitative and fundamental, and is focused on quality earnings growth. In
seeking to identify investment opportunities for the Fund, Pilgrim Baxter begins
by creating a universe of rapidly growing companies with market capitalizations
within the parameters described for the Fund and that possess certain
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<PAGE> 171
quality characteristics. Using proprietary software and research models that
incorporate important attributes of successful growth, such as positive earnings
surprises, upward earnings estimate revisions, and accelerating sales and
earnings growth, Pilgrim Baxter creates a universe of growing companies. Then,
using fundamental research, Pilgrim Baxter evaluates each company's earnings
quality and assesses the sustainability of the company's current growth trends.
Through this highly disciplined process, Pilgrim Baxter seeks to construct an
investment portfolio that possesses strong growth characteristics. Pilgrim
Baxter will attempt to keep their portion of the assets of the Fund fully
invested at all times. Because the universe of companies will undoubtedly
experience volatility in stock price, it is important that shareholders of the
Fund maintain a long-term investment perspective.
RICE, HALL, JAMES & ASSOCIATES
Rice, Hall, James & Associates ("Rice Hall") intends to pursue the Fund's
objective through investment primarily in common stocks of companies whose
market capitalizations range between $300 million and $2.5 billion at the time
of purchase. Rice Hall believes this small/mid cap area of the market has more
than three times the number of securities than the market comprised of companies
with market capitalizations greater than $2.5 billion. Rice Hall also believes
that the small/mid cap market has less analyst coverage, which means there is
greater pricing inefficiency for such securities than for more closely followed,
usually larger capitalization, companies. Rice Hall's investment selections for
the Fund will tend to be from relatively underfollowed securities.
Rice Hall practices a fundamentally driven bottom-up research approach. This
approach focuses on identifying stocks of growth companies that are selling at a
discount to the companies' projected earnings growth rates. Specifically, Rice
Hall requires that equity securities in which it invests have price/earnings
ratios that are lower than the 3 to 5 year projected earnings growth rate. In
addition, the stock must possess catalysts, which are defined by Rice Hall as
fundamental events that ultimately lead to increases in revenue growth rates,
expanding profit margins and/or increases in earnings growth rates, that are
generally not anticipated by the market. Such events can include new product
introductions or applications, discovery of niche markets, new management,
corporate or industry restructures, regulatory change and end market expansion.
Most importantly, Rice Hall must be convinced that such change will lead to
greater investor recognition and a subsequent rise in the stock prices within a
12 to 24 month period. The key is discovering undervalued companies where
fundamental changes are occurring that are temporarily going unnoticed by
investors.
INVESTMENT TECHNIQUES, CONSIDERATIONS AND RISK FACTORS
An investment in the Fund involves certain risks. As a general matter, an
investment in the Fund involves the risk that the net asset value of the Fund's
shares will fluctuate in response to changes in economic conditions and the
market's perception of the securities held by the Fund. In addition, because the
Fund invests primarily in common stocks, an investment in the Fund is subject to
stock market risk, which means that such an investment is subject to the risk
that stock prices in general will decline over short or extended periods of
time. An investment in the Fund is subject to other
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risks as well, depending upon the particular investment techniques employed by
the Fund and the types of securities in which the Fund invests.
SMALL COMPANY AND EMERGING GROWTH STOCKS - Investing in securities of
small-sized and emerging growth companies may involve greater risks than
investing in larger, more established issuers since these securities may have
limited marketability and thus may be more volatile than securities of larger,
more established companies or the market averages in general. Because
small-sized companies normally have fewer shares outstanding than larger
companies, it may be more difficult for the Fund to buy or sell significant
numbers of such shares without an unfavorable impact on prevailing prices.
Small-sized companies may have limited product lines, markets or financial
resources and may lack management depth. In addition, small-sized companies are
typically subject to wider variations in earnings and business prospects than
are larger, more established companies. There is typically less publicly
available information concerning small-sized companies than for larger, more
established ones.
Securities of issuers in "special situations" also may be more volatile, since
the market value of these securities may decline in value if the anticipated
benefits do not materialize. Companies in "special situations" include, but are
not limited to, companies involved in an acquisition or consolidation;
reorganization; recapitalization; merger, liquidation or distribution of cash,
securities or other assets; a tender or exchange offer, a breakup or workout of
a holding company; litigation which, if resolved favorably, would improve the
value of the companies' securities; or a change in corporate control.
Although investing in securities of emerging growth companies or "special
situations" offers potential for above-average returns if the companies are
successful, the risk exists that the companies will not succeed and the prices
of the companies' shares could significantly decline in value. Therefore, an
investment in the Fund may involve a greater degree of risk than an investment
in other mutual funds that seek long-term growth of capital by investing in
better-known, larger companies.
FOREIGN SECURITIES AND CURRENCIES - The Fund may invest in foreign securities,
either directly or indirectly through the use of depository receipts. Depository
receipts, including ADRs, European Depository Receipts and American Depository
Shares, are generally issued by banks or trust companies and evidence ownership
of underlying foreign securities. The Fund may also invest in securities of
foreign investment funds or trusts (including passive foreign investment
companies).
Foreign investments involve special risks, including the possibility of
expropriation, confiscatory taxation, and withholding taxes on dividends and
interest; less extensive regulation of foreign brokers, securities markets, and
issuers; political, economic or social instability; and less publicly available
information and different accounting standards. When investing in foreign
securities, the Fund may also incur costs in conversions between currencies,
possible delays in settlement in foreign securities markets, limitations on the
use or transfer of assets (including suspension of the ability to transfer
currency from a given country), and difficulty in enforcing obligations in other
countries.
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Foreign economies may differ favorably or unfavorably from the U.S. economy in
various respects, including growth of gross domestic product, rates of
inflation, currency depreciation, capital reinvestment, resource
self-sufficiency, and balance of payments positions. Many foreign securities are
less liquid and their prices more volatile than comparable U.S. securities.
Although the Fund generally invests only in securities that are regularly traded
on recognized exchanges or OTC, from time to time, foreign securities may be
difficult to liquidate rapidly without adverse price effects. Certain costs
attributable to foreign investing, such as custody charges and brokerage costs,
are higher than those attributable to domestic investing.
The Fund may invest a portion of its assets in securities of issuers in
developing or emerging markets and economies. Investing in securities of issuers
in developing or emerging markets involves special risks, including less social,
political, and economic stability; smaller securities markets and lower trading
volume, which may result in a lack of liquidity and greater price volatility;
certain national policies that may restrict the Fund's investment opportunities,
including restrictions on investments in issuers or industries deemed sensitive
to national interests, or expropriation or confiscation of assets or property,
which could result in a Fund's loss of its entire investment in that market; and
less developed legal structures governing private or foreign investment or
allowing for judicial redress for injury to private property.
In addition, brokerage commissions, custodial services, withholding taxes, and
other costs relating to investment in emerging markets generally are more
expensive than in the U.S. and certain more established foreign markets.
Economies in emerging markets generally are heavily dependent upon international
trade and, accordingly, have been and may continue to be affected adversely by
trade barriers, exchange controls, managed adjustments in relative currency
values, and other protectionist measures negotiated or imposed by the countries
with which they trade.
Because most foreign securities are denominated in non-U.S. currencies, the
investment performance of the Fund could be significantly affected by changes in
foreign currency exchange rates. The value of the Fund's assets denominated in
foreign currencies will increase or decrease in response to fluctuations in the
value of those foreign currencies relative to the U.S. dollar. Currency exchange
rates can be volatile at times in response to supply and demand in the currency
exchange markets, international balances of payments, governmental intervention,
speculation, and other political and economic conditions.
The Fund may purchase and sell foreign currency on a spot basis and may engage
in forward currency contracts, currency options, and futures transactions for
hedging or risk management purposes. See "--Derivative Instruments" below.
WARRANTS - A warrant is an instrument which gives the holder the right to
subscribe to a specified amount of the issuer's securities at a set price for a
specified period of time or on a specified date. Warrants do not carry the right
to dividends or voting rights with respect to their underlying securities and do
not represent any rights in assets of the issuer. An investment in warrants may
be considered speculative. In addition, the value of a warrant does not
necessarily change with the value of the
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underlying securities, and a warrant ceases to have value if it is not exercised
prior to its expiration date.
CONVERTIBLE SECURITIES - The Fund may invest in convertible securities, which
are bonds, debentures, notes, preferred stocks or other securities that may be
converted into or exchanged for a specified amount of common stock of the same
or a different issuer within a particular period of time at a specified price or
formula. Convertible securities have general characteristics similar to both
debt obligations and equity securities. Although to a lesser extent than with
debt obligations generally, the market value of convertible securities tends to
decline as interest rates increase and, conversely, tends to increase as
interest rates decline. In addition, because of the conversion feature, the
market value of convertible securities tends to vary with fluctuations in the
market value of the underlying common stock and therefore will react to
variations in the general market for equity securities. A unique feature of
convertible securities is that as the market price of the underlying common
stock declines, convertible securities tend to trade increasingly on a yield
basis, and so may not experience market value declines to the same extent as the
underlying common stock. When the market price of the underlying common stock
increases, the prices of the convertible securities tend to rise as a reflection
of the value of the underlying common stock. While no securities investments are
without risk, investments in convertible securities generally entail less risk
than investments in common stock of the same issuer.
As debt obligations, convertible securities are investments that provide for a
stable stream of income with generally higher yields than common stocks. Of
course, like all debt obligations, there can be no assurance of current income
because the issuers of convertible securities may default on their obligations.
Convertible securities, however, generally offer lower interest or dividend
yields than non-convertible securities of similar quality because of the
potential for capital appreciation. A convertible security, in addition to
providing fixed income, offers the potential for capital appreciation through
the conversion feature, which enables the holder to benefit from increases in
the market price of the underlying common stock. There can be no assurance of
capital appreciation, however, because the market value of securities will
fluctuate.
Convertible securities generally are subordinated to other similar but
non-convertible securities of the same issuer, although convertible bonds, as
corporate debt obligations, enjoy seniority in right of payment to all equity
securities, and convertible preferred stock is senior to common stock of the
same issuer. Because of the subordination feature, however, convertible
securities typically have lower ratings than similar non-convertible securities
are rated below investment grade or are not rated.
DEBT OBLIGATIONS - The Fund is permitted to invest up to 35% of its total assets
in debt obligations. Debt obligations in which the Fund may invest generally
will be investment grade debt obligations, although the Fund may invest up to
15% of its assets in debt obligations which are rated below the fourth highest
rating category by any nationally recognized statistical rating organization
("NRSRO") (e.g., Moody's Investors Service, Inc. or Standard & Poor's Ratings
Group). In addition, under normal market conditions, the Fund may invest up to
15% of assets in high quality short-term money market obligations. The Fund's
risk and return potential with respect to the debt portion of its
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portfolio depends in part on the maturity and credit-quality characteristics of
the underlying investments in its portfolio. In general, the longer the maturity
of a debt obligation, the greater its sensitivity to changes in interest rates.
Similarly, debt obligations issued by less creditworthy entities tend to carry
higher yields than those with higher credit ratings. The market value of all
debt obligations is also affected by changes in the prevailing interest rates.
Therefore, the market value of such instruments generally reacts inversely to
interest rate changes. If the prevailing interest rates decrease, the market
value of debt obligations generally increases. If the prevailing interest rates
increase, the market value of debt obligations generally decreases.
Debt obligations in which the Fund may invest include: 1) bonds or bank
obligations; 2) securities issued or guaranteed by the U.S. Government or any
agency or instrumentality thereof; 3) short-term corporate debt securities and
commercial paper rated in one of the two highest ratings categories of any
NRSRO; 4) short-term bank obligations that are rated in one of the two highest
categories by any NRSRO, with respect to obligations maturing in one year or
less; 5) repurchase agreements relating to debt obligations which the Fund could
purchase directly; 6) unrated debt obligations which are determined by the
Adviser or a Subadviser to be of comparable quality; or 7) money market mutual
funds.
Medium-quality obligations are obligations rated in the fourth highest rating
category by any NRSRO. Medium-quality securities, although considered
investment-grade, may have some speculative characteristics and may be subject
to greater fluctuations in value than higher-rated securities. In addition, the
issuers of medium-quality securities may be more vulnerable to adverse economic
conditions or changing circumstances than that of higher-rated issuers.
All ratings are determined at the time of investment. Any subsequent rating
downgrade of a debt obligation will be monitored by the Adviser or a Subadviser
to consider what action, if any, the Fund should take consistent with its
investment objective; such event will not automatically require the sale of the
downgraded securities.
U.S. GOVERNMENT SECURITIES - U.S. Government securities are issued or guaranteed
by the U.S. Government or its agencies or instrumentalities. Securities issued
by the U.S. Government include U.S. Treasury obligations, such as Treasury
bills, notes, and bonds. Securities issued by government agencies or
instrumentalities include, but are not limited to, obligations of the following:
- - the Federal Housing Administration, Farmers Home Administration, and the
Government National Mortgage Association ("GNMA"), including GNMA
pass-through certificates, whose securities are supported by the full faith
and credit of the United States;
- - the Federal Home Loan Banks, whose securities are supported by the right of
the agency to borrow from the U.S. Treasury;
- - the Federal National Mortgage Association ("FNMA"), whose securities are
supported by the discretionary authority of the U.S. government to purchase
certain obligations of the agency or instrumentality; and
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- - the Student Loan Marketing Association, Federal Home Loan Mortgage
Corporation ("FHLMC"), and the International Bank for Reconstruction
and Development, whose securities are supported only by the credit of
such agencies.
Although the U.S. government provides financial support to such U.S.
government-sponsored agencies or instrumentalities, no assurance can be given
that it will always do so. The U.S. government and its agencies and
instrumentalities do not guarantee the market value of their securities;
consequently, the value of such securities will fluctuate.
MORTGAGE-BACKED SECURITIES - The Fund may purchase mortgage-backed securities.
Mortgage-backed securities represent direct or indirect participation in, or
are secured by and payable from, mortgage loans secured by real property, and
include single- and multi-class pass-through securities and collateralized
mortgage obligations. Such securities may be issued or guaranteed by U.S.
government agencies or instrumentalities or by private issuers, generally
originators in mortgage loans, including savings and loan associations, mortgage
bankers, commercial banks, investment bankers, and special purpose entities
(collectively, "private lenders"). Mortgage-backed securities issued by private
lenders may be supported by pools of mortgage loans or other mortgage-backed
securities that are guaranteed, directly or indirectly, by the U.S. government
or one of its agencies or instrumentalities, or they may be issued without any
governmental guarantee of the underlying mortgage assets but with some form of
non-governmental credit enhancement.
The yield characteristics of mortgage-backed securities differ from those of
traditional debt obligations. Among the principal differences are that interest
and principal payments are made more frequently on mortgage-backed securities,
usually monthly, and that principal may be prepaid at any time because the
underlying mortgage loans generally may be prepaid at any time. As a result, if
the Fund purchases these securities at a premium, a prepayment rate that is
higher than expected will reduce yield to maturity, while a prepayment rate that
is lower than expected will have the opposite effect of increasing the yield to
maturity. Conversely, if the Fund purchases these securities at a discount, a
prepayment rate that is faster than expected will increase yield to maturity,
while a prepayment rate that is slower than expected will reduce yield to
maturity. Accelerated prepayments on securities purchased by the Fund at a
premium also impose a risk of loss of principal because the premium may not have
been fully amortized at the time the principal is prepaid in full. The market
for privately issued mortgage-backed securities is smaller and less liquid than
the market for government sponsored mortgage-backed securities.
DERIVATIVE INSTRUMENTS - Derivative instruments may be used by the Fund for
hedging or risk management purposes or for any other permissible purposes
consistent with the Fund's investment objective. Derivative instruments are
securities or agreements whose value is based on the value of some underlying
asset (e.g., a security or currency) or the level of a reference index. Options,
futures, and options on futures transactions are considered derivative
transactions. Derivatives generally have investment characteristics that are
based upon either forward contracts (under which one party is obligated to buy
and the other party is obligated to sell an underlying asset at a specific price
on a specified date) or option contracts (under which the holder of the option
has the right but not the
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obligation to buy or sell an underlying asset at a specified price on or before
a specified date). Consequently, the change in value of a forward-based
derivative generally is roughly proportional to the change in value of the
underlying asset. In contrast, the buyer of an option-based derivative generally
will benefit from favorable movements in the price of the underlying asset but
is not exposed to the corresponding losses that result from adverse movements in
the value of the underlying asset. The seller of an option-based derivative
generally will receive fees or premiums but generally is exposed to losses
resulting from changes in the value of the underlying asset. Derivative
transactions may include elements of leverage and, accordingly, the fluctuation
of the value of the derivative transaction in relation to the underlying asset
may be magnified. In addition to options, futures, and options on futures
transactions, derivative transactions may include short sales against the box,
in which the Fund sells a security it owns for delivery at a future date.
Derivative transactions may also include forward currency contracts and foreign
currency exchange-related securities.
Derivative transactions in which the Fund may engage include the writing of
covered put and call options on securities and the purchase of put and call
options thereon, the purchase of put and call options on securities indices and
exchange-traded options on currencies and the writing of put and call options on
securities indices. The Fund may enter into spread transactions and swap
agreements. The Fund also may buy and sell financial futures contracts, which
may include interest-rate futures, futures on currency exchanges and stock and
bond index futures contracts. The Fund may enter into any futures contracts and
related options without limit for "bona fide hedging" purposes (as defined in
Commodity Futures Trading Commission regulations) and for other permissible
purposes, provided that aggregate initial margin and premiums on positions
engaged in for purposes other than "bona fide hedging" will not exceed 5% of its
net asset value, after taking into account unrealized profits and losses on such
contracts. The Fund may also enter into forward currency contracts to purchase
or sell foreign currencies.
Derivative instruments may be exchange-traded or traded in OTC transactions
between private parties. OTC transactions are subject to the credit risk of the
counterparty to the instrument and are less liquid than exchange-traded
derivatives since they often can only be closed out with the other party to the
transaction. When required by guidelines of the Securities and Exchange
Commission, the Fund will set aside permissible liquid assets in a segregated
account to secure its obligations under derivative transactions. Segregated
assets cannot be sold or transferred unless equivalent assets are substituted in
their place or it is no longer necessary to segregate them. As a result, there
is a possibility that segregation of a large percentage of the Fund's assets
could impede portfolio management or the Fund's ability to meet redemption
requests or other current obligations. In order to maintain its required cover
for a derivative transaction, the Fund may need to sell portfolio securities at
disadvantageous prices or times since it may not be possible to liquidate a
derivative position.
The successful use of derivative transactions by the Fund is dependent upon a
Subadviser's ability to correctly anticipate trends in the underlying asset.
Hedging transactions are subject to risks; if a Subadviser incorrectly
anticipates trends in the underlying asset, the Fund may be in a worse position
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than if no hedging had occurred. In addition, there may be imperfect correlation
between the Fund's derivative transactions and the instruments being hedged.
SHORT SALES - The Fund may engage in short sales of securities. In a short sale,
the Fund sells stock which it does not own, making delivery with securities
"borrowed" from a broker. The Fund is then obligated to replace the security
borrowed by purchasing it at the market price at the time of replacement. This
price may or may not be less than the price at which the security was sold by
the Fund. Until the security is replaced, the Fund is required to pay the lender
any dividends or interest which accrue during the period of the loan. In order
to borrow the security, the Fund may also have to pay a fee which would increase
the cost of the security sold. The proceeds of the short sale will be retained
by the broker, to the extent necessary to meet margin requirements, until the
short position is closed out.
The Fund also must deposit in a segregated account an amount of cash or liquid
assets equal to the difference between (a) the market value of the securities
sold short at the time they were sold short and (b) the value of the collateral
deposited with the broker in connection with the short sale (not including the
proceeds from the short sale). While the short position is open, the Fund must
maintain daily the segregated account at such a level that (1) the amount
deposited in it plus the amount deposited with the broker as collateral equals
the current market value of the securities sold short and (2) the amount
deposited in it plus the amount deposited with the broker as collateral is not
less than the market value of the securities at the time they were sold short.
The Fund will incur a loss as a result of the short sale if the price of the
security increases between the date of the short sale and the date on which the
Fund replaces the borrowed security. The Fund will realize a gain if the
security declines in price between those two dates. The amount of any gain will
be decreased and the amount of any loss will be increased by any interest the
Fund may be required to pay in connection with the short sale. The dollar amount
of short sales at any one time (not including short sales against the box) may
not exceed 25% of the net assets of the Fund.
A short sale is "against-the-box" if at all times when the short position is
open the Fund owns an equal amount of the securities or securities convertible
into, or exchangeable without further consideration for, securities of the same
issue as the securities sold short. Such transactions serve to defer a gain or
loss for Federal income tax purposes.
ILLIQUID SECURITIES - The Fund may invest up to 15% of its net assets in
securities that are illiquid, in that they cannot be expected to be sold within
seven days at approximately the price at which they are valued. Due to the
absence of an active trading market, the Fund may experience difficulty in
valuing or disposing of illiquid securities. Each Subadviser will determine the
liquidity of the Fund's securities, under the supervision the Trust's trustees.
RESTRICTED SECURITIES, NON-PUBLICLY TRADED SECURITIES AND RULE 144A SECURITIES -
The Fund may invest in restricted securities and Rule 144A securities.
Restricted securities cannot be sold to the public without registration under
the Securities Act of 1933 ("1933 Act"). Unless registered for sale,
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these securities can be sold only in privately negotiated transactions or
pursuant to an exemption from registration. Restricted securities are generally
considered illiquid and are therefore subject to the Fund's 15% limitation on
investments in illiquid securities.
Non-publicly traded securities (including Rule 144A securities) may involve a
high degree of business and financial risk which may result in substantial
losses. The securities may be less liquid than publicly traded securities.
Although these securities may be resold in privately negotiated transactions,
the prices realized from these sales could be less than those originally paid by
the Fund. In particular, Rule 144A securities may be resold only to qualified
institutional buyers in accordance with Rule 144A under the 1933 Act.
Unregistered securities may also be sold abroad pursuant to Regulation S under
the 1933 Act. Companies whose securities are not publicly traded are not subject
to the disclosure and other investor protection requirements that would be
applicable if their securities were publicly traded. Acting pursuant to
guidelines established by the Trustees of the Trust, restricted securities and
Rule 144A securities may be considered liquid.
REPURCHASE AGREEMENTS - The Fund may engage in repurchase agreement transactions
as long as the underlying securities are of the type that the Fund would be
permitted to purchase directly. Under the terms of a typical repurchase
agreement, the Fund would acquire an underlying debt obligation for a relatively
short period (usually not more than one week) subject to an obligation of the
seller to repurchase, and the Fund to resell, the obligation at an agreed upon
price and time, thereby determining the yield during the Fund's holding period.
The Fund will enter into repurchase agreements with respect to securities in
which it may invest with member banks of the Federal Reserve System or certain
non-bank dealers. Under each repurchase agreement the selling institution will
be required to maintain the value of the securities subject to the repurchase
agreement at not less than their repurchase price. Repurchase agreements could
involve certain risks in the event of default or insolvency of the other party,
including possible delays or restrictions upon a Fund's ability to dispose of
the underlying securities. The Adviser or a Subadviser, acting under the
supervision of the Board of Trustees, reviews the creditworthiness of those
banks and non-bank dealers with which the Fund enters into repurchase agreements
to evaluate these risks. For additional information, see "Repurchase Agreements"
in the Statement of Additional Information.
REVERSE REPURCHASE AGREEMENTS - The Fund may also enter into reverse repurchase
agreements with the same parties with whom it may enter into repurchase
agreements. Reverse repurchase agreements involve the sale of securities held by
the Fund pursuant to its agreement to repurchase them at a mutually agreed upon
date, price and rate of interest. At the time the Fund enters into a reverse
repurchase agreement, it will establish and maintain a segregated account with
an approved custodian containing liquid securities having a value not less than
the repurchase price (including accrued interest). The assets contained in the
segregated account will be marked-to-market daily and additional assets will be
placed in such account on any day in which the assets fall below the repurchase
price (plus accrued interest). The Fund's liquidity and ability to manage its
assets might be affected when it sets aside cash or portfolio securities to
cover such commitments. Reverse repurchase agreements involve the risk that the
market value of the securities retained in lieu of sale may decline below the
price of the securities the Fund has sold but is obligated to repurchase. In the
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event the buyer of securities under a reverse repurchase agreement files for
bankruptcy or becomes insolvent, such buyer or its trustee or receiver may
receive an extension of time to determine whether to enforce the Fund's
obligation to repurchase the securities, and the Portfolio's use of the proceeds
of the reverse repurchase agreement may effectively be restricted pending such
determination. Reverse repurchase agreements are considered to be borrowings
under the Investment Company Act of 1940 (the "1940 Act").
INVESTMENT COMPANIES - As permitted by the 1940 Act, the Fund reserves the right
to invest up to 10% of its total assets, calculated at the time of investment,
in the securities of other open-end or closed-end investment companies. No more
than 5% of the Fund's total assets may be invested in the securities of any one
investment company nor may it acquire more than 3% of the voting securities of
any other investment company. The Fund will indirectly bear its proportionate
share of any management fees paid by an investment company in which it invests
in addition to the advisory fee paid by the Fund.
WHEN-ISSUED SECURITIES - The Fund may invest without limitation in securities
purchased on a when-issued or delayed delivery basis. Although the payment and
interest terms of these securities are established at the time the purchaser
enters into the commitment, these securities may be delivered and paid for at a
future date, generally within 45 days (for mortgage-backed securities, the
delivery date may extend to as long as 120 days). Purchasing when-issued
securities allows the Fund to lock in a fixed price or yield on a security it
intends to purchase. However, when the Fund purchases a when-issued security, it
immediately assumes the risk of ownership, including the risk of price
fluctuation until the settlement date.
The greater the Fund's outstanding commitments for these securities, the greater
the exposure to potential fluctuations in the net asset value of a Fund.
Purchasing when-issued securities may involve the additional risk that the yield
available in the market when the delivery occurs may be higher or the market
price lower than that obtained at the time of commitment. Although the Fund may
be able to sell these securities prior to the delivery date, it will purchase
when-issued securities for the purpose of actually acquiring the securities,
unless after entering into the commitment a sale appears desirable for
investment reasons. When required by guidelines issued by the Securities and
Exchange Commission, the Fund will set aside permissible liquid assets in a
segregated account to secure its outstanding commitments for when-issued
securities.
LENDING PORTFOLIO SECURITIES - From time to time, the Fund may lend its
portfolio securities to brokers, dealers and other financial institutions who
need to borrow securities to complete certain transactions. In connection with
such loans, the Fund will receive collateral consisting of cash, U.S. Government
securities or irrevocable letters of credit. Such collateral will be maintained
at all times in an amount equal to at least 100% of the current market value of
the loaned securities. The Fund can increase its income through the investment
of such collateral. The Fund continues to be entitled to payments in amounts
equal to the interest, dividends or other distributions payable on the loaned
security and receives interest on the amount of the loan. Such loans will be
terminable at any time
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upon specified notice. The Fund might experience risk of loss if the institution
with which it has engaged in a portfolio loan transaction breaches its agreement
with the Fund.
BORROWING MONEY - Each Fund may borrow money from banks up to 33 1/3% of the
Fund's total assets (including the amount borrowed). However, the Funds
currently intend to borrow money only for temporary or emergency purposes (but
not for leverage or to purchase investments) up to 5% of the value of that
Fund's total assets (including the amount borrowed) valued at the time the
borrowing is made.
NON-DIVERSIFIED STATUS
The Fund is classified as non-diversified under the 1940 Act, which means that
the Fund is not limited by the 1940 Act in the proportion of its assets that it
may invest in securities of a single issuer. The Fund's investments will be
limited, however, in order to qualify as a "regulated investment company" for
purposes of the Code. To qualify, the Fund will comply with certain
requirements, including limiting its investments so that at the close of each
quarter of the taxable year (a) not more than 25% of the market value of its
total assets will be invested in the securities of a single issuer, and (b) with
respect to 50% of the market value of its total assets, not more than 5% of the
market value of its total assets will be invested in the securities of a single
issuer and the Fund will not own more than 10% of the outstanding voting
securities of a single issuer. Being non-diversified means that the Fund may
invest a greater proportion of its assets in the obligations of a small number
of issuers and, as a result, may be subject to greater risk with respect to
portfolio securities. To the extent that the Fund assumes large positions in the
securities of a small number of issuers, its return may fluctuate to a greater
extent than that of a diversified company as a result of changes in the
financial condition or in the market's assessment of the issuers.
PORTFOLIO TURNOVER
The Fund will attempt to purchase securities with the intent of holding them for
investment but may purchase and sell portfolio securities whenever the Adviser
or the Subadviser believes it to be in the best interests of the Fund. The Fund
will not consider portfolio turnover rate a limiting factor in making investment
decisions consistent with its investment objective and policies.
The annual portfolio turnover rate for the Fund is not expected to exceed 150%.
Higher turnover rates will generally result in higher transaction costs to the
Fund, as well as higher brokerage expenses and higher levels of capital gains.
The portfolio turnover rates of the Fund may vary greatly from year to year and
within a particular year.
SUBADVISERS HISTORICAL PERFORMANCE INFORMATION
The Fund has not commenced operations and has no investment performance record.
However, the styles and strategies to be employed by each of the Subadvisers in
managing their relevant portion of the Fund is substantially similar (although
not necessarily identical) to other discretionary investment accounts managed by
the Subadvisers. The historical investment performance includes the performance
of the FPA Crescent Portfolio, another registered investment company managed by
First Pacific, and the performance of a composite of accounts managed by each of
Rice Hall and Pilgrim Baxter (collectively, the "Subadviser Historical
Performance").
In addition to the individual investment performance of each Subadviser, the
following tables reflect the combined performance of the Subadvisers ("Combined
Subadvisers Portfolio"). The combined information is presented only for periods
of time where each of the Subadvisers were managing accounts and employing
strategies similar to the strategy they will employ for the Fund, and reflects
an equal allocation of one-third of the Fund's assets to each of the
Subadvisers, rebalanced annually. The performance below is premised on the
assumption that, had the Fund been in existence, each Subadviser would have been
selected by Nationwide to manage one-third of the Fund during the period
depicted by the performance. Notwithstanding these assumptions, Nationwide may
change Subadvisers and the allocation of assets among the Subadvisers. The
allocation of assets among the Subadvisers in the Fund is also expected to vary
relative to the performance of each portion of the Fund.
THE INVESTMENT PERFORMANCE OF THE SUBADVISER HISTORICAL PERFORMANCE AND THE
COMBINED SUBADVISERS PORTFOLIO DOES NOT REPRESENT THE FUND'S PERFORMANCE, NOR
SHOULD IT BE INTERPRETED AS INDICATIVE OF THE FUND'S FUTURE PERFORMANCE. The
Combined Subadvisers Portfolio information is hypothetical, and is not an
actually managed fund, nor does it represent an estimate of what the Fund's
performance would have been had it operated during the relevant periods
illustrated.
All information has been provided by the Subadvisers, and is believed by the
Fund to be reliable. However, the information has not been independently
verified by the Fund. Please refer to the comments below regarding the
preparation and presentation standards of each Subadviser, and their compliance
with the Performance Presentation Standards of the Association for Investment
Management and Research (AIMR-PPS (TM)). AIMR has not been involved with the
preparation or review of this material. The data for Pilgrim Baxter and Rice
Hall has been constructed by combining actual performance results achieved by
each of these Subadvisers, which results were calculated from performance of a
composite (unless otherwise noted) comprised of actual accounts with a similar
investment objective managed by each respective organization.
Certain of the client accounts that are included in a Subadviser's past
performance record may not be registered investment companies. Such accounts
would not be subject to the same types of expenses to which the Fund is subject
nor to the specific tax diversification and other restrictions and investment
limitations imposed on the Fund by the 1940 Act or Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"). The performance results that
include accounts that are not registered investment companies might have been
less favorable had they been subject to regulation as investment companies under
the relevant federal laws.
ANNUALIZED TOTAL RETURN
FOR PERIODS ENDING JUNE 30, 1997
(NET OF FEES)
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years Inception*
------ ------- ------- -------- ----------
<S> <C> <C> <C> <C> <C>
FPA Crescent Portfolio 24.84 20.47 18.23
Pilgrim Baxter Mid Cap -7.27 22.98 16.74 11.43
Rice, Hall Small-Mid 18.33 24.53 19.80 12.92
Combined Subadvisers Portfolio 11.99 22.98
</TABLE>
* inception date is June 2, 1993
INDIVIDUAL SUBADVISER PERFORMANCE:
Except as otherwise noted below, a Subadviser's performance is presented net of
fees, either actual or the Fund's estimated fees, but does not reflect the
imposition of any sales loads or charges.
FIRST PACIFIC
First Pacific's historical performance data covers the period since June 2, 1993
and reflects the performance of the FPA Crescent Portfolio. The performance
above reflects the fees and expenses of 1.54% based on the FPA Crescent
Portfolio's operations during the fiscal year ended March 31, 1997, which are
higher than the estimated fees for the Fund. This information relates only to
Institutional Class Shares of the FPA Crescent Portfolio.
PILGRIM BAXTER
The investment performance results for the Pilgrim Baxter Mid Cap composite
reflect the deduction of the Fund's total annual operating expenses, estimated
at 1.2%. The performance history is calculated in accordance with the standards
set forth by AIMR.
RICE HALL
The investment performance results for the Rice Hall Small-Mid Cap composite
reflect the deduction of the Fund's total annual operating expenses, estimated
at 1.2%. Since January 1, 1993, the performance history is calculated in
accordance with the standards set forth by AIMR.
COMBINED SUBADVISER PERFORMANCE
Performance for the 1, 3, and since inception time periods reflects a combined
composite weighted equally among the FPA Crescent Portfolio, the Pilgrim Baxter
accounts, and the Rice Hall accounts. The performance for each Subadviser in the
table is presented net of the Fund's total operating expenses, estimated at 1.2%
as described above, but does not reflect the imposition of any sales loads or
charges. If sales loads or charges were reflected, performance would have been
lower.
MANAGEMENT OF THE TRUST
TRUSTEES AND OFFICERS
The business and affairs of the Trust are managed under the direction of its
Board of Trustees.
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The Board of Trustees sets and reviews policies regarding the operation of the
Trust, whereas the officers perform the daily functions of the Trust.
INVESTMENT MANAGEMENT OF THE FUND
THE ADVISER - Under the terms of the Investment Advisory Agreement, Nationwide
Advisory Services, Inc., Three Nationwide Plaza, Columbus, Ohio 43215, oversees
the investment of the assets for the Fund and supervises the daily business
affairs of the Fund. Subject to the supervision and direction of the Trustees,
the Adviser also determines the allocation of assets among the Subadvisers and
evaluates and monitors the performance of the Subadvisers. The Adviser is also
authorized to select and place portfolio investments on behalf of the Fund;
however, the Adviser does not intend to do so at this time.
The Adviser and the Trust have applied to the Securities and Exchange Commission
for an exemptive order which, if granted, will allow the Adviser to appoint,
replace or terminate subadvisers without the approval of shareholders; the order
would also allow the Adviser to revise a subadvisory agreement without
shareholder approval. Any change in subadvisers will be communicated to
shareholders within 60 days of such changes and all changes will be approved by
the Trust's Board of Trustees, including a majority of the Trustees who are not
interested persons of the Trust or the Adviser. The order, if granted, is
intended to facilitate the efficient operation of the Fund and afford the Trust
increased management flexibility. Prior to receiving the exemptive order, the
Adviser will not appoint, replace or terminate any subadvisers or materially
amend any subadvisory agreement without obtaining the approval of shareholders.
The Adviser provides to the Fund investment management evaluation services
principally by performing initial due diligence on prospective subadvisers for
the Fund and thereafter monitoring the performance of the subadvisers through
quantitative and qualitative analysis as well as through periodic in-person,
telephonic and written consultations with the subadvisers. The Adviser has
responsibility for communicating performance expectations and evaluations to the
subadvisers and ultimately recommending to the Trust's Board of Trustees whether
a subadviser's contract should be renewed, modified or terminated; however, the
Adviser does not expect to recommend frequent changes of subadvisers. The
Adviser will regularly provide written reports to the Board of Trustees
regarding the results of its evaluation and monitoring functions. Although the
Adviser will monitor the performance of the subadvisers, there is no certainty
that any subadviser or the Fund will obtain favorable results at any given time.
The Adviser, an Ohio corporation, is a wholly owned subsidiary of Nationwide
Life Insurance Company, which is owned by Nationwide Financial Services, Inc.
(NFS). NFS, a holding company, has two classes of common stock outstanding with
different voting rights enabling Nationwide Corporation (the holder of all the
outstanding Class B Common Stock) to control NFS. Nationwide Corporation is also
a holding company in the Nationwide Insurance Enterprise. All of the common
stock of Nationwide Corporation is held by Nationwide Mutual Insurance Company
(95.3%) and Nationwide Mutual Fire Insurance Company (4.7%), each of which is a
mutual company owned by
17
<PAGE> 183
its policyholders. The Fund pays to the Adviser a fee at the annual rate of
1.05% of the Fund's average daily net assets.
THE SUBADVISERS - Subject to the supervision of the Adviser and the Trustees,
the Subadvisers each manage separate portions of the Fund's assets in accordance
with the Fund's investment objective and policies. With regard to the portion of
the Fund's assets allocated to it, each Subadviser shall make investment
decisions for the Fund, and in connection with such investment decisions shall
place purchase and sell orders for securities. No Subadviser shall have any
investment responsibility for any portion of the Fund's assets not allocated to
it by the Adviser for investment management. For the investment management
services they provide to the Fund, each Subadviser receives an annual fee from
the Adviser in an amount equal to 0.65% of the first $50 million of the average
daily net assets managed by such Subadviser and 0.50% of the average daily net
assets managed by such Subadviser in excess of $50 million. Below is a brief
description of each of the subadvisers.
FIRST PACIFIC ADVISORS, INC.
First Pacific, located at 11400 West Olympic Blvd., Suite 1200, Los Angeles,
California 90064, acts as one of the Fund's Subadvisers; Mr. Steven Romick is
responsible for management of that portion of the Fund's assets allocated to
First Pacific. Mr. Romick has 12 years of experience in the investment
management business. He is currently a Senior Vice President of First Pacific.
From 1990-1996, Mr. Romick was chairman of Crescent Management, an investment
advisory firm he founded.
First Pacific, together with its predecessors, has been in the investment
advisory business since 1954. Presently, First Pacific manages assets of
approximately $4 billion for six investment companies, including one closed-end
investment company, and more than 30 institutional accounts.
PILGRIM BAXTER & ASSOCIATES, LTD.
Pilgrim Baxter is a professional investment management firm and registered
investment adviser that, along with its predecessors, has been in business since
1982. Pilgrim Baxter currently has discretionary management authority with
respect to over $14 billion in assets. In addition to advising a portion of the
Fund, Pilgrim Baxter provides advisory services to pension and profit-sharing
plans, charitable institutions, corporations, trusts and estates, and other
investment companies. The principal business address of Pilgrim Baxter is 1255
Drummers Lane, Suite 300, Wayne, Pennsylvania 19087.
Bruce J. Muzina manages Pilgrim Baxter's mid-cap growth portfolios and serves as
the manager of the Fund. Mr. Muzina joined Pilgrim Baxter in 1985 from Citibank,
where he was Vice President/Portfolio Manager of U.S. equity portfolios for
international institutional accounts. His experience includes security analysis
and investment research focused on health care and chemical industries, as well
as pension and profit sharing portfolio management at a major advisory firm and
at Philadelphia National Bank.
RICE, HALL, JAMES & ASSOCIATES
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<PAGE> 184
Rice, Hall was founded in 1974 and is located at 600 West Broadway, Suite 1000,
San Diego, CA 92101. Rice Hall provides investment management services to
individual and institutional investors. As of the date of this Prospectus, the
Adviser had over $1 billion is assets under management, primarily on behalf of
institutional and individual investors.
The investment professionals of Rice Hall responsible for the day-to-day
management of the Fund are as follows:
Samuel R. Trozzo is Chairman of Rice Hall with over thirty-six years'
experience. Prior to founding Rice Hall in 1974, Mr. Trozzo was Vice President
and Senior Investment Officer of Southern California First National Bank. He is
a former member of the State of California Board of Administration/Investment
Committee Public Employees Retirement System.
Thomas W. McDowell, Jr. is President and Chief Executive Officer of Rice Hall
with over seventeen years' investment experience. Mr. McDowell joined Rice Hall
in 1984. Prior to that time, he was Investment Officer, Security Analyst and
Portfolio Manager at California First Bank.
David P. Tessmer is Partner and Co-Director of Research of Rice Hall with over
thirty years' investment experience. Prior to joining Rice Hall in 1986, Mr.
Tessmer was Vice President and Senior Portfolio Manager at The Pacific Century
Group, San Diego.
Timothy A. Todaro is Partner and Co-Director of Research of Rice Hall with over
seventeen years' investment experience. Mr. Todaro joined Rice Hall in 1983.
Prior to that time, he was Senior Investment Analyst at Comerica Bank, Detroit,
Michigan. He is a Chartered Financial Analyst.
Gary S. Rice is Partner of Rice Hall with fifteen years' investment experience.
Mr. Rice was an Account Administrator with the Trust Division at Federated
Investors, Inc., Pittsburgh, Pennsylvania prior to joining Rice Hall in 1983.
Michelle P. Connell is Partner of Rice Hall with twelve years' investment
experience. Prior to joining Rice Hall in 1995, she was Senior Investment
Analyst with Linsco/Private Ledger. Previously, she was director of Finance and
Operations at the San Diego Natural History Museum.
Each of the Subadvisers is owned, in whole or in part, by United Asset
Management Corporation ("UAM"), a NYSE-listed holding company organized to
acquire and own firms that provide investment advisory services primarily for
institutional clients. First Pacific is an indirect wholly-owned subsidiary of
UAM. Pilgrim Baxter and Rice Hall are each direct wholly-owned subsidiary of
UAM. UAM's corporate headquarters are located at One International Place,
Boston, Massachusetts 02100.
OTHER SERVICES
Under the terms of a Fund Administration Agreement, the Adviser also provides
various administrative and accounting services, including daily valuation of the
Fund's shares and preparation of financial statements, tax returns, and
regulatory reports. For these services, the Fund pays the
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<PAGE> 185
Adviser an annual fee in the amount of 0.07% of the Fund's first $250 million of
average daily net assets, 0.05% on the next $750 million and 0.04% on assets of
more than $1 billion.
The Transfer and Dividend Disbursing Agent, Nationwide Investors Services, Inc.,
("NIS"), Three Nationwide Plaza, Columbus, Ohio 43216, serves as transfer agent
and dividend disbursing agent for the Trust. The Fund pays to NIS a fee for such
services at the annual rate of 0.01% of the Fund's average daily net assets. NIS
is a wholly owned subsidiary of the Adviser.
INVESTMENT IN FUND SHARES
An insurance company may purchase shares of the Fund using purchase payments
received on Contracts issued by Accounts. These Accounts are funded by shares of
the Fund. Funds of Funds may also purchase shares of the Fund for their
portfolios. There is no sales charge, and all shares are sold at net asset
value.
Shares of the Fund are currently sold only to separate accounts of Nationwide
Life Insurance Company and its wholly owned subsidiary Nationwide Life and
Annuity Insurance Company to fund the benefits under the Contract and to
affiliated Fund of Funds. The address for each of these entities is One
Nationwide Plaza, Columbus, Ohio 43215.
All investments in the Fund are credited to the shareholder's account in the
form of full and fractional shares of the Fund (rounded to the nearest 1/1000 of
a share). The Trust does not issue share certificates. Initial and subsequent
purchase payments allocated to the Fund are subject to the limits applicable to
the Contracts.
SHARE REDEMPTION
Redemptions are processed on any day on which the Trust is open for business and
are effected at net asset value next determined after the redemption order, in
proper form, is received by the Trust's transfer agent, NIS.
The net asset value per share of the Fund is determined once daily, as of the
close of regular trading on the New York Stock Exchange (generally 4:00 P.M.
Eastern Time), on each business day the New York Stock Exchange is open for
regular trading and on such other days as the Board determines and on any other
day during which there is a sufficient degree of trading in the Fund's portfolio
securities that the net asset value of the Fund is materially affected by
changes in the value of portfolio securities. The Trust will not compute net
asset value on customary national business holidays, including the following:
Christmas, New Year's Day, Martin Luther King's Birthday, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, and Thanksgiving Day. The net
asset value per share is calculated by adding the value of all securities and
other assets of the Fund, deducting its liabilities, and dividing by the number
of shares outstanding.
In determining net asset value, portfolio securities listed on national
exchanges are valued at the last sales price on the principal exchange;
20
<PAGE> 186
if the securities are traded only in the over-the-counter market, they are
valued at the quoted bid prices. Other portfolio securities are valued at the
quoted prices obtained from an independent pricing organization which employs a
combination of methods, including among others, the obtaining and comparison of
market valuations from dealers who make markets and deal in such securities and
the comparison of valuations with those of other comparable securities in a
matrix of such securities. The pricing service activities and results are
reviewed by an officer of the Trust. Securities for which market quotations are
not readily available are valued at fair value in accordance with procedures
adopted by the Board of Trustees. Expenses and fees are accrued daily.
The Trust may suspend the right of redemption only under the following unusual
circumstances:
- - when the New York Stock Exchange is closed (other than weekends and
holidays) or trading is restricted;
- - when an emergency exists, making disposal of portfolio securities or the
valuation of net assets not reasonably practicable; or
- - during any period when the Securities and Exchange Commission has by order
permitted a suspension of redemption for the protection of shareholders.
NET INCOME AND DISTRIBUTIONS
Substantially all of the net investment income, if any, of the Fund will be
declared and paid as dividends quarterly. Net realized capital gains of the
Fund, if any, will be distributed at least annually.
ADDITIONAL INFORMATION
DESCRIPTION OF SHARES - The Declaration of Trust permits the Trustees to issue
an unlimited number of full and fractional shares of beneficial interest of the
Fund and to divide or combine such shares into a greater or lesser number of
shares without thereby changing the proportionate beneficial interests in the
Trust. Each share of the Fund represents an equal proportionate interest in the
Fund with each other share. The Trust reserves the right to create and issue
shares of a number of different funds. In that case, the shares of each fund
would participate equally in the earnings, dividends, and assets of the
particular fund, but shares of all funds would vote together in the election of
Trustees. Upon liquidation of a fund, its shareholders are entitled to share pro
rata in the net assets of such fund available for distribution to shareholders.
VOTING RIGHTS - Shareholders are entitled to one vote for each share held.
Shareholders may vote in the election or removal of Trustees and on other
matters submitted to meetings of shareholders. No amendment may be made to the
Declaration of Trust without the affirmative vote of a majority of the
outstanding shares of the Trust. The sole shareholder of the Fund initially will
be Nationwide Life Insurance Company. The Trustees may, however, amend the
Declaration of Trust without the vote or consent of shareholders to:
- - designate series of the Trust;
21
<PAGE> 187
- - change the name of the Trust; or
- - supply any omission, cure, correct, or supplement any ambiguous,
defective, or inconsistent provision to conform the Declaration of
Trust to the requirements of applicable federal and state laws or
regulations if they deem it necessary.
Shares have no pre-emptive or conversion rights. Shares are fully paid and
nonassessable. In regard to termination, sale of assets, or changes of
investment restrictions, the right to vote is limited to the holders of shares
of the particular fund affected by the proposal. When a majority is required, it
means the lesser of 67% or more of the shares present at a meeting when the
holders of more than 50% of the outstanding shares are present or represented by
proxy, or more than 50% of the outstanding shares.
SHAREHOLDER INQUIRIES - All inquiries regarding the Fund should be directed to
the Trust at the telephone number or address shown on the cover page of this
Prospectus.
PERFORMANCE ADVERTISING FOR THE FUND
The Fund may use historical performance in advertisements, sales literature, and
the prospectus. Such figures will include quotations of average annual total
return for the most recent one, five, and ten year periods (or the life of the
Fund if less). Average annual total return represents the rate required each
year for an initial investment to equal the redeemable value at the end of the
specific period. Average annual total return reflects reinvestment of all
distributions.
TAX STATUS
The Trust's policy is to cause each fund to qualify as a regulated investment
company and to meet the requirements of Subchapter M of the Internal Revenue
Code (the "Code"). The Fund intends to distribute all its taxable net investment
income and capital gains to shareholders and therefore will not be required to
pay any federal income taxes.
Because each fund of the Trust is treated as a separate entity for purposes of
the regulated investment company provisions of the Code, the assets, income, and
distributions of the Fund are considered separately for purposes of determining
whether or not the Fund qualifies as a regulated investment company. The Fund
intends to comply with the diversification requirements currently imposed by the
Internal Revenue Service on separate accounts of insurance companies as a
condition of maintaining the tax-deferred status of the Contracts. See the
Statement of Additional Information for more specific information.
The tax treatment of payments made by an Account to a Contractholder is
described in the separate account prospectus.
22
<PAGE> 188
CONTENTS
Sale of Fund Shares
Investment Objective and Policies
Investment Techniques, Considerations and Risk Factors
Management of the Trust
Investment in Fund Shares
Share Redemption
Net Income and Distributions
Additional Information
Performance Advertising for the Fund
Tax Status
INVESTMENT ADVISER AND ADMINISTRATOR
Nationwide Advisory Services, Inc.
Three Nationwide Plaza
Columbus, Ohio 43215
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Nationwide Investors Services, Inc.
Box 1492
Three Nationwide Plaza
Columbus, Ohio 43216
AUDITORS
KPMG Peat Marwick LLP
Two Nationwide Plaza
Columbus, Ohio 43215
LEGAL COUNSEL
Druen, Dietrich, Koogler & Reynolds
One Nationwide Plaza
Columbus, Ohio 43215
23
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*******************************************************************************
*******************************************************************************
*******************************************************************************
STATEMENT OF ADDITIONAL INFORMATION
OCTOBER ___, 1997
NATIONWIDE SEPARATE ACCOUNT TRUST
--NATIONWIDE STRATEGIC GROWTH FUND
--NATIONWIDE STRATEGIC VALUE FUND
--NATIONWIDE EQUITY INCOME FUND
--NATIONWIDE HIGH INCOME BOND FUND
--NATIONWIDE BALANCED FUND
--NATIONWIDE MULTI SECTOR BOND FUND
--NATIONWIDE SMALL CAP VALUE FUND
--NATIONWIDE GLOBAL EQUITY FUND
--NATIONWIDE SELECT ADVISERS MID CAP FUND
Nationwide Separate Account Trust is a registered open-end investment
company consisting of 15 series. This Statement of Additional Information
relates to the Nationwide Strategic Growth Fund (the "Strategic Growth Fund"),
the Nationwide Strategic Value Fund (the "Strategic Value Fund"), the
Nationwide Equity Income Fund (the "Equity Income Fund"), the Nationwide High
Income Bond Fund (the "High Income Bond Fund"), the Nationwide Balanced Fund
(the "Balanced Fund"), the Nationwide Multi Sector Bond Fund ("Multi Sector
Bond Fund"), the Nationwide Small Cap Value Fund (the "Small Cap Value Fund"),
the Nationwide Global Equity Fund (the "Global Equity Fund") and the Nationwide
Select Advisers Mid Cap Fund (the "Mid Cap Fund") (each , a "Fund" and
collectively, the "Funds").
This Statement of Additional Information is not a prospectus. It
contains information in addition to and more detailed than that set forth in
the Prospectuses for the Funds and should be read in conjunction with the
Prospectuses, dated October ___, 1997, for Strategic Growth Fund, Strategic
Value Fund, Equity Income Fund, High Income Bond Fund, Balanced Fund, Multi
Sector Bond Fund, Small Cap Value Fund, Global Equity Fund and Mid Cap Fund.
Terms not defined in this Statement of Additional Information have the meanings
assigned to them in the Prospectuses. The Prospectuses may be obtained from
Nationwide Life Insurance Company, One Nationwide Plaza, Columbus, Ohio 43215,
or by calling (614) 249-5134.
1
<PAGE> 190
<TABLE>
<CAPTION>
TABLE OF CONTENTS PAGE
- ----------------- ----
<S> <C>
General Information and History
Additional Information on Portfolio Instruments and Investment Policies
Investment Restrictions
Major Shareholders
Trustees and Officers of the Trust
Calculating Yield and Total Return
Investment Adviser and Other Services
Brokerage Allocations
Purchases, Redemptions and Pricing of Shares
Additional Information
Tax Status
Other Tax Consequences
Tax Consequences to Shareholders
Appendix A - Bond Ratings
</TABLE>
GENERAL INFORMATION AND HISTORY
Nationwide Separate Account Trust is an open-end investment company
organized under the laws of Massachusetts, by a Declaration of Trust, dated
June 30, 1981, as amended October 22, 1981, September 3, 1982, April 16, 1987,
May 1, 1992, August 9, 1995, November 3, 1995, October 17, 1996 and August ___,
1997. The Trust offers shares in fifteen (15) separate series, each with its
own investment objective.
ADDITIONAL INFORMATION ON PORTFOLIO INSTRUMENTS AND INVESTMENT POLICIES
DEBT OBLIGATIONS. Each of the Funds invests in debt obligations. Debt
obligations are subject to the risk of an issuer's inability to meet principal
and interest payments on its obligations ("credit risk") and are subject to
price volatility due to such factors as interest rate sensitivity, market
perception of the creditworthiness of the issuer, and general market liquidity
("market risk"). Lower-rated securities are more likely to react to
developments affecting market and credit risk than are more highly rated
securities, which react primarily to movements in the general level of interest
rates.
RATINGS AS INVESTMENT CRITERIA. High-quality, medium-quality and
non-investment grade debt obligations are characterized as such based on their
ratings by nationally recognized statistical rating organizations ("NRSROs").
In general, the ratings of NRSROs represent the opinions of these agencies as
to the quality of securities that they rate. Such ratings, however, are
relative and subjective, and are not absolute standards of quality and do not
evaluate the market value risk of the securities. These ratings are used by a
Fund as initial criteria for the selection of portfolio securities, but the
Fund will also rely upon the independent advice of the Subadvisers to evaluate
potential investments. Among the factors that will be considered are the
long-term ability of the issuer to pay principal and interest and general
economic trends. The Appendix to this Statement of Additional Information
contains further information about the rating categories of NRSROs and their
significance.
Subsequent to its purchase by a Fund, an issue of securities may cease
to be rated or its rating may be reduced below the minimum required for
purchase by such Fund. In addition, it is possible that an
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<PAGE> 191
NRSRO might not change its rating of a particular issue to reflect subsequent
events. None of these events generally will require sale of such securities,
but a Fund's Subadviser will consider such events in its determination of
whether the Fund should continue to hold the securities. In addition, to the
extent that the ratings change as a result of changes in such organizations or
their rating systems, or due to a corporate reorganization, the Fund will
attempt to use comparable ratings as standards for its investments in
accordance with its investment objective and policies.
HIGH-YIELD (HIGH-RISK) SECURITIES. As described in its Prospectus, the Multi
Sector Bond Fund, the Balanced Fund, the Mid Cap Fund, the Small Cap Value
Fund, the Equity Income Fund, the High Income Bond Fund, the Strategic Growth
Fund and the Strategic Value Fund each has the authority to invest in
non-investment grade debt securities. Non-investment grade debt securities
(hereinafter referred to as "lower-quality securities") include (I) bonds rated
as low as C by Moody's, Standard & Poor's, or Fitch, or CCC by D&P; (ii)
commercial paper rated as low as C by Standard & Poor's, Not Prime by Moody's
or Fitch 4 by Fitch; and (iii) unrated debt securities of comparable quality.
Lower-quality securities, while generally offering higher yields than
investment grade securities with similar maturities, involve greater risks,
including the possibility of default or bankruptcy. They are regarded as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal. The special risk considerations in connection with
investments in these securities are discussed below. Refer to Appendix A of
this Statement of Additional Information for a discussion of securities
ratings.
EFFECT OF INTEREST RATES AND ECONOMIC CHANGES. All interest-bearing
securities typically experience appreciation when interest rates decline and
depreciation when interest rates rise. The market values of lower-quality and
comparable unrated securities tend to reflect individual corporate developments
to a greater extent than do higher rated securities, which react primarily to
fluctuations in the general level of interest rates. Lower-quality and
comparable unrated securities also tend to be more sensitive to economic
conditions than are higher-rated securities. As a result, they generally
involve more credit risks than securities in the higher-rated categories.
During an economic downturn or a sustained period of rising interest rates,
highly leveraged issuers of lower-quality and comparable unrated securities may
experience financial stress and may not have sufficient revenues to meet their
payment obligations. The issuer's ability to service its debt obligations may
also be adversely affected by specific corporate developments, the issuer's
inability to meet specific projected business forecasts or the unavailability
of additional financing. The risk of loss due to default by an issuer of these
securities is significantly greater than issuers of higher-rated securities
because such securities are generally unsecured and are often subordinated to
other creditors. Further, if the issuer of a lower-quality or comparable
unrated security defaulted, the Fund might incur additional expenses to seek
recovery. Periods of economic uncertainty and changes would also generally
result in increased volatility in the market prices of these securities and
thus in the Fund's net asset value.
As previously stated, the value of a lower-quality or comparable
unrated security will generally decrease in a rising interest rate market, and
accordingly so will a Fund's net asset value. If a Fund experiences unexpected
net redemptions in such a market, it may be forced to liquidate a portion of its
portfolio securities without regard to their investment merits. Due to the
limited liquidity of lower-quality and comparable unrated securities (discussed
below), a Fund may be forced to liquidate these securities at a substantial
discount which would result in a lower rate of return to the Fund.
PAYMENT EXPECTATIONS. Lower-quality and comparable unrated securities
typically contain redemption, call or prepayment provisions which permit the
issuer of such securities containing such provisions to, at its discretion,
redeem the securities. During periods of falling interest rates, issuers of
these securities are likely to redeem or prepay the securities and refinance
them with debt securities at a lower interest rate. To the extent an issuer is
able to refinance the securities, or otherwise redeem them, a Fund may have to
replace the securities with a lower yielding security, which would result in a
lower return for that Fund.
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<PAGE> 192
CREDIT RATINGS. Credit ratings issued by credit-rating agencies
evaluate the safety of principal and interest payments of rated securities.
They do not, however, evaluate the market value risk of lower-quality
securities and, therefore, may not fully reflect the true risks of an
investment. In addition, credit rating agencies may or may not make timely
changes in a rating to reflect changes in the economy or in the condition of
the issuer that affect the market value of the security. Consequently, credit
ratings are used only as a preliminary indicator of investment quality.
Investments in lower-quality and comparable unrated securities will be more
dependent on the Adviser's or a Subadviser's credit analysis than would be the
case with investments in investment-grade debt securities. The Adviser and each
Subadviser will employ its own credit research and analysis, which includes a
study of existing debt, capital structure, ability to service debt and to pay
dividends, the issuer's sensitivity to economic conditions, its operating
history and the current trend of earnings. When investing in lower-quality
securities, the Adviser or each Subadviser will continually monitor the
investments in a Fund's portfolio and carefully evaluate whether to dispose of
or to retain lower-quality and comparable unrated securities whose credit
ratings or credit quality may have changed.
LIQUIDITY AND VALUATION. A Fund may have difficulty disposing of
certain lower-quality and comparable unrated securities because there may be a
thin trading market for such securities. Because not all dealers maintain
markets in all lower-quality and comparable unrated securities, there is no
established retail secondary market for many of these securities. The Funds
anticipate that such securities could be sold only to a limited number of
dealers or institutional investors. To the extent a secondary trading market
does exist, it is generally not as liquid as the secondary market for
higher-rated securities. The lack of a liquid secondary market may have an
adverse impact on the market price of the security. As a result, a Fund's asset
value and ability to dispose of particular securities, when necessary to meet
such Fund's liquidity needs or in response to a specific economic event, may be
impacted. The lack of a liquid secondary market for certain securities may also
make it more difficult for a Fund to obtain accurate market quotations for
purposes of valuing that Fund's portfolio. Market quotations are generally
available on many lower-quality and comparable unrated issues only from a
limited number of dealers and may not necessarily represent firm bids of such
dealers or prices for actual sales. During periods of thin trading, the spread
between bid and asked prices is likely to increase significantly. In addition,
adverse publicity and investor perceptions, whether or not based on fundamental
analysis, may decrease the values and liquidity of lower-quality and comparable
unrated securities, especially in a thinly traded market.
PROPOSED LEGISLATION. From time to time proposals have been discussed
regarding new legislation designed to limit the use of certain lower-quality
and comparable unrated securities by certain issuers. It is possible
that if legislation is enacted or proposed, it could have a material affect on
the value of these securities and the existence of a secondary trading market
for the securities.
MONEY MARKET INSTRUMENTS. Each Fund may invest in certain types of money market
instruments which may include the following types of instruments:
-- obligations issued or guaranteed as to interest and principal by
the U.S. Government, its agencies, or instrumentalities, or any
federally chartered corporation, and for the Global Equity Fund,
obligations of sovereign foreign governments, their agencies,
instrumentalities and political subdivisions;
-- repurchase agreements;
-- certificates of deposit, time deposits and bankers' acceptances
issued by domestic banks (including their branches located outside the
United States and subsidiaries located in Canada), domestic branches
of foreign banks, savings and loan associations and similar
institutions, and, for the Global Equity Fund, such obligations issued
by foreign branches of foreign banks and financial institutions;
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-- commercial paper, which are short-term unsecured promissory notes
issued by corporations in order to finance their current operations.
Generally the commercial paper will be rated within the top two rating
categories by an NRSRO, or if not rated, is issued and guaranteed as
to payment of principal and interest by companies which at the date of
investment have a high quality outstanding debt issue;
-- high quality short-term (maturity in 397 days or less) corporate
obligations;
-- bank loan participation agreements representing obligations of
corporations and banks having a high quality short-term rating, at the
date of investment, and under which the Fund will look to the
creditworthiness of the lender bank, which is obligated to make
payments of principal and interest on the loan, as well as to
creditworthiness of the borrower.
MORTGAGE-BACKED SECURITIES - The Balanced Fund, the Mid Cap Fund, the Multi
Sector Bond Fund, the Strategic Growth Fund and the Strategic Value Fund may
purchase mortgage-backed securities. Mortgage-backed securities represent
direct or indirect participation in, or are secured by and payable from,
mortgage loans secured by real property, and include single- and multi-class
pass-through securities and collateralized mortgage obligations. Such
securities may be issued or guaranteed by U.S. Government agencies or
instrumentalities or by private issuers, generally originators in mortgage
loans, including savings and loan associations, mortgage bankers, commercial
banks, investment bankers, and special purpose entities (collectively, "private
lenders"). Mortgage-backed securities issued by private lenders may be
supported by pools of mortgage loans or other mortgage-backed securities that
are guaranteed, directly or indirectly, by the U.S. Government or one of its
agencies or instrumentalities, or they may be issued without any governmental
guarantee of the underlying mortgage assets but with some form of
non-governmental credit enhancement. These credit enhancements may include
letters of credit, reserve funds, overcollateralization, or guarantees by third
parties.
Private lenders or government-related entities may also create
mortgage loan pools offering pass-through investments where the mortgages
underlying these securities may be alternative mortgage instruments, that is,
mortgage instruments whose principal or interest payments may vary or whose
terms to maturity may be shorter than was previously customary. As new types of
mortgage-related securities are developed and offered to investors, a Fund,
consistent with its investment objective and policies, may consider making
investments in such new types of securities.
The yield characteristics of mortgage-backed securities differ from
those of traditional debt obligations. Among the principal differences are that
interest and principal payments are made more frequently on mortgage-backed
securities, usually monthly, and that principal may be prepaid at any time
because the underlying mortgage loans or other assets generally may be prepaid
at any time. As a result, if a Fund purchases these securities at a premium, a
prepayment rate that is faster than expected will reduce yield to maturity,
while a prepayment rate that is lower than expected will have the opposite
effect of increasing the yield to maturity. Conversely, if a Fund purchases
these securities at a discount, a prepayment rate that is faster than expected
will increase yield to maturity, while a prepayment rate that is slower than
expected will reduce yield to maturity. Accelerated prepayments on securities
purchased by the Fund at a premium also impose a risk of loss of principal
because the premium may not have been fully amortized at the time the principal
is prepaid in full. The market for privately issued mortgage-backed securities
is smaller and less liquid than the market for government sponsored
mortgage-backed securities.
The Multi Sector Bond Fund and the Balanced Fund may invest in stripped
mortgage-backed securities, which receive differing proportions of the interest
and principal payments from the underlying assets. The market value of such
securities generally is more sensitive to changes in prepayment and interest
rates than is the case with traditional mortgage- and asset-backed securities,
and in some cases the market value may be extremely volatile. With respect to
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certain stripped securities, such as interest-only ("IO") and principal-only
("PO") classes, a rate of prepayment that is faster or slower than anticipated
may result in a Fund failing to recover all or a portion of its investment,
even though the securities are rated investment grade.
REPURCHASE AGREEMENTS. All of the Funds may enter into repurchase agreements
with certain banks or non-bank dealers. In connection with the purchase of a
repurchase agreement by a Fund, the Fund's custodian, or a subcustodian, will
have custody of, and will hold in a segregated account, securities acquired by
the Fund under a repurchase agreement. Repurchase agreements are contracts
under which the buyer of a security simultaneously commits to resell the
security to the seller at an agreed-upon price and date. Repurchase agreements
are considered by the staff of the Securities and Exchange Commission (the
"SEC") to be loans by the Fund. Repurchase agreements may be entered into with
respect to securities of the type in which it may invest or government
securities regardless of their remaining maturities, and will require that
additional securities be deposited with it if the value of the securities
purchased should decrease below resale price. Repurchase agreements involve
certain risks in the event of default or insolvency by the other party,
including possible delays or restrictions upon a Fund's ability to dispose of
the underlying securities, the risk of a possible decline in the value of the
underlying securities during the period in which a Fund seeks to assert its
rights to them, the risk of incurring expenses associated with asserting those
rights and the risk of losing all or part of the income from the repurchase
agreement.
WHEN-ISSUED SECURITIES AND DELAYED-DELIVERY TRANSACTIONS. Each of the Funds may
invest without limitation in securities purchased on a "when-issued" basis or
purchase or sell securities for delayed delivery (i.e., payment or delivery
occurs beyond the normal settlement date at a stated price and yield).
When-issued transactions normally settle within 45 days. The payment obligation
and the interest rate that will be received on when-issued securities are fixed
at the time the buyer enters into the commitment. Due to fluctuations in the
value of securities purchased or sold on a when-issued or delayed-delivery
basis, the yields obtained on such securities may be higher or lower than the
yields available in the market on the dates when the investments are actually
delivered to the buyers.
When a Fund agrees to purchase when-issued or delayed-delivery
securities, to the extent required by the SEC, its custodian will set aside
permissible liquid assets equal to the amount of the commitment in a segregated
account. Normally, the custodian will set aside portfolio securities to satisfy
a purchase commitment, and in such a case a Fund may be required subsequently
to place additional assets in the segregated account in order to ensure that
the value of the account remains equal to the amount of such Fund's commitment.
It may be expected that the Fund's net assets will fluctuate to a greater
degree when it sets aside portfolio securities to cover such purchase
commitments than when it sets aside cash. When the Fund engages in when-issued
or delayed-delivery transactions, it relies on the other party to consummate
the trade. Failure of the seller to do so may result in a Fund incurring a loss
or missing an opportunity to obtain a price considered to be advantageous.
LENDING PORTFOLIO SECURITIES. Each Fund may lend its portfolio securities to
brokers, dealers and other financial institutions, provided it receives cash
collateral which at all times is maintained in an amount equal to at least 100%
of the current market value of the securities loaned. By lending its portfolio
securities, the Fund can increase its income through the investment of the cash
collateral. For the purposes of this policy, the Fund considers collateral
consisting of cash, U.S. Government securities or letters of credit issued by
banks whose securities meet the standards for investment by the Fund to be the
equivalent of cash. From time to time, the Fund may return to the borrower or a
third party which is unaffiliated with it, and which is acting as a "placing
broker," a part of the interest earned from the investment of collateral
received for securities loaned.
The SEC currently requires that the following conditions must be met
whenever portfolio securities are loaned: (1) a fund must receive at least 100%
cash collateral of the type discussed in the preceding
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paragraph from the borrower; (2) the borrower must increase such collateral
whenever the market value of the securities loaned rises above the level of
such collateral; (3) a fund must be able to terminate the loan at any time; (4)
a fund must receive reasonable interest on the loan, as well as any dividends,
interest or other distributions payable on the loaned securities, and any
increase in market value; (5) a fund may pay only reasonable custodian fees in
connection with the loan; and (6) while any voting rights on the loaned
securities may pass to the borrower, a fund's board of directors or trustees
must be able to terminate the loan and regain the right to vote the securities
if a material event adversely affecting the investment occurs. These conditions
may be subject to future modification. Loan agreements involve certain risks in
the event of default or insolvency of the other party including possible delays
or restrictions upon the Fund's ability to recover the loaned securities or
dispose of the collateral for the loan.
SPECIAL SITUATION COMPANIES. The Small Cap Value Fund, the Mid Cap Fund, the
Strategic Growth Fund, the Strategic Value Fund and the Global Equity Fund may
invest in the securities of "special situation companies," which include those
involved in an actual or prospective acquisition or consolidation;
reorganization; recapitalization; merger, liquidation or distribution of cash,
securities or other assets; a tender or exchange offer; a breakup or workout of
a holding company; or litigation which, if resolved favorably, would improve
the value of the company's stock. If the actual or prospective situation does
not materialize as anticipated, the market price of the securities of a
"special situation company" may decline significantly. Each Fund believes,
however, that if a Subadviser analyzes "special situation companies" carefully
and invests in the securities of these companies at the appropriate time, such
Fund may achieve capital growth. There can be no assurance however, that a
special situation that exists at the time the Fund makes its investment will be
consummated under the terms and within the time period contemplated, if it is
consummated at all.
FOREIGN SECURITIES. All of the Funds may directly or indirectly through the use
of depository receipts, invest in foreign securities. Investors in such Funds
should recognize that investing in foreign securities involves certain special
considerations which are not typically associated with investing in United
States securities. Since investments in foreign companies will frequently
involve currencies of foreign countries, and since a Fund may hold securities
and funds in foreign currencies, a Fund may be affected favorably or
unfavorably by changes in currency rates and in exchange control regulations,
if any, and may incur costs in connection with conversions between various
currencies. Most foreign stock markets, while growing in volume of trading
activity, have less volume than the New York Stock Exchange, and securities of
some foreign companies are less liquid and more volatile than securities of
comparable domestic companies. Similarly, volume and liquidity in most foreign
bond markets are less than in the United States and, at times, volatility of
price can be greater than in the United States. Fixed commissions on foreign
securities exchanges are generally higher than negotiated commissions on United
States exchanges, although each Fund endeavors to achieve the most favorable
net results on its portfolio transactions. There is generally less government
supervision and regulation of securities exchanges, brokers and listed
companies in foreign countries than in the United States. In addition, with
respect to certain foreign countries, there is the possibility of exchange
control restrictions, expropriation or confiscatory taxation, and political,
economic or social instability, which could affect investments in those
countries. Foreign securities, such as those purchased by a Fund, may be
subject to foreign government taxes, higher custodian fees and dividend
collection fees which could reduce the yield on such securities.
Investments may be made from time to time by the Equity Income Fund,
the High Income Bond Fund, Balanced Fund and the Multi Sector Bond Fund in
companies in developing countries as well as in developed countries. Although
there is no universally accepted definition, a developing country is generally
considered to be a country which is in the initial stages of industrialization.
Shareholders should be aware that investing in the equity and fixed income
markets of developing countries involves exposure to unstable governments,
economies based on only a few industries, and securities markets which trade a
small number of securities. Securities markets of developing countries tend to
be more volatile than the markets of developed countries; however, such markets
have in the past provided the opportunity for higher rates of return to
investors.
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The value and liquidity of investments in developing countries may be
affected favorably or unfavorably by political, economic, fiscal, regulatory or
other developments in the particular countries or neighboring regions. The
extent of economic development, political stability and market depth of
different countries varies widely. Certain countries in the Asia region,
including Cambodia, China, Laos, Indonesia, Malaysia, the Philippines,
Thailand, and Vietnam are either comparatively underdeveloped or are in the
process of becoming developed. Such investments typically involve greater
potential for gain or loss than investments in securities of issuers in
developed countries.
The securities markets in developing countries are substantially
smaller, less liquid and more volatile than the major securities markets in the
United States. A high proportion of the shares of many issuers may be held by a
limited number of persons and financial institutions, which may limit the
number of shares available for investment by a Fund. Similarly, volume and
liquidity in the bond markets in developing countries are less than in the
United States and, at times, price volatility can be greater than in the United
States. A limited number of issuers in developing countries' securities markets
may represent a disproportionately large percentage of market capitalization
and trading volume. The limited liquidity of securities markets in developing
countries may also affect the Fund's ability to acquire or dispose of
securities at the price and time it wishes to do so. Accordingly, during
periods of rising securities prices in the more illiquid securities markets,
the Fund's ability to participate fully in such price increases may be limited
by its investment policy of investing not more than 15% of its total net assets
in illiquid securities. Conversely, the Fund's inability to dispose fully and
promptly of positions in declining markets will cause the Fund's net asset
value to decline as the value of the unsold positions is marked to lower
prices. In addition, securities markets in developing countries are susceptible
to being influenced by large investors trading significant blocks of
securities.
Political and economic structures in many such countries may be
undergoing significant evolution and rapid development, and such countries may
lack the social, political and economic stability characteristic of the United
States. Certain of such countries have in the past failed to recognize private
property rights and have at times nationalized or expropriated the assets of
private companies. As a result, the risks described above, including the risks
of nationalization or expropriation of assets, may be heightened. In addition,
unanticipated political or social developments may affect the value of the
Fund's investments in those countries and the availability to the Fund of
additional investments in those countries.
Economies of developing countries may differ favorably or unfavorably
from the United States' economy in such respects as rate of growth of gross
national product, rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments position. As export-driven economies,
the economies of countries in the Asia Region are affected by developments in
the economies of their principal trading partners. Hong Kong, Japan and Taiwan
have limited natural resources, resulting in dependence on foreign sources for
certain raw materials and economic vulnerability to global fluctuations of
price and supply.
Certain developing countries do not have comprehensive systems of
laws, although substantial changes have occurred in many such countries in this
regard in recent years. Laws regarding fiduciary duties of officers and
directors and the protection of shareholders may not be well developed. Even
where adequate law exists in such developing countries, it may be impossible to
obtain swift and equitable enforcement of such law, or to obtain enforcement of
the judgment by a court of another jurisdiction.
Trading in futures contracts on foreign commodity exchanges may be
subject to the same or similar risks as trading in foreign securities.
Depository Receipts. As indicated in a Fund's Prospectus, each Fund
may invest in foreign securities by purchasing depository receipts, including
American Depository Receipts ("ADRs") and European Depository Receipts ("EDRs")
or other securities convertible into securities of issuers based in foreign
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countries. These securities may not necessarily be denominated in the same
currency as the securities into which they may be converted. Generally, ADRs,
in registered form, are denominated in U.S. dollars and are designed for use in
the U.S. securities markets, while EDRs (also referred to as Continental
Depository Receipts ("CDRs")), in bearer form, may be denominated in other
currencies and are designed for use in European securities markets. ADRs are
receipts typically issued by a U.S. Bank or trust company evidencing ownership
of the underlying securities. EDRs are European receipts evidencing a similar
arrangement. For purposes of a Fund's investment policies, ADRs and EDRs are
deemed to have the same classification as the underlying securities they
represent. Thus, an ADR or EDR representing ownership of common stock will be
treated as common stock.
Each Fund may invest in depository receipts through "sponsored" or
"unsponsored" facilities. While ADRs issued under these two types of facilities
are in some respects similar, there are distinctions between them relating to
the rights and obligations of ADR holders and the practices of market
participants.
A depository may establish an unsponsored facility without
participation by (or even necessarily the acquiescence of) the issuer of the
deposited securities, although typically the depository requests a letter of
non-objection from such issuer prior to the establishment of the facility.
Holders of unsponsored ADRs generally bear all the costs of such facilities.
The depository usually charges fees upon the deposit and withdrawal of the
deposited securities, the conversion of dividends into U.S. dollars, the
disposition of non-cash distributions, and the performance of other services.
The depository of an unsponsored facility frequently is under no obligation to
pass through voting rights to ADR holders in respect of the deposited
securities. In addition, an unsponsored facility is generally not obligated to
distribute communications received from the issuer of the deposited securities
or to disclose material information about such issuer in the U.S. and thus
there may not be a correlation between such information and the market value of
the depository receipts. Unsponsored ADRs tend to be less liquid than sponsored
ADRs.
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.
CONVERTIBLE SECURITIES. Each Fund may invest in convertible securities to the
extent described in its Prospectus. Convertible securities are bonds,
debentures, notes, preferred stocks, or other securities that may be converted
into or exchanged for a specified amount of common stock of the same or a
different issuer within a particular period of time at a specified price or
formula. A convertible security entitles the holder to receive interest
normally paid or accrued on debt or the dividend paid on preferred stock until
the convertible security matures or is redeemed, converted, or exchanged.
Convertible securities have unique investment characteristics in that they
generally (i) have higher yields than common stocks, but lower yields than
comparable non-convertible securities, (ii) are less subject to fluctuation in
value than the underlying stock since they have fixed income characteristics,
and (iii) provide the potential for capital appreciation if the market price of
the underlying common stock increases. Most convertible securities currently
are issued by U.S. companies, although a substantial Eurodollar convertible
securities market has developed, and the markets for convertible securities
denominated in local currencies are increasing.
The value of a convertible security is a function of its "investment
value" (determined by its yield in comparison with the yields of other
securities of comparable maturity and quality that do not have a
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conversion privilege) and its "conversion value" (the security's worth, at
market value, if converted into the underlying common stock). The investment
value of a convertible security is influenced by changes in interest rates,
with investment value declining as interest rates increase and increasing as
interest rates decline. The credit standing of the issuer and other factors
also may have an effect on the convertible security's investment value. The
conversion value of a convertible security is determined by the market price of
the underlying common stock. If the conversion value is low relative to the
investment value, the price of the convertible security is governed principally
by its investment value. Generally, the conversion value decreases as the
convertible security approaches maturity. To the extent the market price of the
underlying common stock approaches or exceeds the conversion price, the price
of the convertible security will be increasingly influenced by its conversion
value. A convertible security generally will sell at a premium over its
conversion value by the extent to which investors place value on the right to
acquire the underlying common stock while holding a fixed income security.
A convertible security may be subject to redemption at the option of
the issuer at a price established in the convertible security's governing
instrument. If a convertible security held by a Fund is called for redemption,
a Fund will be required to permit the issuer to redeem the security, convert it
into the underlying common stock, or sell it to a third party.
WARRANTS. Each Fund may acquire warrants. Warrants are securities giving the
holder the right, but not the obligation, to buy the stock of an issuer at a
given price (generally higher than the value of the stock at the time of
issuance), on a specified date, during a specified period, or perpetually.
Warrants may be acquired separately or in connection with the acquisition of
securities. Warrants acquired by a Fund in units or attached to securities are
not subject to these restrictions. Warrants do not carry with them the right to
dividends or voting rights with respect to the securities that they entitle
their holder to purchase, and they do not represent any rights in the assets of
the issuer. As a result, warrants may be considered more speculative than
certain other types of investments. In addition, the value of a warrant does
not necessarily change with the value of the underlying securities, and a
warrant ceases to have value if it is not exercised prior to its expiration
date.
SHORT SELLING OF SECURITIES. The Mid Cap Fund, the Strategic Growth Fund and
the Strategic Value Fund may engage in short sales of securities. In a short
sale, the Fund sells stock which it does not own, making delivery with
securities "borrowed" from a broker. The Fund is then obligated to replace the
security borrowed by purchasing it at the market price at the time of
replacement. This price may or may not be less than the price at which the
security was sold by the Fund. Until the security is replaced, the Fund is
required to pay the lender any dividends or interest which accrue during the
period of the loan. In order to borrow the security, the Fund may also have to
pay a fee which would increase the cost of the security sold. The proceeds of
the short sale will be retained by the broker, to the extent necessary to meet
margin requirements, until the short position is closed out.
The Fund will incur a loss as a result of the short sale if the price
of the security increases between the date of the short sale and the date on
which the Fund replaces the borrowed security. The Fund will realize a gain if
the security declines in price between those two dates. The amount of any gain
will be decreased and the amount of any loss will be increased by any interest
the Fund may be required to pay in connection with the short sale.
In a short sale, the seller does not immediately deliver the
securities sold and is said to have a short position in those securities until
delivery occurs. The Fund must deposit in a segregated account an amount of
cash or liquid assets equal to the difference between (a) the market value of
securities sold short at the time that they were sold short and (b) the value
of the collateral deposited with the broker in connection with the short sale
(not including the proceeds from the short sale). While the short position is
open, the Fund must maintain on a daily basis the segregated account at such a
level that (1) the amount deposited in it plus the
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amount deposited with the broker as collateral equals the current market value
of the securities sold short and (2) the amount deposited in it plus the amount
deposited with the broker as collateral is not less than the market value of
the securities at the time they were sold short.
The Mid Cap Fund, the Strategic Growth Fund, the Strategic Value Fund
and the Small Cap Value Fund may engage in short sales if at the time of the
short sale the Fund owns or has the right to obtain without additional cost an
equal amount of the security being sold short. This investment technique is
known as a short sale "against the box." Each Fund does not intend to engage in
short sales against the box for investment purposes. A Fund may, however, make
a short sale as a hedge, when it believes that the price of a security may
decline, causing a decline in the value of a security owned by the Fund (or a
security convertible or exchangeable for such security), or when the Fund wants
to sell the security at an attractive current price, but also wishes to defer
recognition of gain or loss for U.S. federal income tax purposes and for
purposes of satisfying certain tests applicable to regulated investment
companies under the Code. In such case, any future losses in the Fund's long
position should be offset by a gain in the short position and, conversely, any
gain in the long position should be reduced by a loss in the short position.
The extent to which such gains or losses are reduced will depend upon the
amount of the security sold short relative to the amount the Fund owns. There
will be certain additional transaction costs associated with short sales
against the box, but the Fund will endeavor to offset these costs with the
income from the investment of the cash proceeds of short sales.
RESTRICTED, NON-PUBLICLY TRADED AND ILLIQUID SECURITIES. Each Fund may not
invest more than 15% of its net assets, in the aggregate, in illiquid
securities, including repurchase agreements which have a maturity of longer
than seven days, time deposits maturing in more than seven days and securities
that are illiquid because of the absence of a readily available market or legal
or contractual restrictions on resale. Repurchase agreements subject to demand
are deemed to have a maturity equal to the notice period.
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933, as amended (the "Securities Act"),
securities which are otherwise not readily marketable and repurchase agreements
having a maturity of longer than seven days. Securities which have not been
registered under the Securities Act are referred to as private placements or
restricted securities and are purchased directly from the issuer or in the
secondary market. Investment companies do not typically hold a significant
amount of these restricted or other illiquid securities because of the
potential for delays on resale and uncertainty in valuation. Limitations on
resale may have an adverse effect on the marketability of portfolio securities,
and an investment company might be unable to dispose of restricted or other
illiquid securities promptly or at reasonable prices and might thereby
experience difficulty satisfying redemptions within seven days. An investment
company might also have to register such restricted securities in order to
dispose of them resulting in additional expense and delay. Adverse market
conditions could impede such a public offering of securities.
In recent years, however, a large institutional market has developed
for certain securities that are not registered under the Securities Act
including repurchase agreements, commercial paper, foreign securities,
municipal securities and corporate bonds and notes. Institutional investors
depend on an efficient institutional market in which the unregistered security
can be readily resold or on an issuer's ability to honor a demand for
repayment. The fact that there are contractual or legal restrictions on resale
to the general public or to certain institutions may not be indicative of the
liquidity of such investments.
The SEC has adopted Rule 144A which allows for a broader institutional
trading market for securities otherwise subject to restriction on resale to the
general public. Rule 144A establishes a "safe harbor" from the registration
requirements of the Securities Act for resales of certain securities to
qualified institutional buyers. It is anticipated that the market for certain
restricted securities such as institutional commercial paper will expand
further as a result of this regulation and use of automated systems for the
trading, clearance and
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settlement of unregistered securities of domestic and foreign issuers, such as
the PORTAL System sponsored by the National Association of Securities Dealers,
Inc.
A Fund may sell over-the-counter ("OTC") options and, in connection
therewith, segregate assets or cover its obligations with respect to OTC
options written by the Fund. The assets used as cover for OTC options written
by a Fund will be considered illiquid unless the OTC options are sold to
qualified dealers who agree that the Fund may repurchase any OTC option it
writes at a maximum price to be calculated by a formula set forth in the option
agreement. The cover for an OTC option written subject to this procedure would
be considered illiquid only to the extent that the maximum repurchase price
under the formula exceeds the intrinsic value of the option.
Each Subadviser will monitor the liquidity of restricted securities in
the portion of a Fund it manages under the supervision of the Board and the
Adviser. In reaching liquidity decisions, each Subadviser may consider the
following factors: (A) the unregistered nature of the security; (B) the
frequency of trades and quotes for the security; (C) the number of dealers
wishing to purchase or sell the security and the number of other potential
purchasers; (D) dealer undertakings to make a market in the security and (E)
the nature of the security and the nature of the marketplace trades (e.g., the
time needed to dispose of the security, the method of soliciting offers and the
mechanics of the transfer).
BORROWING. Each Fund may borrow money from banks, limited by the Fund's
fundamental investment restriction to 33-1/3% of its total assets (including
the amount borrowed), and may engage in mortgage dollar roll and reverse
repurchase agreements which may be considered a form of borrowing. In addition,
a Fund may borrow up to an additional 5% of its total assets from banks for
temporary or emergency purposes. A Fund will not purchase securities when bank
borrowings exceed 5% of such Fund's total assets. Each Fund expects that
its borrowings will be on a secured basis. In such situations, either the
custodian will segregate the pledged assets for the benefit of the lender or
arrangements will be made with a suitable subcustodian, which may include the
lender. The Funds have established a line-of-credit ("LOC") with their
custodian by which they may borrow for temporary or emergency purposes. The
Funds intend to use the LOC to meet large or unexpected redemptions that would
otherwise force a Fund to liquidate securities under circumstances which are
unfavorable to a Fund's remaining shareholders.
DERIVATIVE INSTRUMENTS. As discussed in the Prospectuses, the Adviser and each
of the Subadvisers may use a variety of derivative instruments, including
options, futures contracts (sometimes referred to as "futures"), options on
futures contracts, stock index options and forward currency contracts to hedge a
Fund's portfolio or for risk management.
The use of these instruments is subject to applicable regulations of
the SEC, the several options and futures exchanges upon which they may be
traded, and the Commodity Futures Trading Commission ("CFTC"). In addition, a
Fund's ability to use these instruments will be limited by tax considerations.
Special Risks Of Derivative Instruments. The use of derivative
instruments involves special considerations and risks as described below. Risks
pertaining to particular instruments are described in the sections that follow.
(1) Successful use of most of these instruments depends upon the
Adviser's or a Subadviser's ability to predict movements of the overall
securities and currency markets, which requires different skills than
predicting changes in the prices of individual securities. There can be no
assurance that any particular strategy adopted will succeed.
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(2) There might be imperfect correlation, or even no correlation,
between price movements of an instrument and price movements of investments
being hedged. For example, if the value of an instrument used in a short hedge
(such as writing a call option, buying a put option, or selling a futures
contract) increased by less than the decline in value of the hedged investment,
the hedge would not be fully successful. Such a lack of correlation might occur
due to factors unrelated to the value of the investments being hedged, such as
speculative or other pressures on the markets in which these instruments are
traded. The effectiveness of hedges using instruments on indices will depend on
the degree of correlation between price movements in the index and price
movements in the investments being hedged.
(3) Hedging strategies, if successful, can reduce the risk of loss by
wholly or partially offsetting the negative effect of unfavorable price
movements in the investments being hedged. However, hedging strategies can also
reduce opportunity for gain by offsetting the positive effect of favorable
price movements in the hedged investments. For example, if a Fund entered into
a short hedge because the Adviser or Subadviser projected a decline in the
price of a security in the Fund's portfolio, and the price of that security
increased instead, the gain from that increase might be wholly or partially
offset by a decline in the price of the instrument. Moreover, if the price of
the instrument declined by more than the increase in the price of the security,
a Fund could suffer a loss.
(4) As described below, the Fund might be required to maintain assets
as "cover," maintain segregated accounts, or make margin payments when it takes
positions in these instruments involving obligations to third parties (i.e.,
instruments other than purchased options). If the Fund were unable to close out
its positions in such instruments, it might be required to continue to maintain
such assets or accounts or make such payments until the position expired or
matured. The requirements might impair the Fund's ability to sell a portfolio
security or make an investment at a time when it would otherwise be favorable
to do so, or require that the Fund sell a portfolio security at a
disadvantageous time. The Fund's ability to close out a position in an
instrument prior to expiration or maturity depends on the existence of a liquid
secondary market or, in the absence of such a market, the ability and
willingness of the other party to the transaction ("counter party") to enter
into a transaction closing out the position. Therefore, there is no assurance
that any hedging position can be closed out at a time and price that is
favorable to the Fund.
For a discussion of the federal income tax treatment of a Fund's
derivative instruments, see "Tax Status" below.
OPTIONS. Each of the Funds may purchase or write put and call options
on securities and indices, and may purchase options on foreign currencies, and
enter into closing transactions with respect to such options to terminate an
existing position. The purchase of call options serves as a long hedge, and the
purchase of put options serves as a short hedge. Writing put or call options can
enable a Fund to enhance income by reason of the premiums paid by the purchaser
of such options. Writing call options serves as a limited short hedge because
declines in the value of the hedged investment would be offset to the extent of
the premium received for writing the option. However, if the security
appreciates to a price higher than the exercise price of the call option, it can
be expected that the option will be exercised, and the Fund will be obligated to
sell the security at less than its market value or will be obligated to purchase
the security at a price greater than that at which the security must be sold
under the option. All or a portion of any assets used as cover for OTC options
written by a Fund would be considered illiquid to the extent described under
"Restricted and Illiquid Securities" above. Writing put options serves as a
limited long hedge because increases in the value of the hedged investment would
be offset to the extent of the premium received for writing the option. However,
if the security depreciates to a price lower than the exercise price of the put
option, it can be expected that the put option will be exercised, and the Fund
will be obligated to purchase the security at more than its market value.
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The value of an option position will reflect, among other things, the
historical price volatility of the underlying investment, the current market
value of the underlying investment, the time remaining until expiration of the
option, the relationship of the exercise price to the market price of the
underlying investment, and general market conditions. Options that expire
unexercised have no value. Options used by the Fund may include European-style
options, which can only be exercised at expiration. This is in contrast to
American-style options which can be exercised at any time prior to the
expiration date of the option.
A Fund may effectively terminate its right or obligation under an
option by entering into a closing transaction. For example, a Fund may
terminate its obligation under a call or put option that it had written by
purchasing an identical call or put option; this is known as a closing purchase
transaction. Conversely, a Fund may terminate a position in a put or call
option it had purchased by writing an identical put or call option; this is
known as a closing sale transaction. Closing transactions permit the Fund to
realize the profit or limit the loss on an option position prior to its
exercise or expiration.
A Fund may purchase or write both OTC options and options traded on
foreign and U.S. exchanges. Exchange-traded options are issued by a clearing
organization affiliated with the exchange on which the option is listed that,
in effect, guarantees completion of every exchange-traded option transaction.
OTC options are contracts between the Fund and the counterparty (usually a
securities dealer or a bank) with no clearing organization guarantee. Thus,
when the Fund purchases or writes an OTC option, it relies on the counter party
to make or take delivery of the underlying investment upon exercise of the
option. Failure by the counter party to do so would result in the loss of any
premium paid by the fund as well as the loss of any expected benefit of the
transaction.
Each Fund's ability to establish and close out positions in
exchange-listed options depends on the existence of a liquid market. Each of
the Funds intends to purchase or write only those exchange-traded options for
which there appears to be a liquid secondary market. However, there can be no
assurance that such a market will exist at any particular time. Closing
transactions can be made for OTC options only by negotiating directly with the
counterparty, or by a transaction in the secondary market if any such market
exists. Although a Fund will enter into OTC options only with counterparties
that are expected to be capable of entering into closing transactions with a
Fund, there is no assurance that such Fund will in fact be able to close out an
OTC option at a favorable price prior to expiration. In the event of insolvency
of the counter party, a Fund might be unable to close out an OTC option
position at any time prior to its expiration.
If a Fund is unable to effect a closing transaction for an option it
had purchased, it would have to exercise the option to realize any profit. The
inability to enter into a closing purchase transaction for a covered call
option written by a Fund could cause material losses because the Fund would be
unable to sell the investment used as a cover for the written option until the
option expires or is exercised.
Each Fund may engage in options transactions on indices in much the
same manner as the options on securities discussed above, except that index
options may serve as a hedge against overall fluctuations in the securities
markets in general.
The writing and purchasing of options is a highly specialized activity
that involves investment techniques and risks different from those associated
with ordinary portfolio securities transactions. Imperfect correlation between
the options and securities markets may detract from the effectiveness of
attempted hedging.
Transactions using options (other than purchased options) expose a Fund
to counter party risk. To the extent required by SEC guidelines, a Fund will not
enter into any such transactions unless it owns either (1) an offsetting
("covered") position in securities, other options, or futures or (2) cash and
liquid obligations with a value sufficient at all times to cover its potential
obligations to the extent not covered
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as provided in (1) above. A Fund will also set aside cash and/or appropriate
liquid assets in a segregated custodial account if required to do so by the SEC
and CFTC regulations. Assets used as cover or held in a segregated account
cannot be sold while the position in the corresponding option or futures
contract is open, unless they are replaced with similar assets. As a result,
the commitment of a large portion of the Fund's assets to segregated accounts
as a cover could impede portfolio management or the Fund's ability to meet
redemption requests or other current obligations.
SPREAD TRANSACTIONS. Each Fund may purchase covered spread options
from securities dealers. Such covered spread options are not presently
exchange-listed or exchange-traded. The purchase of a spread option gives a
Fund the right to put, or sell, a security that it owns at a fixed dollar
spread or fixed yield spread in relationship to another security that the Fund
does not own, but which is used as a benchmark. The risk to a Fund in
purchasing covered spread options is the cost of the premium paid for the
spread option and any transaction costs. In addition, there is no assurance
that closing transactions will be available. The purchase of spread options
will be used to protect a Fund against adverse changes in prevailing credit
quality spreads, i.e., the yield spread between high quality and lower quality
securities. Such protection is only provided during the life of the spread
option.
FUTURES CONTRACTS. Each Fund may enter into futures contracts,
including interest rate, index, and currency futures and purchase and write
(sell) related options. The purchase of futures or call options thereon can
serve as a long hedge, and the sale of futures or the purchase of put options
thereon can serve as a short hedge. Writing covered call options on futures
contracts can serve as a limited short hedge, and writing covered put options
on futures contracts can serve as a limited long hedge, using a strategy
similar to that used for writing covered options in securities. A Fund's
hedging may include purchases of futures as an offset against the effect of
expected increases in securities prices or currency exchange rates and sales of
futures as an offset against the effect of expected declines in securities
prices or currency exchange rates. A Fund may write put options on futures
contracts while at the same time purchasing call options on the same futures
contracts in order to create synthetically a long futures contract position.
Such options would have the same strike prices and expiration dates. A Fund
will engage in this strategy only when the Adviser or a Subadviser believes it
is more advantageous to a Fund than is purchasing the futures contract.
To the extent required by regulatory authorities, a Fund will only
enter into futures contracts that are traded on U.S. or foreign exchanges or
boards of trade approved by the CFTC and are standardized as to maturity date
and underlying financial instrument. These transactions may be entered into for
"bona fide hedging" purposes as defined in CFTC regulations and other
permissible purposes including increasing return and hedging against changes in
the value of portfolio securities due to anticipated changes in interest rates,
currency values and/or market conditions. The ability of a Fund to trade in
futures contracts may be limited by the requirements of the Code applicable to
a regulated investment company.
A Fund will not enter into futures contracts and related options for
other than "bona fide hedging" purposes for which the aggregate initial margin
and premiums required to establish positions exceed 5% of the Fund's net asset
value after taking into account unrealized profits and unrealized losses on any
such contracts it has entered into. There is no overall limit on the percentage
of a Fund's assets that may be at risk with respect to futures activities.
Although techniques other than sales and purchases of futures contracts could
be used to reduce a Fund's exposure to market, currency, or interest rate
fluctuations, such Fund may be able to hedge its exposure more effectively and
perhaps at a lower cost through using futures contracts.
A futures contract provides for the future sale by one party and
purchase by another party of a specified amount of a specific financial
instrument (e.g., debt security) or currency for a specified price at a
designated date, time, and place. An index futures contract is an agreement
pursuant to which the parties agree to take or make delivery of an amount of
cash equal to a specified multiplier times 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
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index futures contract was originally written. Transactions costs are incurred
when a futures contract is bought or sold and margin deposits must be
maintained. A futures contract may be satisfied by delivery or purchase, as the
case may be, of the instrument, the currency, or by payment of the change in
the cash value of the index. More commonly, futures contracts are closed out
prior to delivery by entering into an offsetting transaction in a matching
futures contract. Although the value of an index might be a function of the
value of certain specified securities, no physical delivery of those securities
is made. If the offsetting purchase price is less than the original sale
price, a Fund realizes a gain; if it is more, a Fund realizes a loss.
Conversely, if the offsetting sale price is more than the original purchase
price, a Fund realizes a gain; if it is less, a Fund realizes a loss. The
transaction costs must also be included in these calculations. There can be no
assurance, however, that a Fund will be able to enter into an offsetting
transaction with respect to a particular futures contract at a particular time.
If a Fund is not able to enter into an offsetting transaction, that Fund will
continue to be required to maintain the margin deposits on the futures
contract.
No price is paid by a Fund upon entering into a futures contract.
Instead, at the inception of a futures contract, the Fund is required to deposit
in a segregated account with its custodian, in the name of the futures broker
through whom the transaction was effected, "initial margin" consisting of cash,
U.S. Government securities or other liquid obligations, in an amount generally
equal to 10% or less of the contract value. Margin must also be deposited when
writing a call or put option on a futures contract, in accordance with
applicable exchange rules. Unlike margin in securities transactions, initial
margin on futures contracts does not represent a borrowing, but rather is in the
nature of a performance bond or good-faith deposit that is returned to a Fund at
the termination of the transaction if all contractual obligations have been
satisfied. Under certain circumstances, such as periods of high volatility, a
Fund may be required by an exchange to increase the level of its initial margin
payment, and initial margin requirements might be increased generally in the
future by regulatory action.
Subsequent "variation margin" payments are made to and from the
futures broker daily as the value of the futures position varies, a process
known as "marking to market." Variation margin does not involve borrowing, but
rather represents a daily settlement of a Fund's obligations to or from a
futures broker. When a Fund purchases an option on a future, the premium paid
plus transaction costs is all that is at risk. In contrast, when a Fund
purchases or sells a futures contract or writes a call or put option thereon,
it is subject to daily variation margin calls that could be substantial in the
event of adverse price movements. If a Fund has insufficient cash to meet daily
variation margin requirements, it might need to sell securities at a time when
such sales are disadvantageous. Purchasers and sellers of futures positions and
options on futures can enter into offsetting closing transactions by selling or
purchasing, respectively, an instrument identical to the instrument held or
written. Positions in futures and options on futures may be closed only on an
exchange or board of trade on which they were entered into (or through a linked
exchange). Although the Funds intend to enter into futures transactions only
on exchanges or boards of trade where there appears to be an active market,
there can be no assurance that such a market will exist for a particular
contract at a particular time.
Under certain circumstances, futures exchanges may establish daily
limits on the amount that the price of a future or option on a futures contract
can vary from the previous day's settlement price; once that limit is reached,
no trades may be made that day at a price beyond the limit. Daily price limits
do not limit potential losses because prices could move to the daily limit for
several consecutive days with little or no trading, thereby preventing
liquidation of unfavorable positions.
If a Fund were unable to liquidate a futures or option on a futures
contract position due to the absence of a liquid secondary market or the
imposition of price limits, it could incur substantial losses, because it would
continue to be subject to market risk with respect to the position. In
addition, except in the case of purchased options, the Fund would continue to
be required to make daily variation margin payments and might be required to
maintain the position being hedged by the future or option or to maintain cash
or securities in a segregated account.
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Certain characteristics of the futures market might increase the risk
that movements in the prices of futures contracts or options on futures
contracts might not correlate perfectly with movements in the prices of the
investments being hedged. For example, all participants in the futures and
options on futures contracts markets are subject to daily variation margin
calls and might be compelled to liquidate futures or options on futures
contracts positions whose prices are moving unfavorably to avoid being subject
to further calls. These liquidations could increase price volatility of the
instruments and distort the normal price relationship between the futures or
options and the investments being hedged. Also, because initial margin deposit
requirements in the futures markets are less onerous than margin requirements
in the securities markets, there might be increased participation by
speculators in the future markets. This participation also might cause
temporary price distortions. In addition, activities of large traders in both
the futures and securities markets involving arbitrage, "program trading" and
other investment strategies might result in temporary price distortions.
SWAP AGREEMENTS. The Funds may enter into interest rate, securities
index, commodity, or security and currency exchange rate swap agreements for any
lawful purpose consistent with such Fund's investment objective, such as for the
purpose of attempting to obtain or preserve a particular desired return or
spread at a lower cost to the Fund than if the Fund had invested directly in an
instrument that yielded that desired return or spread. The Funds also may enter
into swaps in order to protect against an increase in the price of, or the
currency exchange rate applicable to, securities that the Fund anticipates
purchasing at a later date. Swap agreements are two-party contracts entered into
primarily by institutional investors for periods ranging from a few weeks to
several years. In a standard "swap" transaction, two parties agree to exchange
the returns (or differentials in rates of return) earned or realized on
particular predetermined investments or instruments. The gross returns to be
exchanged or "swapped" between the parties are calculated with respect to a
"notional amount," i.e., the return on or increase in value of a particular
dollar amount invested at a particular interest rate, in a particular foreign
currency, or in a "basket" of securities representing a particular index. Swap
agreements may include interest rate caps, under which, in return for a premium,
one party agrees to make payments to the other to the extent that interest rates
exceed a specified rate, or "cap"; interest rate floors under which, in return
for a premium, one party agrees to make payments to the other to the extent that
interest rates fall below a specified level, or "floor"; and interest rate
collars, under which a party sells a cap and purchases a floor, or vice versa,
in an attempt to protect itself against interest rate movements exceeding given
minimum or maximum levels.
The "notional amount" of the swap agreement is the agreed upon basis
for calculating the obligations that the parties to a swap agreement have
agreed to exchange. Under most swap agreements entered into by a Fund, the
obligations of the parties would be exchanged on a "net basis." Consequently, a
Fund's obligation (or rights) under a swap agreement will generally be equal
only to the net amount to be paid or received under the agreement based on the
relative values of the positions held by each party to the agreement (the "net
amount"). A Fund's obligation under a swap agreement will be accrued daily
(offset against amounts owed to the Fund) and any accrued but unpaid net
amounts owed to a swap counterparty will be covered by the maintenance of a
segregated account consisting of cash or liquid assets.
Whether a Fund's use of swap agreements will be successful in
furthering its investment objective will depend, in part, on the Adviser's or a
Subadviser's ability to predict correctly whether certain types of investments
are likely to produce greater returns than other investments. Swap agreements
may be considered to be illiquid. Moreover, a Fund bears the risk of loss of
the amount expected to be received under a swap agreement in the event of the
default or bankruptcy of a swap agreement counterparty. Certain restrictions
imposed on a Fund by the Code may limit a Fund's ability to use swap
agreements. The swaps market is largely unregulated.
The Fund will enter swap agreements only with counterparties that the
Adviser or a Subadviser reasonably believes are capable of performing under the
swap agreements. If there is a default by the other
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party to such a transaction, a Fund will have to rely on its contractual
remedies (which may be limited by bankruptcy, insolvency or similar laws)
pursuant to the agreements related to the transaction.
FOREIGN CURRENCY-RELATED DERIVATIVE STRATEGIES - SPECIAL
CONSIDERATIONS. Each of the Funds may use options and futures and options on
futures on foreign currencies and forward currency contracts to hedge against
movements in the values of the foreign currencies in which a Fund's securities
are denominated. A Fund may engage in currency exchange transactions to protect
against uncertainty in the level of future exchange rates and may also engage
in currency transactions to increase income and total return. The Global Equity
Fund may engage in foreign currency exchange transactions to adjust its
currency exposure relative to its benchmark, the MSCI World Equity Index. Such
currency hedges can protect against price movements in a security the Fund owns
or intends to acquire that are attributable to changes in the value of the
currency in which it is denominated. Such hedges do not, however, protect
against price movements in the securities that are attributable to other
causes.
A Fund might seek to hedge against changes in the value of a
particular currency when no hedging instruments on that currency are available
or such hedging instruments are more expensive than certain other hedging
instruments. In such cases, a Fund may hedge against price movements in that
currency by entering into transactions using hedging instruments on another
foreign currency or a basket of currencies, the values of which a subadviser
believes will have a high degree of positive correlation to the value of the
currency being hedged. The risk that movements in the price of the hedging
instrument will not correlate perfectly with movements in the price of the
currency being hedged is magnified when this strategy is used.
The value of derivative instruments on foreign currencies depends on
the value of the underlying currency relative to the U.S. dollar. Because
foreign currency transactions occurring in the interbank market might involve
substantially larger amounts than those involved in the use of such hedging
instruments, a Fund could be disadvantaged by having to deal in the odd lot
market (generally consisting of transactions of less than $1 million) for the
underlying foreign currencies at prices that are less favorable than for round
lots.
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis. Quotation
information generally is representative of very large transactions in the
interbank market and thus might not reflect odd-lot transactions where rates
might be less favorable. The interbank market in foreign currencies is a
global, round-the-clock market. To the extent the U.S. options or futures
markets are closed while the markets for the underlying currencies remain open,
significant price and rate movements might take place in the underlying markets
that cannot be reflected in the markets for the derivative instruments until
they reopen.
Settlement of derivative transactions involving foreign currencies
might be required to take place within the country issuing the underlying
currency. Thus, a Fund might be required to accept or make delivery of the
underlying foreign currency in accordance with any U.S. or foreign regulations
regarding the maintenance of foreign banking arrangements by U.S. residents and
might be required to pay any fees, taxes and charges associated with such
delivery assessed in the issuing country.
Permissible foreign currency options will include options traded
primarily in the OTC market. Although options on foreign currencies are traded
primarily in the OTC market, a Fund will normally purchase OTC options on
foreign currency only when the Adviser or a Subadviser believes a liquid
secondary market will exist for a particular option at any specific time.
FORWARD CURRENCY CONTRACTS. Each of the Funds may enter into forward currency
contracts. A forward currency contract involves an obligation to purchase or
sell a specific currency at a future date, which may be any fixed number of
days from the date of the contract agreed upon by the parties, at a price set
at the time
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of the contract. These contracts are entered into in the interbank market
conducted directly between currency traders (usually large commercial banks)
and their customers.
At or before the maturity of a forward contract, a Fund may either
sell a portfolio security and make delivery of the currency, or retain the
security and fully or partially offset its contractual obligation to deliver
the currency by purchasing a second contract. 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 contract prices.
The precise matching of forward currency contract amounts and the
value of the securities involved generally will not be possible because the
value of such securities, measured in the foreign currency, will change after
the foreign currency contract has been established. Thus, the Fund might need
to purchase or sell foreign currencies in the spot (cash) market to the extent
such foreign currencies are not covered by forward contracts. The projection of
short-term currency market movements is extremely difficult, and the successful
execution of a short-term hedging strategy is highly uncertain.
CURRENCY HEDGING. While the values of forward currency contracts,
currency options, currency futures and options on futures may be expected to
correlate with exchange rates, they will not reflect other factors that may
affect the value of a Fund's investments. A currency hedge, for example, should
protect a Yen-denominated bond against a decline in the Yen, but will not
protect a Fund against price decline if the issuer's creditworthiness
deteriorates. Because the value of a Fund's investments denominated in foreign
currency will change in response to many factors other than exchange rates, a
currency hedge may not be entirely successful in mitigating changes in the
value of a Fund's investments denominated in that currency over time.
A decline in the dollar value of a foreign currency in which a Fund's
securities are denominated will reduce the dollar value of the securities, even
if their value in the foreign currency remains constant. The use of currency
hedges 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 order to protect against such diminutions in the value of
securities it holds, a Fund may purchase put options on the foreign currency.
If the value of the currency does decline, the Fund will have the right to sell
the currency for a fixed amount in dollars and will thereby offset, in whole or
in part, the adverse effect on its securities that otherwise would have
resulted. Conversely, if a rise in the dollar value of a currency in which
securities to be acquired are denominated is projected, thereby potentially
increasing the cost of the securities, a Fund may purchase call options on the
particular currency. The purchase of these options could offset, at least
partially, the effects of the adverse movements in exchange rates. Although
currency hedges limit the risk of loss due to a decline in the value of a
hedged currency, at the same time, they also limit any potential gain that
might result should the value of the currency increase.
A Fund may enter into foreign currency exchange transactions to hedge
its currency exposure in specific transactions or portfolio positions or, in
the case of the Global Equity Fund, to adjust its currency exposure relative to
its benchmark, the MSCI World Equity Index. Transaction hedging is the purchase
or sale of forward currency with respect to specific receivables or payables of
a Fund generally accruing in connection with the purchase or sale of its
portfolio securities. Position hedging is the sale of forward currency with
respect to portfolio security positions. A Fund may not position hedge to an
extent greater than the aggregate market value (at the time of making such
sale) of the hedged securities.
FOREIGN COMMERCIAL PAPER. A Fund may invest in commercial paper which is
indexed to certain specific foreign currency exchange rates. The terms of such
commercial paper provide that its principal amount is adjusted upwards or
downwards (but not below zero) at maturity to reflect changes in the exchange
rate between two currencies while the obligation is outstanding. A Fund will
purchase such commercial paper
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with the currency in which it is denominated and, at maturity, will receive
interest and principal payments thereon in that currency, but the amount or
principal payable by the issuer at maturity will change in proportion to the
change (if any) in the exchange rate between two specified currencies between
the date the instrument is issued and the date the instrument matures. While
such commercial paper entails the risk of loss of principal, the potential for
realizing gains as a result of changes in foreign currency exchange rate
enables the Fund to hedge or cross-hedge against a decline in the U.S. dollar
value of investments denominated in foreign currencies while providing an
attractive money market rate of return. A Fund will purchase such commercial
paper for hedging purposes only, not for speculation. 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" within the meaning of the
1940 Act. The Funds believe that such investments do not involve the creation
of such a senior security, but nevertheless will establish a segregated account
with respect to its investments in this type of commercial paper and to
maintain in such account cash not available for investment or other liquid
assets having a value equal to the aggregate principal amount of outstanding
commercial paper of this type.
SECURITIES OF OTHER NON-AFFILIATED INVESTMENT COMPANIES. Some of the countries
in which a Fund may invest may not permit direct investment by outside
investors. Investments in such countries may only be permitted through foreign
government-approved or government-authorized investment vehicles, which may
include other investment companies. The Funds may also invest in shares of
other non-affiliated investment companies registered under the 1940 Act.
Investing through such vehicles may involve frequent or layered fees or
expenses and may also be subject to limitation under the 1940 Act. Under the
1940 Act, a Fund may invest up to 10% of its assets in shares of investment
companies and up to 5% of its assets in any one investment company as long as
the investment does not represent more than 3% of the voting stock of the
acquired investment company.
BANK OBLIGATIONS. As stated in a Fund's Prospectus, bank obligations that may
be purchased by a Fund include certificates of deposit, banker's acceptances
and fixed time deposits. A certificate of deposit is a short-term negotiable
certificate issued by a commercial bank against funds deposited in the bank and
is either interest-bearing or purchased on a discount basis. A bankers'
acceptance is a short-term draft drawn on a commercial bank by a borrower,
usually in connection with an international commercial transaction. The
borrower is liable for payment as is the bank, which unconditionally guarantees
to pay the draft at its face amount on the maturity date. Fixed time deposits
are obligations of branches of U.S. banks or foreign banks which are payable at
a stated maturity date and bear a fixed rate of interest. Although fixed time
deposits do not have a market, there are no contractual restrictions on the
right to transfer a beneficial interest in the deposit to a third party.
Bank obligations may be general obligations of the parent bank or may
be limited to the issuing branch by the terms of the specific obligations or by
government regulation.
FLOATING AND VARIABLE RATE INSTRUMENTS. The Funds may invest in floating and
variable rate instruments. Certain of the floating or variable rate obligations
that may be purchased by the Funds may carry a demand feature that would permit
the holder to tender them back to the issuer of the instrument or to a third
party at par value prior to maturity. Some of the demand instruments purchased
by a Fund are not traded in a secondary market and derive their liquidity solely
from the ability of the holder to demand repayment from the issuer or third
party providing credit support. If a demand instrument is not traded in a
secondary market, the Fund will nonetheless treat the instrument as "readily
marketable" for the purposes of its investment restriction limiting investments
in illiquid securities unless the demand feature has a notice period of more
than seven days in which case the instrument will be characterized as "not
readily marketable" and therefore illiquid.
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The Fund's right to obtain payment at par on a demand instrument could
be affected by events occurring between the date the Fund elects to demand
payment and the date payment is due that may affect the ability of the issuer
of the instrument or third party providing credit support to make payment when
due, except when such demand instruments permit same day settlement. To
facilitate settlement, these same day demand instruments may be held in book
entry form at a bank other than a Fund's custodian subject to a subcustodian
agreement approved by the Fund between that bank and the Fund's custodian.
BRADY BONDS. The Multi Sector Bond Fund and the Balanced Fund, and the other
Funds in accordance with their Prospectuses, may invest in Brady Bonds. Brady
Bonds are debt securities, generally denominated in U.S. dollars, issued under
the framework of the Brady Plan. The Brady Plan is an initiative announced by
former U.S. Treasury Secretary Nicholas F. Brady in 1989 as a mechanism for
debtor nations to restructure their outstanding external commercial bank
indebtedness. In restructuring its external debt under the Brady Plan framework,
a debtor nation negotiates with its existing bank lenders as well as
multilateral institutions such as the International Bank for Reconstruction and
Development (the "World Bank") and the International Monetary Fund (the "IMF").
The Brady Plan framework, as it has developed, contemplates the exchange of
external commercial bank debt for newly issued bonds known as "Brady Bonds".
Brady Bonds may also be issued in respect of new money being advanced by
existing lenders in connection with the debt restructuring. The World Bank
and/or the IMF support the restructuring by providing funds pursuant to loan
agreements or other arrangements which enable the debtor nation to collateralize
the new Brady Bonds or to repurchase outstanding bank debt at a discount. Under
these arrangements with the World Bank and/or the IMF, debtor nations have been
required to agree to the implementation of certain domestic monetary and fiscal
reforms. Such reforms have included the liberalization of trade and foreign
investment, the privatization of state-owned enterprises and the setting of
targets for public spending and borrowing. These policies and programs seek to
promote the debtor country's economic growth and development. Investors should
also recognize that the Brady Plan only sets forth general guiding principles
for economic reform and debt reduction, emphasizing that solutions must be
negotiated on a case-by-case basis between debtor nations and their creditors.
The Subadviser believes that economic reforms undertaken by countries in
connection with the issuance of Brady Bonds may make the debt of countries which
have issued or have announced plans to issue Brady Bonds an attractive
opportunity for investment. However, there can be no assurance that a
Subadviser's expectations with respect to Brady Bonds will be realized.
Investors should recognize that Brady Bonds have been issued only
recently, and accordingly, do not have a long payment history. Brady Bonds which
have been issued to date are rated in the categories "BB" or "B" by Standard &
Poor's Corporation ("S&P) or "Ba" or "B" by Moody's Investors Service, Inc.
("Moody's") or, in cases in which a rating by S&P or Moody's has not been
assigned, are generally considered by the Advisor or Subadviser to be of
comparable quality.
Agreements implemented under the Brady Plan to date are designed to
achieve debt and debt-service reduction through specific options negotiated by
a debtor nation with its creditors. As a result, the financial packages offered
by each country differ. The types of options have included the exchange of
outstanding commercial bank debt for bonds issued at 100% of face value of such
debt which carry a below-market stated rate of interest (generally known as par
bonds), bonds issued at a discount from the face value of such debt (generally
known as discount bonds), bonds bearing an interest rate which increases over
time and bonds issued in exchange for the advancement of new money by existing
lenders. Discount bonds issued to date under the framework of the Brady Plan
have generally borne interested computed semi-annually at a rate equal to 13/16
of 1% above the then current six month London Inter-Bank Offered Rate ("LIBOR")
rate. Regardless of the stated face amount and stated interest rate of the
various types of Brady Bonds, the applicable Funds will purchase Brady Bonds in
secondary markets, as described below, in which the price and yield to the
investor reflect market conditions at the time of purchase. Brady Bonds issued
to date have traded at a deep discount from their face value. Certain sovereign
bonds are entitled to "value recovery payments" in certain circumstances, which
in effect constitute supplemental interest payments but generally
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are not collateralized. Certain Brady Bonds have been collateralized as to
principal due date at maturity (typically 30 years from the date of issuance)
by U.S. Treasury zero coupon bonds with a maturity equal to the final maturity
of such Brady Bonds. Collateral purchases are financed by the IMF, the World
Bank and the debtor nations' reserves. In addition, interest payments on
certain types of Brady Bonds may be collateralized by cash or high-grade
securities in amounts that typically represent between 12 and 18 months of
interest accruals on these instruments with the balance of the interest
accruals being uncollateralized. The applicable Funds may purchase Brady Bonds
with no or limited collateralization, and will be relying for payment of
interest and (except in the case of principal collateralized Brady Bonds)
principal primarily on the willingness and ability of the foreign government to
make payment in accordance with the terms of the Brady Bonds. Brady Bonds
issued to date are purchased and sold in secondary markets through U.S.
securities dealers and other financial institutions and are generally
maintained through European transnational securities depositories. A
substantial portion of the Brady Bonds and other sovereign debt securities in
which these Funds may invest are likely to be acquired at a discount, which
involves certain considerations discussed below under "Additional Information
Concerning Taxes."
ZERO COUPON SECURITIES, STEP-COUPON SECURITIES, PAY-IN-KIND BONDS ("PIK BONDS")
AND DEFERRED PAYMENT SECURITIES. Each of the Funds except the Small Cap Value
Fund, the Global Equity Fund and the Strategic Value Fund may invest in zero
coupon securities, PIK bonds, Step-coupon securities and deferred payment
securities.
Zero coupon securities are debt securities that pay no cash income but
are sold at substantial discounts from their value at maturity. Step-coupon
securities are debt securities that do not make regular cash interest payments
and are sold at a deep discount to their face value. When a zero coupon security
is held to maturity, its entire return, which consists of the amortization of
discount, comes from the difference between its purchase price and its maturity
value. This difference is known at the time of purchase, so that investors
holding zero coupon securities until maturity know at the time of their
investment what the expected return on their investment will be. Zero coupon
securities may have conversion features. The Fund also may purchase PIK bonds.
PIK bonds pay all or a portion of their interest in the form of debt or equity
securities. Deferred payment securities are securities that remain zero coupon
securities until a predetermined date, at which time the stated coupon rate
becomes effective and interest becomes payable at regular intervals. Deferred
payment securities are often sold at substantial discounts from their maturity
value.
Zero coupon securities, PIK bonds and deferred payment securities tend
to be subject to greater price fluctuations in response to changes in interest
rates than are ordinary interest-paying debt securities with similar
maturities. The value of zero coupon securities appreciates more during
periods of declining interest rates and depreciates more during periods of
rising interest rates than ordinary interest-paying debt securities with
similar maturities. Zero coupon securities, PIK bonds and deferred payment
securities may be issued by a wide variety of corporate and governmental
issuers. Although these instruments are generally not traded on a national
securities exchange, they are widely traded by brokers and dealers and, to such
extent, will not be considered illiquid for the purposes of the Fund's
limitation on investments in illiquid securities.
Current federal income tax law requires the holder of a zero coupon
security, certain PIK bonds, deferred payment securities and certain other
securities acquired at a discount (such as Brady Bonds) to accrue income with
respect to these securities prior to the receipt of cash payments. Accordingly,
to avoid liability for federal income and excise taxes, the Fund may be
required to distribute income accrued with respect to these securities and may
have to dispose of portfolio securities under disadvantageous circumstances in
order to generate cash to satisfy these distribution requirements.
MORTGAGE DOLLAR ROLLS AND REVERSE REPURCHASE AGREEMENTS. The Funds may engage
in reverse repurchase agreements to facilitate portfolio liquidity, a practice
common in the mutual fund industry, or for arbitrage transactions discussed
below. In a reverse repurchase agreement, a Fund would sell a security and
enter into an agreement to repurchase the security at a specified future date
and price. A Fund generally
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retains the right to interest and principal payments on the security. Since a
Fund receives cash upon entering into a reverse repurchase agreement, it may be
considered a borrowing (see "Borrowing"). When required by guidelines of the
SEC, a Fund will set aside permissible liquid assets in a segregated account to
secure its obligations to repurchase the security.
The Strategic Growth Fund, Strategic Value Fund, and the Multi Sector
Bond Fund may also enter into mortgage dollar rolls, in which a Fund would sell
mortgage-backed securities for delivery in the current month and simultaneously
contract to purchase substantially similar securities on a specified future
date. While a Fund would forego principal and interest paid on the
mortgage-backed securities during the roll period, the Fund would be compensated
by the difference between the current sales price and the lower price for the
future purchase as well as by any interest earned on the proceeds of the initial
sale. A Fund also could be compensated through the receipt of fee income
equivalent to a lower forward price. At the time the Fund would enter into a
mortgage dollar roll, it would set aside permissible liquid assets in a
segregated account to secure its obligation for the forward commitment to buy
mortgage-backed securities. Mortgage dollar roll transactions may be considered
a borrowing by the Funds. (See "Borrowing".)
The mortgage dollar rolls and reverse repurchase agreements entered
into by the Funds may be used as arbitrage transactions in which a Fund will
maintain an offsetting position in investment grade debt obligations or
repurchase agreements that mature on or before the settlement date on the
related mortgage dollar roll or reverse repurchase agreements. Since a Fund
will receive interest on the securities or repurchase agreements in which it
invests the transaction proceeds, such transactions may involve leverage.
However, since such securities or repurchase agreements will be high quality
and will mature on or before the settlement date of the mortgage dollar roll or
reverse repurchase agreement, the Adviser or a Subadviser believes that such
arbitrage transactions do not present the risks to the Funds that are
associated with other types of leverage.
INVESTMENT RESTRICTIONS FOR THE FUNDS
THE FOLLOWING ARE FUNDAMENTAL INVESTMENT RESTRICTIONS WHICH CANNOT BE
CHANGED WITHOUT SHAREHOLDER APPROVAL:
Each Fund (except the Strategic Growth Fund):
May not purchase securities of any one issuer, other than obligations
issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, if, immediately after such purchase, more than 5%
of the Fund's total assets would be invested in such issuer or the
Fund would hold more than 10% of the outstanding voting securities of
the issuer, except that 25% or less of the Fund's total assets may be
invested without regard to such limitations. There is no limit to the
percentage of assets that may be invested in U.S. Treasury bills,
notes, or other obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities.
May (i) borrow money from banks and (ii) make other investments or
engage in other transactions permissible under the Investment Company
Act of 1940 (the "1940 Act") which may involve a borrowing, provided
that the combination of (i) and (ii) shall not exceed 33-1/3% of the
value of the Fund's total assets (including the amount borrowed), less
the Fund's liabilities (other than borrowings), except that the Fund
may borrow up to an additional 5% of its total assets (not including
the amount borrowed) from a bank for temporary or emergency purposes
(but not for leverage or the purchase of investments). The Fund may
also borrow money from other persons to the extent permitted by
applicable law. For purposes of this restriction, short sales, the
entry into currency transactions, options, futures contracts, options
on futures contracts, forward commitment
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transactions and dollar roll transactions that are not accounted for
as financings (and the segregation of assets in connection with any of
the foregoing) shall not constitute borrowing.
May not issue senior securities, except as permitted under the 1940
Act.
May not act as an underwriter of another issuer's securities, except
to the extent that the Fund may be deemed an underwriter within the
meaning of the Securities Act in connection with the purchase and sale
of portfolio securities.
May not purchase or sell real estate unless acquired as a result of
ownership of securities or instruments, but this restriction shall not
prohibit the Fund from purchasing or selling securities issued by
entities or investment vehicles that own or deal in real estate or
interests therein or instruments secured by real estate or interests
therein.
May not purchase or sell commodities or commodities contracts, except
to the extent disclosed in the current Prospectus of such Fund.
May not lend any security or make any other loan if, as a result, more
than 33 1/3% of its total assets (taken at current value) would be
lent to other parties, except in accordance with its investment
objective, policies and limitations through (i) purchase of debt
securities or other debt instruments, including loan participations,
assignments and structured securities, or (ii) by engaging in
repurchase agreements.
May not purchase the securities of any issuer if, as a result, more
than 25% (taken at current value) of the Fund's total assets would be
invested in the securities of issuers, the principal activities of
which are in the same industry. This limitation does not apply to
securities issued by the U.S. Government or its agencies or
instrumentalities.
THE STRATEGIC GROWTH FUND:
May (i) borrow money from banks and (ii) make other investments or
engage in other transactions permissible under the Investment Company
Act of 1940 (the "1940 Act") which may involve a borrowing, provided
that the combination of (i) and (ii) shall not exceed 33-1/3% of the
value of the Fund's total assets (including the amount borrowed), less
the Fund's liabilities (other than borrowings), except that the Fund
may borrow up to an additional 5% of its total assets (not including
the amount borrowed) from a bank for temporary or emergency purposes
(but not for leverage or the purchase of investments). The Fund may
also borrow money from other persons to the extent permitted by
applicable law. For purposes of this restriction, short sales, the
entry into currency transactions, options, futures contracts, options
on futures contracts, forward commitment transactions and dollar roll
transactions that are not accounted for as financings (and the
segregation of assets in connection with any of the foregoing) shall
not constitute borrowing.
May not issue senior securities, except as permitted under the 1940
Act.
May not act as an underwriter of another issuer's securities, except to
the extent that the Fund may be deemed an underwriter within the
meaning of the Securities Act in connection with the purchase and sale
of portfolio securities.
May not purchase or sell physical commodities unless acquired as a
result of ownership of securities or other instruments, but this shall
not prevent the Fund from purchasing or selling options, futures
contracts, or other derivative instruments, or from investing in
securities or other instruments backed by physical commodities.
May not lend any security or make any other loan if, as a result, more
than 33 1/3% of its total assets (taken at current value) would be lent
to other parties, except in accordance with its investment objective,
policies and limitations through (i) purchase of debt securities or
other debt instruments, including loan participations, assignments and
structured securities, or (ii) by engaging in repurchase agreements.
May not purchase the securities of any issuer if, as a result, more
than 25% (taken at current value) of the Fund's total assets would be
invested in the securities of issuers, the principal activities of
which are in the same industry. This limitation does not apply to
securities issued by the U.S. government or its agencies or
instrumentalities.
May not purchase or sell real estate unless acquired as a result of
ownership of securities or instruments, but this restriction shall not
prohibit the Fund from purchasing or selling securities issued by
entities or investment vehicles that own or deal in real estate or
interests therein or instruments secured by real estate or interests
therein.
The following are the non-fundamental operating policies of the Funds which may
be changed by the Board of Trustees of the Trust without shareholder approval:
Each Fund may not:
Sell securities short (except for the Mid Cap Fund), unless the Fund
owns or has the right to obtain securities equivalent in kind and
amount to the securities sold short or unless it covers such short
sales as required by the current rules and positions of the SEC or its
staff, and provided that short positions in forward currency
contracts, options, futures contracts, options on futures contracts,
or other derivative instruments are not deemed to constitute selling
securities short. The Mid Cap Fund may only sell securities short in
accordance with the description contained in its Prospectus.
Purchase securities on margin, except that the Fund may obtain such
short-term credits as are necessary for the clearance of transactions;
and provided that margin deposits in connection with options, futures
contracts, options on futures contracts, transactions in currencies or
other derivative instruments shall not constitute purchasing
securities on margin.
Purchase or otherwise acquire any security if, as a result, more than
15% of its net assets would be invested in securities that are
illiquid.
Purchase securities of other investment companies except in connection
with a merger, consolidation, acquisition, reorganization or offer of
exchange, or as otherwise permitted under the 1940 Act.
Pledge, mortgage or hypothecate any assets owned by the Fund except as
may be necessary in connection with permissible borrowings or
investments and then such pledging, mortgaging, or
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hypothecating may not exceed 33 1/3% of the Fund's total assets at the
time of the borrowing or investment.
INSURANCE LAW RESTRICTIONS - In connection with the Trust's agreement
to sell shares to the Accounts, the Adviser and the insurance companies may
enter into agreements, required by certain state insurance departments, under
which the Adviser may agree to use its best efforts to assure and to permit
insurance companies to monitor that each Fund of the Trust complies with the
investment restrictions and limitations prescribed by state insurance laws and
regulations applicable to the investment of separate account assets in shares
of mutual funds. If a Fund failed to comply with such restrictions or
limitations, the Accounts would take appropriate action which might include
ceasing to make investments in the Fund or withdrawing from the state imposing
the limitation. Such restrictions and limitations are not expected to have a
significant impact on the Trust's operations.
MAJOR SHAREHOLDERS
As of August 5, 1997, there were no outstanding shares of the Funds.
Immediately prior to the public offering of shares of the Funds, [the Adviser]
owned all of the issued and outstanding shares of each Fund. It is anticipated
that upon the public offering of shares of the Funds, the [Adviser's] holdings
will be reduced below 5% of the outstanding shares of each Fund.
As of July 30, 1997, the Trustees and Officers of the Trust as a group
owned beneficially less than 1% of the shares of the Trust.
TRUSTEES AND OFFICERS OF THE TRUST
TRUSTEES AND OFFICERS
The principal occupations of the Trustees and Officers during the last
five years and their affiliations are:
Dr. John C. Bryant
Trustee
Age 61
44 Faculty Place, Wilmington, Ohio.
Dr. Bryant is Executive Director of the Cincinnati Youth
Collaborative.
Robert M. Duncan
Trustee
Age 69
1397 Haddon Road, Columbus, Ohio.
Mr. Duncan is a member of the Ohio Elections Commission. He was
formerly Secretary to the Board of Trustees of the Ohio State
University. Prior to that, he was Vice President and General Counsel
of The Ohio State University.
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Dr. Thomas J. Kerr, IV
Trustee
Age 63
4890 Smoketalk Lane, Westerville, Ohio.
Dr. Kerr is President Emeritus of Kendall College. He was formerly
President of Kendall College.
Dimon R. McFerson
Trustee*, Chairman
Age 60
One Nationwide Plaza, Columbus, Ohio
Mr. McFerson is Chairman and Chief Executive Officer of the Nationwide
Insurance Enterprise.
James F. Laird, Jr.
Treasurer
Age 40
Three Nationwide Plaza, Columbus, Ohio.
Mr. Laird is Vice President and General Manager of Nationwide Advisory
Services, Inc., the Distributor and Investment Adviser. He was
formerly Treasurer of Nationwide Advisory Services, Inc.
Rae Mercer Pollina
Secretary
Age ___
Three Nationwide Plaza, Columbus, Ohio.
Mrs. Pollina is Corporate Secretary of Nationwide Advisory Services,
Inc., the Distributor and Investment Adviser.
*A Trustee who is an "interested person" of the Trust as defined in the
1940 Act.
The Funds do not pay any fees to Officers or to Trustees who are
considered "interested persons" of the Trust. The table below lists the
aggregate compensation paid by the Trust to each disinterested Trustee during
the fiscal year ended December 31, 1996, and the aggregate compensation paid to
each disinterested Trustee during the year by all fifteen registered investment
companies to which the Adviser provides investment advisory services (the
"Nationwide Fund Complex").
The Trust does not maintain any pension or retirement plans for the
Officers or Trustees of the Trust.
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COMPENSATION TABLE
FISCAL YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Total
Compensation
from the
Aggregate Nationwide Fund
Disinterested Compensation Complex Including
Trustees from the Trust the Trust
-------- -------------- ---------
<S> <C> <C>
Dr. John C. Bryant $1,000 $15,500
Robert M. Duncan $1,000 $15,500
Dr. Thomas J. Kerr, IV $1,000 $15,500
</TABLE>
CALCULATING YIELD AND TOTAL RETURN
The Funds may from time to time advertise historical performance,
subject to Rule 482 under the Securities Act of 1933. An investor should keep
in mind that any return or yield quoted represents past performance and is not
a guarantee of future results. The investment return and principal value of
investments will fluctuate so that an investor's shares, when redeemed, may be
worth more or less than their original cost.
All performance advertisements shall include average annual total
return quotations for the most recent one, five, and ten year periods (or life,
if a Fund has been in operation less than one of the prescribed periods).
Average annual total return represents the rate required each year for an
initial investment to equal the redeemable value at the end of the quoted
period. It is calculated in a uniform manner by dividing the ending redeemable
value of a hypothetical initial payment of $1,000 for a specified period of
time, by the amount of the initial payment, assuming reinvestment of all
dividends and distributions. The one, five, and ten year periods are calculated
based on periods that end on the last day of the calendar quarter preceding the
date on which an advertisement is submitted for publication.
INVESTMENT ADVISORY AND OTHER SERVICES
The Adviser will oversee the management of each of the Funds pursuant to an
Investment Advisory Agreement dated October , 1997. Subject to the supervision
and direction of the Trustees, the Adviser will initially identify and select
the Subadvisers and will determine the allocation of assets among multiple
Subadvisers, if applicable. The Adviser will also evaluate and monitor the
performance of Subadvisers. The Adviser will be authorized to select and place
portfolio investments on behalf of the Fund; however, the Adviser currently does
not intend to do so. The Adviser will have responsibility for communicating
performance expectations and evaluations to the Subadvisers and ultimately
recommending to the Trust's Board of Trustees whether a Subadviser's contract
should be renewed, modified or terminated; however, the Adviser does not expect
to recommend frequent changes of subadvisers. The Adviser will regularly provide
written reports to the Board of Trustees regarding the results of its evaluation
and monitoring functions.
The Adviser pays the compensation of the Trustees affiliated with
the Adviser. The officers of the Trust receive no compensation from the Trust.
The Adviser also furnishes, at its own expense, all necessary administrative
services, office space, equipment, and clerical personnel for servicing the
investments of the
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Trust and maintaining its organization, investment advisory facilities, and
executive and supervisory personnel for managing the investments and effecting
the portfolio transactions of the Trust.
The Investment Advisory Agreements also specifically provide that
the Adviser, including its directors, officers, and employees, shall not be
liable for any error of judgment, or mistake of law, or for any loss arising out
of any investment, or for any act or omission in the execution and management of
the Trust, except for willful misfeasance, bad faith, or gross negligence in the
performance of its duties, or by reason of reckless disregard of its obligations
and duties under the Agreement. The Agreement will continue in effect for an
initial period of two years with respect to a Fund and thereafter shall continue
automatically for successive annual periods provided such continuance is
specifically approved at least annually by the Trustees, or by vote of a
majority of the outstanding voting securities of the Trust, and in either case,
by a majority of the Trustees who are not parties to the Agreement or interested
persons of any such party. The Agreement terminates automatically if it is
assigned. It may be terminated without penalty by vote of a majority of the out
standing voting securities, or by either party, on not more than 60 days nor
less than 30 days written notice. The Agreements further provide that the
Adviser may render services to others.
The Trust pays the compensation of the Trustees who are not
affiliated with the Adviser and all expenses (other than those assumed by the
Adviser), including governmental fees, interest charges, taxes, membership dues
in the Investment Company Institute allocable to the Trust; fees and expenses
of independent certified public accountants, legal counsel, and any transfer
agent, registrar, and dividend disbursing agent of the Trust; expenses of
preparing, printing, and mailing shareholders' reports, notices, proxy
statements, and reports to governmental offices and commissions; expenses
connected with the execution, recording, and settlement of portfolio security
transactions, insurance premiums, fees and expenses of the custodian for all
services to the Trust; and expenses of calculating the net asset value of
shares of the Trust, expenses of shareholders' meetings, and expenses relating
to the issuance, registration, and qualification of shares of the Trust.
Subject to the supervision of the Adviser and the Trustees, each
Subadviser manages a Fund's assets in accordance with such Fund's investment
objective and policies. Each Subadviser shall make investment decisions for
such Fund, and in connection with such investment decisions, shall place
purchase and sell orders for securities.
Each Subadviser will provide investment advisory services to one
or more Funds pursuant to a Subadvisory Agreement. Each of the Subadvisory
Agreements specifically provides that the Subadviser, including its directors,
officers, partners and employees, shall not be liable for any error of judgment,
or mistake of law, or for any loss arising out of any investment, or for any act
or omission in the execution and management of the Fund, except for willful
misfeasance, bad faith, or gross negligence in the performance of its duties, or
by reason of reckless disregard of its obligations and duties under such
Agreement. Each Subadvisory Agreement will continue in effect for an initial
period of two years with respect to a Fund and thereafter shall continue
automatically for successive annual periods provided such continuance is
specifically approved at least annually by the Trustees, or by vote of a
majority of the outstanding voting securities of the Fund, and in either case,
by a majority of the Trustees who are not parties to the Subadvisory Agreement
or interested persons of any such party. Each Subadvisory Agreement terminates
automatically if it is assigned. It may also be terminated without penalty by
vote of a majority of the outstanding voting securities, or by either party, on
not more than 60 days nor less than 30 days written notice.
EQUITY INCOME FUND
Under the terms of its Investment Advisory Agreement, the Equity
Income Fund pays to the Adviser a fee at the annual rate of 0.80% of the Fund's
average daily net assets.
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<PAGE> 217
Federated Investment Counseling ("Federated") is the Subadviser of
the Fund. For the investment management services it provides to the Fund,
Federated receives an annual fee from the Adviser in the amount of 0.40% of the
Fund's first $50 million of average daily net assets, 0.25% of the Fund's next
$200 million of average daily net assets, 0.20% of the Fund's next $250 million
of average daily net assets, and 0.15% of the Fund's average daily net assets in
excess of $500 million.
Federated, a Delaware business trust organized on April 11, 1989
is a registered investment adviser under the Investment Advisers Act of 1940.
It is a subsidiary of Federated Investors. All of the Class A (voting) shares
of Federated Investors are owned by a trust, the trustees of which are John F.
Donahue, Chairman and Trustee of Federated Investors, Mr. Donahue's wife, and
Mr. Donahue's son, J. Christopher Donahue, who is President and Trustee of
Federated Investors.
Federated and other subsidiaries of Federated Investors serve as
investment advisers to a number of investment companies and private accounts.
Certain other subsidiaries also provide administrative services to a number of
investment companies. With over $110 billion invested across more than 300
funds under management and/or administration by its subsidiaries, as of
December 31, 1996, Federated Investors is one of the largest mutual fund
investment managers in the United States. With more than 2,000 employees,
Federated continues to be led by the management who founded the company in
1955. Federated funds are presently at work in and through 4,500 financial
institutions nationwide.
HIGH INCOME BOND FUND
Under the terms of its Investment Advisory Agreement, the High
Income Bond Fund pays to the Adviser a fee at the annual rate of .80% of the
Fund's average daily net assets.
Federated is the Subadviser of the Fund. For the investment
management services it provides to the Fund, Federated receives an annual fee
from the Adviser in the amount of 0.40% of the Fund's first $50 million of
average daily net assets, 0.25% of the Fund's next $200 million of average
daily net assets, 0.20% of the Fund's next $250 million of average daily net
assets, and 0.15% of the Fund's average daily net assets in excess of $500
million. Additional information about Federated is included above.
GLOBAL EQUITY FUND
Under the terms of its Investment Advisory Agreement the Global
Equity Fund pays to the Adviser a fee at the annual rate of 1.00% of the Fund's
average daily net assets.
J.P. Morgan Investment Management Inc. ("J.P. Morgan") is the
subadviser of the Fund. For the investment management services it provides to
the Fund, J.P. Morgan receives an annual fee from the Adviser in an amount
equal to 0.60% of the first $50 million of the Fund's average daily net assets
and 0.55% of average daily net assets in excess of $50 million.
J.P. Morgan is a wholly owned subsidiary of J.P. Morgan & Co.
Incorporated, a bank holding company organized under the laws of Delaware. J.P.
Morgan offers a wide range of investment management services and acts as
investment adviser to corporate and institutional clients. J.P. Morgan uses a
sophisticated, disciplined, collaborative process for managing all asset
classes. As of June 30, 1997, J.P. Morgan and its affiliates had assets under
management of approximately $234 billion, including approximately $7.4 billion
in global equity portfolios.
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MID CAP FUND
Under the terms of its Investment Advisory Agreement the Fund
pays to the Adviser a fee at the annual rate of 1.05% of the Fund's average
daily net assets.
The Adviser has selected three Subadvisers, each of whom will
each manage part of the Fund's portfolio. Each Subadviser receives an annual
fee from the Adviser in an amount equal to 0.65% of the first $50 million of
the average daily net assets managed by such Subadviser and 0.50% of the
average daily net assets managed by such Subadviser in excess of $50 million.
The Mid Cap Fund's Subadvisers are:
- First Pacific Advisors, Inc. ("First Pacific")
- Pilgrim Baxter & Associates, Ltd. ("Pilgrim Baxter")
- Rice, Hall, James & Associates ("Rice Hall")
Subject to the supervision of the Adviser and the Trustees, the
Subadvisers each manage separate portions of the Fund's assets in accordance
with the Fund's investment objective and policies. With regard to the portion
of the Fund's assets allocated to it, each Subadviser shall make investment
decisions for the Fund, and in connection with such investment decisions shall
place purchase and sell orders for securities. No Subadviser shall have any
investment responsibility for any portion of the Fund's assets not allocated to
it by the Adviser for investment management.
Each of First Pacific, Pilgrim Baxter, and Rice Hall is wholly
owned by United Asset Management Corporation ("UAM"), a NYSE-listed holding
company organized to acquire and own firms that provide investment advisory
services primarily for institutional clients. First Pacific is an indirect
wholly-owned subsidiary of UAM. Pilgrim Baxter and Rice Hall are each direct
wholly-owned subsidiaries of UAM. UAM's corporate headquarters are located at
One International Place, Boston 02110.
BALANCED FUND
Under the terms of its Investment Advisory Agreement, the
Balanced Fund pays to the Adviser a fee at the annual rate of 0.75% of the
Fund's average daily net assets.
Salomon Brothers Asset Management Inc ("SBAM") is the Subadviser
of the fund. For the investment management services it provides to the Fund,
SBAM receives an annual fee from the Adviser in an amount equal to 0.35% of the
first $150 million of the Fund's average daily net assets, 0.30% of the Fund's
next $350 million of average daily net assets, and 0.25% of the Fund's average
daily net assets in excess of $500.
SBAM is a wholly owned subsidiary of Salomon Brothers Holding
Company Inc, which is in turn wholly owned by Salomon Inc. SBAM was
incorporated in 1987 and together with affiliates in London, Frankfurt, Tokyo
and Hong Kong, provides a broad range of fixed-income and equity investment
advisory services to various individuals and institutional clients located
throughout the world, and serves as investment adviser to various investment
companies. In providing such services, the SBAM has access to Salomon Inc's
more than 400 economists and mortgage, bond, sovereign and equity analysts. As
of __________, 1997, SBAM and its worldwide investment advisory affiliates
managed approximately $_____ billion of assets.
MULTI SECTOR BOND FUND
Under the terms of its Investment Advisory Agreement, the Multi
Sector Bond Fund pays to the Adviser a fee at the annual rate of 0.75% of the
Fund's average daily net assets.
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SBAM is the Subadviser of the Fund. For the investment management
services it provides to the Fund, SBAM receives an annual fee from the Adviser
in the amount of 0.35% of the Fund's first $50 million of average daily net
assets, 0.30% of the Fund's next $150 million of average daily net assets,
0.25% of the Fund's next $300 million of average daily net assets, and 0.20% of
the Fund's average daily net assets in excess of $500 million. Additional
information about SBAM is included above.
In connection with SBAM's service as investment manager to the
Multi Sector Bond Fund, SBAM has entered into a subadvisory agreement with its
London based affiliate Salomon Brothers Asset Management Limited ("SBAM
Limited") pursuant to which SBAM has delegated to SBAM Limited responsibility
for management of the Fund's investments in non dollar-denominated debt
securities and currency transactions. SBAM Limited is compensated by SBAM at no
additional expense to the Fund. Like SBAM, SBAM Limited is an indirect,
wholly-owned subsidiary of Salomon Inc.
SMALL CAP VALUE FUND
Under the terms of its Investment Advisory Agreement, the Small
Cap Value Fund pays to the Adviser a fee at the annual rate of 0.90% of the
Fund's average daily net assets.
The Dreyfus Corporation. For the investment management services
it provides to the Small Cap Value Fund, Dreyfus receives an annual fee from
the Adviser in an amount equal to 0.50% of the first $200 million of the Fund's
average daily net assets and 0.45% of the Fund's average daily net assets in
excess of $200 million. Dreyfus, located at 200 Park Avenue, New York, New York
10166, was formed in 1947. Dreyfus is a wholly-owned subsidiary of Mellon Bank,
N.A., which is a wholly-owned subsidiary of Mellon Bank Corporation ("Mellon").
As of June 30, 1997, Dreyfus managed or administered approximately $87 billion
in assets for approximately 1.7 million investor accounts nationwide.
Mellon is a publicly owned multibank holding company incorporated
under Pennsylvania law in 1971 and registered under the Federal Bank Holding
Company Act of 1956, as amended. Mellon provides a comprehensive range of
financial products and services in domestic and selected international markets.
Mellon is among the twenty-five largest bank holding companies in the United
States based on total assets. Mellon's principal wholly-owned subsidiaries are
Mellon Bank, N.A., Mellon Bank (DE) National Association, Mellon Bank (MD), The
Boston Company, Inc. AFCO Credit Corporation and a number of companies known as
Mellon Financial Services Corporations. Through its subsidiaries, including
Dreyfus, Mellon managed approximately $259 billion in assets as of March 31,
1997, including approximately $88 billion in mutual fund assets. As of March
31, 1997, various subsidiaries of Mellon provided non-investment services, such
as custodial or administration services, for approximately $1.061 trillion in
assets including approximately $58 billion in mutual fund assets.
STRATEGIC VALUE FUND AND STRATEGIC GROWTH FUND
Under the terms of the Investment Advisory Agreement, each of the Strategic
Value Fund and Strategic Growth Fund pays to the Adviser a fee at the annual
rate of 0.90% of that Fund's average daily net assets.
The Adviser has selected Strong Capital Management, Inc.
("Strong") to be the Subadviser to the Strategic Growth Fund and the Strategic
Value Fund. Strong has subcontracted with Schafer Capital, ("Schafer Capital")
to subadvise the Strategic Value Fund. For the investment management services
provided to each Fund, Strong receives an annual fee from the Adviser in an
amount equal to 0.50% of such Fund's first $500 million of average daily net
assets and 0.45% of such Fund's average daily net assets in excess of $500
million. Pursuant to its subcontract with Schafer Capital Management, Inc.,
Strong pays Schafer's subadvisory fees.
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Strong began conducting business in 1974. Since then, its
principal business has been providing continuous investment supervision for
individuals and institutional accounts, such as pension funds and
profit-sharing plans. Strong also acts as investment advisor for each of the
mutual funds within the Strong Family of Funds. As of June 30, 1997, Strong
had over $25 billion under management. Strong's principal mailing address is
P.O. Box 2936, Milwaukee, Wisconsin 53201. Mr. Richard S. Strong is the
controlling shareholder of Strong.
Schafer Capital's controlling person and sole shareholder is
David K. Schafer. Mr. Schafer has been in the investment management business
for more than 25 years and founded Schafer Capital in 1981.
FUND ADMINISTRATION SERVICES
Under the terms of a Fund Administration Agreement, the Adviser
also provides various administrative and accounting services, including daily
valuation of each Fund's shares and preparation of financial statements, tax
returns, and regulatory reports. For these services, each Fund pays the Adviser
an annual fee in the amount of 0.07% of the Fund's first $250 million of
average daily net assets, 0.05% on the next $750 million and 0.04% on assets of
more than $1 billion.
CUSTODIAN
The Fifth Third Bank ("Fifth Third"), 38 Fountain Square Plaza,
Cincinnati, OH 45263, is the Custodian for the Funds and makes all receipts and
disbursements under a Custodian Agreement. Pursuant to the Custodian Agreement,
Fifth Third utilizes the services of the global custody network of State Street
Bank and Trust for foreign custody of the Funds' assets. The Custodian performs
no managerial or policymaking functions for the Fund.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Nationwide Investors Services, Inc. (NIS) is the Transfer Agent
and Dividend Disbursing Agent for the Funds. NIS is a wholly-owned subsidiary
of Nationwide Advisory Services, Inc. For these services, NIS is paid a fee by
each Fund at the annual rate of 0.01% of that Fund's average daily net assets.
Management believes the charges for the services performed are comparable to
fees charged by other companies performing similar services.
BROKERAGE ALLOCATIONS
The Adviser (or a Subadviser) is responsible for decisions to buy
and sell securities and other investments for the Funds, the selection of
brokers and dealers to effect the transactions and the negotiation of brokerage
commissions, if any. In transactions on stock and commodity exchanges in the
United States, these commissions are negotiated, whereas on foreign stock and
commodity exchanges these commissions are generally fixed and are generally
higher than brokerage commissions in the United States. In the case of
securities traded on the OTC markets, there is generally no commission, but the
price includes a spread between the dealer's purchase and sale price which
makes up the dealer's profit. In underwritten offerings, the price includes a
disclosed, fixed commission or discount. Most short term obligations are
normally traded on a "principal" rather than agency basis. This may be done
through a dealer (e.g. securities firm or bank) who buys or sells for its own
account rather than as an agent for another client, or directly with the
issuer. A dealer's profit, if any, is the difference, or spread, between the
dealer's purchase and sale price for the obligation.
The primary consideration in portfolio security transactions is
"best price-best execution," i.e., execution at the most favorable prices and in
the most effective manner possible. The Adviser or a Subadviser always attempts
to achieve best price-best execution, and it has complete freedom as to the
markets in and the broker-dealers through which it seeks this result. Subject to
the requirement of seeking best execution, securities may be bought from or sold
to broker-dealers who have furnished statistical, research, and other
information or services to the Adviser or a Subadviser. In placing orders with
such broker-dealers, the Adviser or a Subadviser will, where possible, take into
account the comparative usefulness of such information. Such information is
useful to the Adviser or a Subadviser even though its dollar value may be
indeterminable, and its receipt or availability generally does not reduce the
Adviser's or a Subadviser's normal research activities or expenses.
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Fund portfolio transactions may be effected with broker-dealers
who have assisted investors in the purchase of Contracts. However, neither such
assistance nor sale of other investment company shares is a qualifying or
disqualifying factor in a broker-dealer's selection, nor is the selection of
any broker-dealer based on the volume of shares sold.
There may be occasions when portfolio transactions for a Fund are
executed as part of concurrent authorizations to purchase or sell the same
security for trusts or other accounts served by affiliated companies of the
Adviser or a Subadviser. Although such concurrent authorizations potentially
could be either advantageous or disadvantageous to a Fund, they are effected
only when the Adviser or a Subadviser believes that to do so is in the interest
of the Fund. When such concurrent authorizations occur, the executions will be
allocated in an equitable manner.
The Trustees periodically review the Adviser's and each
Subadviser's performance of its responsibilities in connection with the
placement of portfolio transactions on behalf of the Funds and review the
commissions paid by the Funds over representative periods of time to determine
if they are reasonable in relation to the benefits to the Funds.
In purchasing and selling investments for the Funds, it is the
policy of each of the Subadvisers to obtain best execution at the most
favorable prices through responsible broker-dealers. In selecting
broker-dealers, each Subadviser will consider various relevant factors,
including, but not limited to, the size and type of the transaction; the nature
and character of the markets for the security or asset to be purchased or sold;
the execution efficiency, settlement capability, and financial condition of the
broker-dealer's firm; the broker-dealer's execution services, rendered on a
continuing basis; and the reasonableness of any commissions.
Each Subadviser may cause a Fund to pay a broker-dealer who
furnishes brokerage and/or research services a commission that is in excess of
the commission another broker-dealer would have received for executing the
transaction if it is determined that such commission is reasonable in relation
to the value of the brokerage and/or research services as defined in Section
28(e) of the Securities Exchange Act of 1934 which have been provided. Such
research services may include, among other things, analyses and reports
concerning issuers, industries, securities, economic factors and trends, and
portfolio strategy. Any such research and other information provided by brokers
to a Subadviser is considered to be in addition to and not in lieu of services
required to be performed by the Subadviser under its subadvisory agreement with
the Adviser. The fees to each of the Subadvisers pursuant to its subadvisory
agreement with the Adviser is not reduced by reason of its receiving any
brokerage and research services. The research services provided by
broker-dealers can be useful to a Subadviser in serving its other clients or
clients of the Subadviser's affiliates. Subject to the policy of the
Subadvisers to obtain best execution at the most favorable prices through
responsible broker-dealers, a Subadviser also may consider the broker-dealer's
sale of shares of any fund for which the Subadviser serves as investment
adviser, subadviser or administrator.
Under the 1940 Act, "affiliated persons" of a Fund are prohibited
from dealing with it as a principal in the purchase and sale of securities
unless an exemptive order allowing such transactions is obtained from the SEC.
However, each Fund may purchase securities from underwriting syndicates of
which a Subadviser or any of its affiliates as defined in the 1940 Act, is a
member under certain conditions, in accordance with Rule 10f-3 under the 1940
Act.
The Balanced Fund and the Multi Sector Bond Fund contemplate
that, consistent with the policy of obtaining best results, brokerage
transactions by be conducted through "affiliated broker/dealers," as defined in
the 1940 Act. Under the 1940 Act, commissions paid by a Fund to an "affiliated
broker/dealer" in connection with a purchase or sale of securities offered on a
securities exchange may not exceed the usual and customary broker's commission.
Accordingly, it is the Funds' policy that the commissions to be paid to
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an affiliated broker-dealer must, in its judgment, be (1) at least as favorable
as those that would be charged by other brokers having comparable execution
capability and (2) at least as favorable as commissions contemporaneously
charged by such broker/dealer on comparable transactions for its most favored
unaffiliated customers, except for accounts for which the affiliated
broker/dealer acts as a clearing broker for another brokerage firm and
customers of an affiliated broker/dealer considered by a majority of the
independent trustees not to be comparable to the Fund. The Fund does not deem
it practicable and in its best interests to solicit competitive bids for
commissions on each transaction. However, consideration regularly is given to
information concerning the prevailing level of commissions charged on
comparable transactions by other brokers during comparable periods of time.
PURCHASES, REDEMPTIONS AND PRICING OF SHARES
An insurance company purchases shares of the Funds at their net
asset value using purchase payments received on Contracts issued by Accounts.
These Accounts are funded by shares of the Funds. For certain of the Funds,
shares may also be sold to affiliated Funds of Funds.
All investments in the Trust are credited to the shareholder's
account in the form of full and fractional shares of the designated Fund
(rounded to the nearest 1/1000 of a share). The Trust does not issue share
certificates.
The net asset value per share of the Funds is determined once
daily, as of the close of regular trading on the New York Stock Exchange
(generally 4 P.M. Eastern Time) on each business day the New York Stock Exchange
is open for regular trading (and on such other days as the Board determines) and
on any other day during which there is a sufficient degree of trading in each
Fund's portfolio securities that the net asset value of the Fund is materially
affected by changes in the value of portfolio securities. The Trust will not
compute net asset value for the Funds on customary national business holidays,
including the following: Christmas Day, New Year's Day, Martin Luther King's
Birthday, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day and Thanksgiving Day. The net asset value per share is calculated by adding
the value of all securities and other assets of a Fund, deducting its
liabilities, and dividing by the number of shares outstanding.
The offering price for orders placed before the close of the New
York Stock Exchange, on each business day the Exchange is open for trading, will
be based upon calculation of the net asset value at the close of regular trading
on the Exchange. For orders placed after the close of the regular trading on the
Exchange, or on a day on which the Exchange is not open for trading, the
offering price is based upon net asset value at the close of the Exchange on the
next day thereafter on which the Exchange is open for trading. The net asset
value of a share of each Fund on which offering and redemption prices are based
is the net asset value of that Fund, divided by the number of shares
outstanding, the result being adjusted to the nearer cent. Securities of the
Fund listed on national exchanges are valued at the last sales price on the
principal exchange, or if the securities are traded only in the over-the-counter
market, they are valued at the quoted bid prices. Securities and other assets,
for which such market prices are unavailable, are valued at fair value in
accordance with procedures authorized by the Trustees.
An insurance company separate account redeems shares to make
benefit or surrender payments under the terms of its Policies. Redemptions are
processed on any day on which the Trust is open for business
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and are effected at net asset value next determined after the redemption order,
in proper form, is received by the Trust's transfer agent, NIS.
The Trust may suspend the right of redemption for such periods as
are permitted under the 1940 Act and under the following unusual circumstances:
(a) when the New York Stock Exchange is closed (other than weekends and
holidays) or trading is restricted; (b) when an emergency exists, making
disposal of portfolio securities or the valuation of net assets not reasonably
practicable; or (c) during any period when the Securities and Exchange
Commission has by order permitted a suspension of redemption for the protection
of shareholders.
ADDITIONAL INFORMATION
DESCRIPTION OF SHARES - The Declaration of Trust permits the
Trustees to issue an unlimited number of full and fractional shares of
beneficial interest of each Fund and to divide or combine such shares into a
greater or lesser number of shares without thereby exchanging the proportionate
beneficial interests in the Trust. Each share of a Fund represents an equal
proportionate interest in that Fund with each other share. The Trust reserves
the right to create and issue a number of series of shares. In that case, the
shares of each series would participate equally in the earnings, dividends, and
assets of the particular series, but shares of all series would vote together
in the election of Trustees. Upon liquidation of a Fund, shareholders are
entitled to share pro rata in the net assets of such Fund available for
distribution to shareholders.
VOTING RIGHTS - Shareholders are entitled to one vote for each
share held. Shareholders may vote in the election of Trustees and on other
matters submitted to meetings of shareholders. No amendment may be made to the
Declaration of Trust without the affirmative vote of a majority of the
outstanding shares of the Trust. The Trustees may, however, amend the
Declaration of Trust without the vote or consent of shareholders to:
designate series of the Trust; or
change the name of the Trust; or
supply any omission, cure, correct, or supplement any ambiguous,
defective, or inconsistent provision to conform the Declaration
of Trust to the requirements of applicable federal laws or
regulations if they deem it necessary.
Shares have no pre-emptive or conversion rights. Shares are fully
paid and nonassessable. In regard to termination, sale of assets, or change of
investment restrictions, the right to vote is limited to the holders of shares
of the particular Fund affected by the proposal. When a majority is required, it
means the lesser of 67% or more of the shares present at a meeting when the
holders of more than 50% of the outstanding shares are present or represented by
proxy, or more than 50% of the outstanding shares.
SHAREHOLDER INQUIRIES - All inquiries regarding the Trust should
be directed to the Trust at the telephone number or address shown on the cover
page of this Prospectus.
TAX STATUS
Each Fund is treated as a separate entity for purpose of the
regulated investment company provisions of the Internal Revenue Code (the
"Code"), and, therefore, the assets, income, and distributions of each Fund are
considered separately for purposes of determining whether or not the Fund
qualifies as a regulated investment company.
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Each Fund intends to qualify as a "regulated investment company" under
Subchapter M of the Code. If it qualifies as a regulated investment company, a
Fund will pay no federal income taxes on its taxable net investment income (that
is, taxable income other than net realized capital gains) and its net realized
capital gains that are distributed to shareholders. To qualify under Subchapter
M, a Fund must, among other things: (i) distribute to its shareholders at least
90% of its taxable net investment income (for this purpose consisting of taxable
net investment income and net realized short-term capital gains); (ii) derive at
least 90% of its gross income from dividends, interest, payments with respect to
loans of securities, gains from the sale or other disposition of securities, or
other income (including, but not limited to, gains from options, futures, and
forward contracts) derived with respect to its business of investing in
securities; (iii) derive less than 30% of its annual gross income from the sale
or other disposition of securities, options, futures or forward contracts held
for less than three months; and (iv) diversify its holdings so that, at the end
of each fiscal quarter of the Fund (a) at least 50% of the market value of the
Fund's assets is represented by cash, U.S. Government securities and other
securities, with those other securities limited, with respect to any one issuer,
to an amount no greater in value than 5% of the Fund's total assets and to not
more than 10% of the outstanding voting securities of the issuer, and (b) not
more than 25% of the market value of the Fund's assets is invested in the
securities of any one issuer (other than U.S. Government securities or
securities of other regulated investment companies) or of two or more issuers
that the Fund controls and that are determined to be in the same or similar
trades or businesses or related trades or businesses. In meeting these
requirements, a Fund may be restricted in the selling of securities held by the
Fund for less than three months and in the utilization of certain of the
investment techniques described above and in the respective Fund's Prospectus.
As a regulated investment company, a Fund will be subject to a 4% non-deductible
excise tax measured with respect to certain undistributed amounts of ordinary
income and capital gain required to be but not distributed under a prescribed
formula. The formula requires payment to shareholders during a calendar year of
distributions representing at least 98% of the Fund's taxable ordinary income
for the calendar year and at least 98% of the excess of its capital gains over
capital losses realized during the one-year period ending October 31 during such
year, together with any undistributed, untaxed amounts of ordinary income and
capital gains from the previous calendar year. The Funds expect to pay the
dividends and make the distributions necessary to avoid the application of this
excise tax.
In addition, each Fund intends to comply with the diversification
requirements of Section 817(h) of the Code related to the tax-deferred status
of insurance company separate accounts. To comply with regulations under
Section 817(h) of the code, each Fund will be required to diversify its
investments so that on the last day of each calendar quarter no more than 55%
of the value of its assets is represented by any one investment, no more than
70% is represented by any two investments, no more than 80% is represented by
any three investments and no more than 90% is represented by any four
investments. Generally, all securities of the same issuer are treated as a
single investment. For the purposes of Section 817(h), obligations of the
United States Treasury and each U.S. Government instrumentality are treated as
securities of separate issuers. The Treasury Department has indicated that it
may issue future pronouncements addressing the circumstances in which a Policy
owner's control of the investments of a separate account may cause the Policy
owner, rather than the participating insurance company, to be treated as the
owner of the assets held by the separate account. If the Policy owner is
considered the owner of the securities underlying the separate account, income
and gains produced by those securities would be included currently in the
Policy owner's gross income. It is not known what standards will be set forth
in such pronouncements or when, if at all, these pronouncements may be issued.
In the event that rules or regulations are adopted, there can be no assurance
that the Funds will be able to operate as currently described, or that the
Trust will not have to change the investment goal or investment policies of a
Fund. The Board of Trustees reserves the right to modify the investment
policies of a Fund as necessary to prevent any such prospective rules and
regulations from causing a Policy owner to be considered the owner of the
shares of the Fund underlying the separate account.
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OTHER TAX CONSEQUENCES
Foreign Transactions. Dividends and interest received by a Fund
may be subject to income, withholding, or other taxes imposed by foreign
countries and U.S. possessions that would reduce the yield on its securities.
Tax conventions between certain countries and the United States may reduce or
eliminate these foreign taxes, however, and many foreign countries do not
impose taxes on capital gains in respect of investments by foreign investors.
Policy holders will bear the cost of foreign tax withholding in the form of
increased expenses to the Fund but generally will not be able to claim a
foreign tax credit or deduction for foreign taxes paid by the Fund by reason of
the tax-deferred status of the policies.
A Fund's transactions, if any, in foreign currencies, forward
contracts, options and futures contracts (including options and forward
contracts on foreign currencies) will be subject to special provisions of the
Code that, among other things, may affect the character of gains and losses
recognized by the Fund (i.e., may affect whether gains or losses are ordinary
or capital), accelerate recognition of income to the Fund, defer Fund losses
and cause the Fund to be subject to hyperinflationary currency rules. These
rules could therefore affect the character, amount and timing of distributions
to shareholders. These provisions also (a) will require a Fund to
mark-to-market certain types of its positions (i.e., treat them as if they were
closed out) and (b) may cause the Fund to recognize income without receiving
cash with which to pay dividends or make distributions in amounts necessary to
satisfy the distribution requirements for avoiding income and excise taxes. A
Fund will monitor its transactions, will make the appropriate tax elections and
will make the appropriate entries in its books and records when it acquires any
foreign currency, forward contract, option, futures contract or hedged
investment so that (i) neither the Fund nor its shareholders will be treated as
receiving a materially greater amount of capital gains or distributions than
actually realized or received, (ii) the Fund will be able to use substantially
all of its losses for the fiscal years in which the losses actually occur, and
(iii) the Fund will continue to qualify as a regulated investment company.
Investment in Passive Foreign Investment Companies. If a Fund
purchases shares in certain foreign entities classified under the Code as
"passive foreign investment companies" ("PFICs"), such Fund may be subject to
federal income tax on a portion of an "excess distribution" or gain from the
disposition of the shares, even though the income may have to be distributed by
the Fund to its shareholders, the Contracts. In addition, gain on the
disposition of shares in a PFIC generally is treated as ordinary income even
though the shares are capital assets in the hands of the Fund. Certain interest
charges may be imposed on the Fund with respect to any taxes arising from
excess distributions or gains on the disposition of shares in a PFIC.
The Fund may be eligible to elect to include in its gross income
its share of earnings of a PFIC on a current basis. Generally, the election
would eliminate the interest charge and the ordinary income treatment on the
disposition of stock, but such an election may have the effect of accelerating
the recognition of income and gains by the Fund compared to a fund that did not
make the election. In addition, information required to make such an election
may not be available to the Fund.
On April 1, 1992 proposed regulations of the Internal Revenue
Service were published providing a mark-to-market election for shares in
certain PFICs held by regulated investment companies. If the Fund is able to
make the foregoing election in the first year in which it is permitted to do
so, it may be able to avoid the interest charge (but not the ordinary income
treatment) on disposition of the PFIC stock by each year marking-to-market the
stock (that is, by treating it as if it were sold for fair market value on the
last day of the year). Such an election could also result in acceleration of
income to the Fund.
Derivative Instruments. The use of derivatives strategies, such
as purchasing and selling (writing) options and futures and entering into
forward currency contracts, involves complex rules that will determine for
income tax purposes the character and timing of recognition of the gains and
losses a Fund realizes in connection therewith. Gains from the disposition of
foreign currencies (except certain gains therefrom that
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may be excluded by future regulations), and income from transactions in
options, futures, and forward currency contracts derived by a Fund with
respect to its business of investing in securities or foreign currencies, will
qualify as permissible income. However, income from the disposition of options
and futures (other than those on foreign currencies) will be subject to a 30%
limitation if they are held for less than three months. Income from the
disposition of foreign currencies, and options, futures, and forward contracts
on foreign currencies, that are not directly related to the Fund's principal
business of investing in securities (or options and futures with respect to
securities) also will be subject to a 30% limitation if they are held for less
than three months.
If the Fund satisfies certain requirements, any increase in value
of a position that is part of a "designated hedge" will be offset by any
decrease in value (whether realized or not) for the offsetting hedging position
during the period of the hedge for purposes of determining whether the Fund
satisfies the 30% limitation on the gross income that can be derived from the
sale or other disposition of securities or derivative instruments that were
held for less than three months. Thus, only the net gain (if any) from the
designated hedge will be included in gross income for purposes of that
limitation. The Fund intends that, when it engages in hedging strategies, the
hedging transactions will qualify for this treatment, but at the present time
it is not clear whether this treatment will be available for all of the Fund's
hedging transactions. To the extent this treatment is not available or is not
elected by the Fund, it may be forced to defer the closing out of certain
options, futures, or forward currency contracts beyond the time when it
otherwise would be advantageous to do so, in order for the Fund to continue to
qualify as a regulated investment company.
TAX CONSEQUENCES TO SHAREHOLDERS
Since shareholders of the Funds will be the Accounts, no
discussion is included herein as to the Federal income tax consequences at the
level of the holders of the Contracts. For information concerning the Federal
income tax consequences to such holders, see the Prospectuses for such
Contracts.
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APPENDIX A
BOND RATINGS
STANDARD & POOR'S DEBT RATINGS
A Standard & Poor's corporate or municipal debt rating is a
current assessment of the creditworthiness of an obligor with respect to a
specific obligation. This assessment may take into consideration obligors such
as guarantors, insurers, or lessees.
The debt rating is not a recommendation to purchase, sell, or
hold a security, inasmuch as it does not comment as to market price or
suitability for a particular investor. The ratings are based on current
information furnished by the issuer or obtained by Standard & Poor's from other
sources it considers reliable. Standard & Poor's does not perform an audit in
connection with any rating and may, on occasion, rely on unaudited financial
information. The ratings may be changed, suspended, or withdrawn as a result of
changes in, or unavailability of, such information, or for other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
1. Likelihood of default - capacity and willingness of the
obligor as to the timely payment of interest and repayment of
principal in accordance with the terms of the obligation.
2. Nature of and provisions of the obligation.
3. Protection afforded by, and relative position of, the
obligation in the event of bankruptcy, reorganization, or
other arrangement under the laws of bankruptcy and other laws
affecting creditors' rights.
INVESTMENT GRADE
AAA - Debt rated 'AAA' has the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely strong.
AA - Debt rated 'AA' has a very strong capacity to pay interest and
repay principal and differs from the highest rated issues only in small degree.
A - Debt rated 'A' has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
BBB - Debt rated 'BBB' is regarded as having an adequate capacity to
pay interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest and repay
principal for debt in this category than in higher rated categories.
SPECULATIVE GRADE
Debt rated 'BB', 'B', 'CCC', 'CC' and 'C' is regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. 'BB' indicates the least degree of speculation
and
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'C' the highest. 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 - Debt rated 'BB' has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could
lead to inadequate capacity to meet timely interest and principal payments. The
'BB' rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied 'BBB-' rating.
B - Debt rated 'B' has a greater vulnerability to default but
currently has the capacity to meet interest payments and principal repayments.
Adverse business, financial, or economic conditions will likely impair capacity
or willingness to pay interest and repay principal. The 'B' rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied 'BB' or 'BB-' rating.
CCC - Debt rated 'CCC' has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of principal. In
the event of adverse business, financial, or economic conditions, it is not
likely to have the capacity to pay interest and repay principal. The 'CCC'
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied 'B' or 'B-' rating.
CC - Debt rated 'CC' typically is applied to debt subordinated to
senior debt that is assigned an actual or implied 'CCC' rating.
C - Debt rated 'C' typically is applied to debt subordinated to senior
debt which is assigned an actual or implied 'CCC-' debt rating. The 'C' rating
may be used to cover a situation where a bankruptcy petition has been filed,
but debt service payments are continued.
CI - The rating 'CI' is reserved for income bonds on which no interest
is being paid.
D - Debt rated 'D' is in payment default. The 'D' rating category is
used when interest payments or principal payments are not made on the date due
even if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grade period. The 'D'
rating also will be used upon the filing of a bankruptcy petition if debt
service payments are jeopardized.
MOODY'S LONG-TERM DEBT RATINGS
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 edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risk 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 some time in the
future.
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Baa - Bonds which are rated Baa are considered as medium-grade
obligations (i.e., they are neither highly protected nor poorly secured).
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
Ba - Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered well-assured. Often the protection of
interest and principal payments may be very moderate, and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa - Bonds which are rated Caa are of poor standing. Such issues may
be in default or there may be present elements of danger with respect to
principal or interest.
Ca - Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
FITCH INVESTORS SERVICE, INC. BOND RATINGS
Fitch investment grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
represent Fitch's assessment of the issuer's ability to meet the obligations of
a specific debt issue or class of debt in a timely manner.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the
issuer's future financial strength and credit quality.
Fitch ratings do not reflect any credit enhancement that may be
provided by insurance policies or financial guaranties unless otherwise
indicated.
Bonds that have the same rating are of similar but not necessarily
identical credit quality since the rating categories do not fully reflect small
differences in the degrees of credit risk.
Fitch ratings are not recommendations to buy, sell, or hold any
security. ratings do not comment on the adequacy of market price, the
suitability of any security for a particular investor, or the tax-exempt nature
or taxability of payments made in respect of any security.
Fitch ratings are based on information obtained from issuers, other
obligors, underwriters, their experts, and other sources Fitch believes to be
reliable. Fitch does not audit or verify the truth or accuracy of such
information. Ratings may be changed, suspended, or withdrawn as a result of
changes in, or the unavailability of, information or for other reasons.
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AAA Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
AA Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated 'AAA'.
Because bonds rated in the 'AAA' and 'AA' categories are not
significantly vulnerable to foreseeable future developments,
short-term debt of the issuers is generally rated 'F-1+'.
A Bonds considered to be investment grade and of high credit quality.
The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes
in economic conditions and circumstances than bonds with higher
ratings.
BBB Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on
these bonds, and therefore, impair timely payment. The likelihood that
the ratings of these bonds will fall below investment grade is higher
than for bonds with higher ratings.
Fitch speculative grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
('BB' to 'C') represent Fitch's assessment of the likelihood of timely payment
of principal and interest in accordance with the terms of obligation for bond
issues not in default. For defaulted bonds, the rating ('DDD' to 'D') is an
assessment of the ultimate recovery value through reorganization or
liquidation.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the
issuer's future financial strength.
Bonds that have the same rating are of similar but not necessarily
identical credit quality since the rating categories cannot fully reflect the
differences in the degrees of credit risk.
BB Bonds are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse
economic changes. However, business and financial alternatives can be
identified which could assist the obligor in satisfying its debt
service requirements.
B Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of
continued timely payment of principal and interest reflects the
obligor's limited margin of safety and the need for reasonable
business and economic activity throughout the life of the issue.
CCC Bonds have certain identifiable characteristics which, if not
remedied, may lead to default. The ability to meet obligations
requires an advantageous business and economic environment.
CC Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C Bonds are in imminent default in payment of interest or principal.
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DDD, Bonds are in default on interest and/or principal payments. Such bonds
DD are extremely speculative, and should be valued on the basis of their
&D ultimate recovery value in liquidation or reorganization of the
obligor. 'DDD' represents the highest potential for recovery of these
bonds, and 'D' represents the lowest potential for recovery.
DUFF & PHELPS, INC. LONG-TERM DEBT RATINGS
These ratings represent a summary opinion of the issuer's long-term
fundamental quality. Rating determination is based on qualitative and
quantitative factors which may vary according to the basic economic and
financial characteristics of each industry and each issuer. Important
considerations are vulnerability to economic cycles as well as risks related to
such factors as competition, government action, regulation, technological
obsolescence, demand shifts, cost structure, and management depth and
expertise. The projected viability of the obligor at the trough of the cycle
is a critical determination.
Each rating also takes into account the legal form of the security,
(e.g., first mortgage bonds, subordinated debt, preferred stock, etc.). The
extent of rating dispersion among the various classes of securities is
determined by several factors including relative weightings of the different
security classes in the capital structure, the overall credit strength of the
issuer, and the nature of covenant protection. Review of indenture restrictions
is important to the analysis of a company's operating and financial
constraints.
The Credit Rating Committee formally reviews all ratings once per
quarter (more frequently, if necessary). Ratings of 'BBB-' and higher fall
within the definition of investment grade securities, as defined by bank and
insurance supervisory authorities.
<TABLE>
<CAPTION>
RATING
SCALE DEFINITION
- ----- ----------
<S> <C>
AAA Highest credit quality. The risk factors are negligible, being
only slightly more than for risk-free U.S. Treasury debt.
AA+ High credit quality. Protection factors are
AA strong. Risk is modest, but may vary slightly
AA- from time to time because of economic conditions.
A+ Protection factors are average but adequate.
A However, risk factors are more variable and
A- greater in periods of economic stress.
BBB+ Below average protection factors but still
BBB considered sufficient for prudent investment.
BBB- Considerable variability in risk during economic cycles.
BB+ Below investment grade but deemed likely to meet
BB obligations when due. Present or prospective
BB- financial protection factors fluctuate according to
industry conditions or company fortunes. Overall
quality may move up or down frequently within this category.
B+ Below investment grade and possessing risk that
B obligations will not be met when due. Financial
B- protection factors will fluctuate widely according to
economic cycles, industry conditions and/or company
</TABLE>
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<TABLE>
<S> <C>
fortunes. Potential exists for frequent Changes in the rating
within this category or into a higher or lower rating grade.
CCC Well below investment grade securities. Considerable
uncertainty exists as to timely payment of principal, interest
or preferred dividends. Protection factors are narrow and risk
can be substantial with unfavorable economic/industry
conditions, and/or with unfavorable company developments.
DD Defaulted debt obligations. Issuer failed to meet scheduled
principal and/or interest payments.
DP Preferred stock with dividend arrearages.
</TABLE>
SHORT-TERM RATINGS
STANDARD & POOR'S COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current assessment of
the likelihood of timely payment of debt considered short-term in the relevant
market.
Ratings are graded into several categories, ranging from 'A-1' for the
highest quality obligations to 'D' for the lowest. These categories are as
follows:
A-1 This highest category indicates that the degree of safety
regarding timely payment is strong. Those issues determined to possess
extremely strong safety characteristics are denoted with a plus sign (+)
designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated 'A-1'.
A-3 Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of changes
in circumstances than obligations carrying the higher designations.
B Issues rated 'B' are regarded as having only speculative capacity
for timely payment.
C This rating is assigned to short-term debt obligations with doubtful
capacity for payment.
D Debt rated 'D' is in payment default. the 'D' rating category is
used when interest payments or principal payments are not made on the date due,
even if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grade period.
STANDARD & POOR'S NOTE RATINGS
An S&P note rating reflects the liquidity factors and market-access
risks unique to notes. Notes maturing in three years or less will likely
receive a note rating. Notes maturing beyond three years will most likely
receive a long-term debt rating.
The following criteria will be used in making the assessment:
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1. Amortization schedule - the larger the final maturity relative to
other maturities, the more likely the issue is to be treated as a
note.
2. Source of payment - the more the issue depends on the market for
its refinancing, the more likely it is to be considered a note.
Note rating symbols and definitions are as follows:
SP-1 Strong capacity to pay principal and interest. Issues determined
to possess very strong characteristics are given a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the term of the
notes.
SP-3 Speculative capacity to pay principal and interest.
MOODY'S SHORT-TERM RATINGS
Moody's short-term debt ratings are opinions on the ability of issuers
to repay punctually senior debt obligations. These obligations have an original
maturity not exceeding one year, unless explicitly noted. Moody's employs the
following three designations, all judged to be investment grade, to indicate
the relative repayment capacity of rated issuers:
Issuers rated Prime-1 (or supporting institutions) have a superior
capacity for repayment of senior short-term debt obligations. Prime-1 repayment
capacity will normally be evidenced by the following characteristics: (I)
leading market positions in well established industries, (II) high rates of
return on funds employed, (III) conservative capitalization structures with
moderate reliance on debt and ample asset protection, (IV) broad margins in
earnings coverage of fixed financial charges and high internal cash generation,
and (V) well established access to a range of financial markets and assured
sources of alternative liquidity.
Issuers rated Prime-2 (or supporting institutions) have 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 alternate liquidity is maintained.
Issuers rated Prime-3 (or supporting institutions) have an acceptable
capacity for repayment of short-term promissory obligations. The effect of
industry characteristics and market composition may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and may require relatively high financial
leverage. Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the prime rating
categories.
MOODY'S NOTE RATINGS
MIG 1/VMIG 1 This designation denotes best quality. There is present
strong protection by established cash dflows, superior liquidity support or
demonstrated broad based access to the market for refinancing.
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MIG 2/VMIG 2 This designation denotes high quality. Margins of
protection are ample although not so large as in the preceding group.
MIG 3/VMIG 3 This designation denotes favorable quality. All security
elements are accounted for but there is lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow and market
access for refinancing is likely to be less well established.
MIG 4/VMIG 4 This designation denotes adequate quality. Protection
commonly regarded as required of an investment security is present and although
not distinctly or predominantly speculative, there is specific risk.
SG This designation denotes speculative quality. Debt instruments in
this category lack margins of protection.
FITCH'S SHORT-TERM RATINGS
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.
F-1+ Exceptionally strong credit quality. Issues
assigned this rating are regarded as having the strongest
degree of assurance for timely payment.
F-1 Very strong credit quality. Issues assigned this
rating reflect an assurance of timely payment only slightly
less in degree than issues rated 'f-1+'.
F-2 Good credit quality. Issues assigned this rating
have a satisfactory degree of assurance for timely payment
but the margin of safety is not as great as for issues
assigned 'F-1+' and 'F-1' ratings.
F-3 Fair credit quality. Issues assigned this rating
have characteristics suggesting that the degree of assurance
for timely payment is adequate, however, near-term adverse
changes could cause these securities to be rated below
investment grade.
F-S 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.
LOC The symbol LOC indicates that the rating is
based on a letter of credit issued by a commercial bank.
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DUFF & PHELPS SHORT-TERM DEBT RATINGS
Duff & Phelps' short-term ratings are consistent with the rating
criteria utilized by money market participants. The ratings apply to all
obligations with maturities 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.
<TABLE>
<CAPTION>
RATING SCALE DEFINITION
- ------------ ----------
<S> <C>
HIGH GRADE
D-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 U.S. Treasury short-term obligations.
D-1 Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection
factors. Risk factors are minor.
D-1- High certainty of timely payment. Liquidity factors are strong
and supported by good fundamental protection factors. Risk
factors are very small.
GOOD GRADE
D-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
D-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
D-4 Speculative investment characteristics. Liquidity is not
sufficient to insure against disruption in debt service.
Operating factors and market access may be subject to a high
degree of variation.
DEFAULT
D-5 Issuer failed to meet scheduled principal and/or interest
payments.
</TABLE>
THOMSON'S SHORT-TERM RATINGS
The Thomson Short-Term Ratings apply, unless otherwise noted, to
specific debt instruments of the rated entities with a maturity of one year or
less. Thomson short-term ratings are intended to assess the likelihood of an
untimely or incomplete payments of principal or interest.
TBW-1 the highest category, indicates a very high 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 the
obligation is more susceptible to adverse developments (both internal and
external) than those with higher ratings, the capacity to service principal and
interest in a timely fashion is considered adequate.
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TBW-4 the lowest rating category; this rating is regarded as
non-investment grade and therefore speculative.
IBCA SHORT-TERM RATINGS
IBCA short-term ratings assess the borrowing characteristics of banks
and corporations, and the capacity for timely repayment of debt obligations.
The short-term ratings relate to debt which has a maturity of less than one
year.
IBCA issues ratings and reports on the largest U.S. and international
bank holding companies, as well as major investment banks. IBCA's short-term
rating system utilizes a dual system--Individual Ratings and Legal Ratings. The
Individual Rating addresses 1) the current strength of consolidated banking
companies and their principal bank subsidiaries. A consolidated bank holding
company/bank with an "A" rating has a strong balance sheet, and a favorable
credit profile without significant problems. A "B" rating indicates sound
credit profile without significant problems. Performance is generally in line
with or better than that of its peers. The legal rating addresses the question
of whether an institution would receive support if it ran into difficulties.
Issues rated "A-1" are obligations supported by a very strong capacity for
timely repayment. Issues rated "A-2" have a very strong capacity for timely
repayment although such capacity may be susceptible to adverse changes in
business, economic or financial conditions.
A1+ Obligations supported by the highest capacity for
timely repayment and possess a particularly strong
credit feature.
A1 Obligations supported by the highest capacity for
timely repayment.
A2 Obligations supported by a good capacity for
timely repayment.
A3 Obligations supported by a satisfactory capacity
for timely repayment.
B Obligations for which there is an uncertainty as
to the capacity to ensure timely repayment.
C Obligations for which there is a high risk of
default or which are currently in default.
D Obligations which are currently in default.
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PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENT AND EXHIBITS
(a) Financial Statements:
Nationwide Separate Account Trust
--Total Return Fund
--Capital Appreciation Fund
--Government Bond Fund
--Money Market Fund
--Small Company Fund
(1) Financial statements and schedules included in the Prospectuses for the
Funds (except the Income Fund) (Part A):
Financial Highlights
(2) Financial statements and schedules included in Part B:
Those schedules required by Item 23 to be included in Part B have been
incorporated therein by reference to the Prospectuses (Part A).
(i) Audited Financials:
Independent Auditors' Report
Statements of Investments as of December 31, 1996.
Statements of Assets and Liabilities as of December 31, 1996.
Statements of Operations for the year ended December 31, 1996.
Statements of Changes in Net Assets for each of the years ended
December 31, 1996 and 1995.
Financial Highlights
Notes to Financial Statements
(b) Exhibits
(1) Amended Declaration of Trust - previously filed with
Post-Effective Amendment and hereby incorporated by
reference.
(2) Amended Bylaws (Code of Regulations)-previously filed
with Registration Statement and Post-Effective
Amendments, and herein incorporated by reference.
(3) Not applicable.
(4) Not applicable.
(5) (a) Investment Advisory Agreement for the Funds
(except the Small Company and Income Funds)
-previously filed with Registration
Statement and Post-Effective Amendments,
and herein incorporated by reference.
(b) Investment Advisory Agreement for the Small
Company Fund. - previously filed with Post-
Effective Amendment to the Registration
Statement, and herein incorporated by
reference.
(c) Subadvisory Agreements for the Small
Company Fund.
C-1
<PAGE> 238
(1) Subadvisory Agreement with The Dreyfus
Corporation. - previously filed with Post-Effective
Amendment to the Registration Statement, and herein
incorporated by reference.
(2) Subadvisory Agreement with Neuberger & Berman
L.P. - previously filed with Post-Effective
Amendment to the Registration Statement, and herein
incorporated by reference.
(3) Subadvisory Agreement with Strong Capital
Management, Inc. - previously filed with
Post-Effective Amendment to the Registration
Statement, and herein incorporated by reference.
(4) Subadvisory Agreement with Van Eck Associates
Corporation and Pictet International Management
Limited. - previously filed with Post-Effective
Amendment to the Registration Statement, and herein
incorporated by reference.
(5) Subadvisory Agreement with Warburg, Pincus
Counsellors, Inc. - previously filed with
Post-Effective Amendment to the Registration
Statement, and herein incorporated by reference.
(d) Investment Advisory Agreement for Income Fund -
previously filed with Post-Effective Amendment to the
Registration Statement, and herein incorporated by
reference.
(e) Subadvisory Agreements for the Income Fund
(1) Subadvisory Agreement with NCM Capital Management
Group, Inc. - previously filed with Post-Effective
Amendment to the Registration Statement, and herein
incorporated by reference.
(2) Subadvisory Agreement with Smith Graham & Co.
Asset Managers, L.P. - previously filed with
Post-Effective Amendment to the Registration
Statement, and herein incorporated by reference.
(f) Investment Advisory Agreement for Strategic Growth
Fund, Strategic Value Fund, Equity Income Fund, High
Income Bond Fund, Balanced Fund, Multi Sector Bond
Fund, Small Cap Value Fund, Global Equity Fund,
Select Advisors Mid Cap Fund (the "Subadvised
Funds") to be filed with Subsequent Post-Effective
Amendment
(g) Subadvisory Agreements for the Subadvised Funds to
be filed with Subsequent Post-Effective Amendment
(6) Not Applicable
(7) Not applicable.
(8) Custody Agreement-previously filed with Registration
Statement and Post-Effective Amendments, and herein
incorporated by reference.
(9) Fund Administration Agreement for the Subadvised Funds to
be filed with Subsequent Post-Effective Amendment.
(10) Opinion and consent of counsel.
(11) Not applicable
(12) Not applicable.
(13) Not applicable.
(14) Not applicable.
(15) Not applicable.
(16) Performance Quotation Computation Schedule-previously
filed with a Post-Effective Amendment, and herein
incorporated by reference.
(17) Not applicable.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT No
person is presently controlled by or under common control with
Registrant.
C-2
<PAGE> 239
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
<TABLE>
<CAPTION>
Number of Record Holders
Title of Class as of June 30 , 1997
-------------- --------------------
<S> <C> <C>
Total Return Fund 2
Government Bond Fund 2
Money Market Fund 2
Capital Appreciation Fund 2
Small Company Fund 2
Income Fund 0
Strategic Growth Fund 0
Strategic Value Fund 0
Equity Income Fund 0
High Income Bond Fund 0
Balanced Fund 0
Multi Sector Bond Fund 0
Small Cap Value Fund 0
Global Equity Fund 0
Select Advisors Mid Cap Equity Fund 0
</TABLE>
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ITEM 27. INDEMNIFICATION
Indemnification provisions for officers, directors and employees of
Registrant are set forth in Article X, Section 2 of the Declaration of
Trust. See Item 24(b)1 above.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
(a) Nationwide Advisory Services, Inc. (NAS), the investment adviser
of the Trust, also serves as investment adviser to the Nationwide
Investing Foundation, Nationwide Investing Foundation II,
Nationwide Separate Account Trust, Financial Horizons Investment
Trust, and Nationwide Asset Allocation Trust and serves as general
distributor to the Nationwide Multi-Flex Variable Account,
Nationwide Variable Account-II, Nationwide Variable Account-5,
Nationwide Variable Account-8, Nationwide Variable Account-9,
Nationwide DC Variable Account, Nationwide DCVA II, Nationwide VA
Separate Account-A, Nationwide VA Separate Account-C, NACo
Variable Account, Nationwide VLI Separate Account-2, Nationwide
VLI Separate Account-3, Nationwide VL Separate Account-A,
Nationwide VL Separate Account-B, Nationwide VA Separate Account-B
and Nationwide Variable Account, separate accounts of Nationwide
Life Insurance Company, or its subsidiary Nationwide Life and
Annuity Insurance Company, registered as unit investment trusts
under the Investment Company Act of 1940.
<TABLE>
<CAPTION>
<S> <C>
Joseph J. Gasper Director and President and Chief Operating Officer
Nationwide Life Insurance Company
Nationwide Life and Annuity Insurance Company
Nationwide Financial Services, Inc.
Director and Chairman of the Board
Nationwide Investment Services Corporation
Director and Vice Chairman
Nationwide Financial Institution Distributors Agency, Inc.
Nationwide Global Holdings, Inc.
NEA Valuebuilder Investor Services, Inc.
NEA Valuebuilder Investor Services of Arizona, Inc.
Public Employees Benefit Services Corporation
Director and President
Nationwide Advisory Services, Inc.
Nationwide Investor Services, Inc.
Director
Affiliate Agency, Inc.
Affiliate Agency of Ohio, Inc.
Financial Horizons Distributors Agency of Alabama, Inc.
Financial Horizons Distributors Agency of Ohio, Inc.
Financial Horizons Distributors Agency of Oklahoma, Inc.
Financial Horizons Securities Corporation
Landmark Financial Services of New York, Inc.
Nationwide Indemnity Company
Trustee and Chairman
Nationwide Asset Allocation Trust
Trustee and President
Nationwide Insurance Golf Charities, Inc.
</TABLE>
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<PAGE> 241
<TABLE>
<CAPTION>
<S> <C>
Gordon E. McCutchan Executive Vice President-Law and Corporate Services
and Secretary
Nationwide Mutual Insurance Company
Nationwide Mutual Fire Insurance Company
Nationwide Life Insurance Company
Nationwide General Insurance Company
Nationwide Property and Casualty Insurance Company
Nationwide Life and Annuity Insurance Company
Nationwide Financial Services, Inc.
Nationwide Properties, Ltd.
Nationwide Realty Investors, Ltd.
NEA Valuebuilder Investor Services, Inc.
NEA Valuebuilder Investor Services of Arizona, Inc.
Nationwide Financial Institution Distributors Agency, Inc.
Colonial County Mutual Insurance Company
Gates, McDonald & Company of Nevada
Gates, McDonald & Company of New York, Inc.
Farmland Mutual Insurance Company
Lone Star General Agency, Inc.
Nationwide Agribusiness Insurance Company
Nationwide Communications Inc.
Employers Insurance of Wausau A Mutual Company
National Premium and Benefit Administration Company
Nationwide Corporation
Nationwide Insurance Enterprise Foundation
Nationwide Investment Services Corporation
Scottsdale Indemnity Company
Scottsdale Insurance Company
Scottsdale Surplus Lines Insurance Company
Wausau Underwriters Insurance Company
Wausau Service Corporation
Wausau Business Insurance Company
Wausau General Insurance Company
Executive Vice President-Law and Corporate Services
American Marine Underwriters, Inc.
Employers Life Insurance Company of Wausau
Pension Associations of Wausau, Inc.
Public Employees Benefit Services Corporation
Wausau Preferred Health Insurance Company
Companies Agency, Inc.
Companies Agency of Alabama, Inc.
Companies Agency Insurance Services of California
Companies Agency of Idaho, Inc.
Companies Agency of Illinois, Inc.
Companies Agency of Kentucky, Inc.
Companies Agency of Massachusetts, Inc.
Companies Agency of New York, Inc.
Companies Agency of Pennsylvania, Inc.
Companies Agency of Phoenix, Inc.
Countrywide Services Corporation
Wausau International Underwriters
</TABLE>
C-5
<PAGE> 242
<TABLE>
<CAPTION>
<S> <C>
Executive Vice President-Law and Corporate Services
and Director
Nationwide Advisory Services, Inc.
Nationwide Investor Services, Inc.
Executive Vice President-Law and Corporate Services,
Secretary and Director
California Cash Management Company
Colonial Insurance Company of Wisconsin
Gates, McDonald & Company
GatesMcDonald Health Plus Inc.
Nationwide Global Holdings, Inc.
National Casualty Company
Nationwide Cash Management Company
Nationwide Indemnity Company
Nationwide Community Urban Redevelopment Corporation
Vice Chairman and Director
Neckura Holding Company
Neckura Insurance Company
Neckura Life Insurance Company
Secretary
The Beak and Wire Corporation
Affiliate Agency, Inc.
Affiliate Agency of Ohio, Inc.
Financial Horizons Distributors Agency of Alabama, Inc.
Financial Horizons Distributors Agency of Ohio, Inc.
Financial Horizons Distributors Agency of Oklahoma, Inc.
Financial Horizons Securities Corporation
Landmark Financial Services of New York, Inc.
NEA Valuebuilder Investor Services of Alabama, Inc.
NEA Valuebuilder Investor Services of Montana, Inc.
NEA Valuebuilder Investor Services of Nevada, Inc.
NEA Valuebuilder Investor Services of Ohio, Inc.
NEA Valuebuilder Investor Services of Oklahoma, Inc.
NEA Valuebuilder Investor Services of Wyoming, Inc.
Secretary and Director
Nationwide Agency, Inc.
Nationwide HMO, Inc.
Nationwide Management Systems, Inc.
Director
MRM Investments, Inc.
NWE, Inc.
Clerk
NEA Valuebuilder Services Insurance Agency, Inc.
Dimon R. McFerson Chairman and Chief Executive Officer-Nationwide Insurance
Enterprise and Director
Nationwide Mutual Insurance Company
</TABLE>
C-6
<PAGE> 243
<TABLE>
<CAPTION>
<S> <C>
Nationwide Mutual Fire Insurance Company
Nationwide General Insurance Company
Nationwide Property and Casualty Insurance Company
Nationwide Life Insurance Company
Nationwide Life and Annuity Insurance Company
Colonial Insurance Company of Wisconsin
Nationwide Communications Inc.
Farmland Mutual Insurance Company
Nationwide Agribusiness Insurance Company
National Casualty Company
Nationwide Financial Services, Inc.
Nationwide Global Holdings, Inc.
Nationwide Indemnity Company
Nationwide Investment Services Corporation
California Cash Management Company
Nationwide Cash Management Company
Employers Insurance of Wausau A Mutual Company
Scottsdale Indemnity Company
Scottsdale Insurance Company
Scottsdale Surplus Lines Insurance Company
Wausau Service Corporation
Wausau General Insurance Company
Wausau Business Insurance Company
Wausau Underwriters Insurance Company
Chairman and Chief Executive Officer - Nationwide Insurance
Enterprise, President and Director
Nationwide Corporation
Chairman of the Board, Chairman and Chief Executive
Officer-Nationwide Insurance Enterprise and Director
American Marine Underwriters, Inc.
Gates, McDonald and Company
GatesMcDonald Health Plus, Inc.
Nationwide Investor Services, Inc.
Public Employees Benefit Services Corporation
Companies Agency, Inc.
Companies Agency of Alabama, Inc.
Companies Agency Insurance Services of California
Companies Agency of Idaho, Inc.
Companies Agency of Illinois, Inc.
Companies Agency of Kentucky, Inc.
Companies Agency of Massachusetts, Inc.
Companies Agency of New York, Inc.
Companies Agency of Pennsylvania, Inc.
Companies Agency of Phoenix, Inc.
Countrywide Services Corporation
Employers Life Insurance Company of Wausau
Nationwide Advisory Services, Inc.
Nationwide Financial Institution Distributors Agency, Inc.
Wausau International Underwriters
Wausau Preferred Health Insurance Company
Chairman and Director
</TABLE>
C-7
<PAGE> 244
<TABLE>
<CAPTION>
<S> <C>
NEA Valuebuilder Investor Services of Arizona, Inc.
Trustee and Chairman
Financial Horizons Investment Trust
Nationwide Investing Foundation
Nationwide Investing Foundation II
Nationwide Separate Account Trust
Chairman of the Board
Nationwide Insurance Golf Charities, Inc.
Chairman of the Board and Director
Lone Star General Agency, Inc.
Nationwide Community Urban Redevelopment Corporation
NEA Valuebuilder Investor Services, Inc.
Colonial County Mutual Insurance Company
Director
Gates, McDonald & Company of Nevada
Gates, McDonald & Company of New York
Chairman of the Board, Chairman and Chief Executive
Officer-Nationwide Insurance Enterprise and Trustee
Nationwide Insurance Enterprise Foundation
Member-Board of Managers, Chairman of the Board,
Chairman and Chief Executive Officer-Nationwide Insurance
Enterprise
Nationwide Properties, Ltd.
Nationwide Realty Investors, Ltd.
Robert A. Oakley Executive Vice President-Chief Financial Officer
Nationwide Mutual Insurance Company
Nationwide Mutual Fire Insurance Company
Nationwide General Insurance Company
Nationwide Property and Casualty Insurance Company
Nationwide Life Insurance Company
Nationwide Life and Annuity Insurance Company
American Marine Underwriters, Inc.
Companies Agency, Inc.
Companies Agency of Alabama, Inc.
Companies Agency of Idaho, Inc.
Companies Agency of Illinois, Inc.
Companies Agency of Kentucky, Inc.
Companies Agency of Massachusetts, Inc.
Companies Agency of New York, Inc.
Companies Agency of Pennsylvania, Inc.
Companies Agency of Phoenix, Inc.
Countrywide Services Corporation
Employers Life Insurance Company of Wausau
National Casualty Company
National Premium and Benefit Administration Company
The Beak and Wire Corporation
</TABLE>
C-8
<PAGE> 245
<TABLE>
<CAPTION>
<S> <C>
Employers Insurance of Wausau A Mutual Company
Farmland Mutual Insurance Company
Nationwide Financial Institution Distributors Agency, Inc.
Lone Star General Agency, Inc.
Nationwide Agribusiness Insurance Company
Nationwide Communications Inc.
Nationwide Corporation
Nationwide Financial Services, Inc.
Nationwide Investment Services Corporation
Nationwide Investor Services, Inc.
Nationwide Insurance Enterprise Foundation
Nationwide Properties, Ltd.
Nationwide Realty Investors, Ltd.
NEA Valuebuilder Investor Services, Inc.
NEA Valuebuilder Investor Services of Arizona, Inc.
Colonial County Mutual Insurance Company
Pension Associates of Wausau, Inc.
Public Employees Benefit Services Corporation
Scottsdale Indemnity Company
Scottsdale Insurance Company
Scottsdale Surplus Lines Insurance Company
Wausau Business Insurance Company
Wausau General Insurance Company
Wausau Preferred Health Insurance Company
Wausau Service Corporation
Wausau Underwriters Insurance Company
Director, Chairman of the Board
Neckura Holding Company
Neckura Insurance Company
Neckura Life Insurance Company
Executive Vice President-Chief Financial Officer and
Director
California Cash Management Company
Colonial Insurance Company of Wisconsin
Nationwide Cash Management Company
Nationwide Community Urban Redevelopment Corporation
Nationwide Global Holdings, Inc.
MRM Investments, Inc.
Nationwide Advisory Services, Inc.
Nationwide Indemnity Company
Executive Vice President
Companies Agency Insurance Services of California
Wausau International Underwriters
Director and Vice Chairman
Leben Direkt Insurance Company
Neckura General Insurance Company
Auto Direkt Insurance Company
Director
</TABLE>
C-9
<PAGE> 246
<TABLE>
<CAPTION>
<S> <C>
NWE, Inc..
Gates, McDonald & Company
GatesMcDonald Health Plus Inc.
Robert J. Woodward, Jr. Executive Vice President-Chief Investment Officer
Nationwide Mutual Insurance Company
Nationwide Mutual Fire Insurance Company
Nationwide General Insurance Company
Nationwide Property and Casualty Insurance Company
Nationwide Life Insurance Company
Nationwide Life and Annuity Insurance Company
Colonial County Mutual Insurance Company
Colonial Insurance Company of Wisconsin
Employers Insurance of Wausau A Mutual Company
Employers Life Insurance Company of Wausau
Farmland Mutual Insurance Company
Gates, McDonald & Company
GatesMcDonald Health Plus, Inc.
Lone Star General Agency, Inc.
National Casualty Company
Nationwide Financial Services, Inc.
Nationwide Agribusiness Insurance Company
Nationwide Corporation
Nationwide Insurance Enterprise Foundation
Nationwide Investment Services Corporation
Pension Associates of Wausau, Inc.
Public Employees Benefit Services Corporation
Scottsdale Indemnity Company
Scottsdale Insurance Company
Scottsdale Surplus Lines Insurance Company
Wausau Business Insurance Company
Wausau General Insurance Company
Wausau Preferred Health Insurance Company
Wausau Service Corporation
Wausau Underwriters Insurance Company
Vice Chairman and Director
Nationwide Communications Inc.
Director
Nationwide Global Holdings, Inc.
Member-Board of Managers and Vice Chairman
Nationwide Properties, Ltd.
Nationwide Realty Investors, Ltd.
Director and President
California Cash Management Company
MRM Investments, Inc.
Nationwide Cash Management Company
Nationwide Community Urban Redevelopment Corporation
NWE, Inc.
</TABLE>
C-10
<PAGE> 247
<TABLE>
<CAPTION>
<S> <C>
Director, Executive Vice President-Chief Investment Officer
Nationwide Indemnity Company
Nationwide Advisory Services, Inc.
Vice Chairman and Director
Nationwide Communications Inc.
Director
Nationwide Global Holdings, Inc.
Trustee and Vice Chairman
Nationwide Asset Allocation Trust
James F. Laird, Jr. Vice President and General Manager and Acting Treasurer
Nationwide Advisory Services, Inc.
Vice President and General Manager and Acting Treasurer
and Director
Nationwide Investors Services, Inc.
Treasurer
Nationwide Investing Foundation
Nationwide Separate Account Trust
Nationwide Investing Foundation II
Financial Horizons Investment Trust.
Nationwide Asset Allocation Trust
W. Sidney Druen Senior Vice President and General Counsel and
Assistant Secretary
Nationwide Mutual Insurance Company
Nationwide Mutual Fire Insurance Company
Nationwide General Insurance Company
Nationwide Property and Casualty Insurance Company
Nationwide Life Insurance Company
Nationwide Life and Annuity Insurance Company
Nationwide Advisory Services, Inc.
Nationwide Investors Services, Inc.
Employers Insurance of Wausau A Mutual Company
Employers Life Insurance Company of Wausau
Wausau Business Insurance Company
Wausau General Insurance Company
Wausau Underwriters Insurance Company
Wausau Preferred Health Insurance Company
Wausau Service Corporation
Senior Vice President and General Counsel
Affiliate Agency, Inc.
Affiliate Agency of Ohio, Inc.
American Marine Underwriters, Inc.
The Beak and Wire Corporation
California Cash Management Company
Colonial County Mutual Insurance Company
Colonial Insurance Company of California
</TABLE>
C-11
<PAGE> 248
<TABLE>
<CAPTION>
<S> <C>
Farmland Mutual Insurance Company
Nationwide Agribusiness Insurance Company
Nationwide Financial Services, Inc.
Nationwide Financial Institution Distributors Agency, Inc.
Financial Horizons Distributors Agency of Alabama, Inc.
Financial Horizons Distributors Agency of Ohio, Inc.
Financial Horizons Distributors Agency of Oklahoma, Inc.
Financial Horizons Securities Corporation
Gates, McDonald & Company
Gates, McDonald & Company of Nevada
Gates, McDonald & Company of New York, Inc.
GatesMcDonald Health Plus, Inc.
Landmark Financial Services of New York, Inc.
National Casualty Company
Nationwide Cash Management Company
Nationwide Communications Inc.
Nationwide Corporation
Nationwide Global Holdings, Inc.
Nationwide Investment Services Corporation
Companies Agency, Inc.
Companies Agency Insurance Services of California
Companies Agency of Alabama, Inc.
Companies Agency of Idaho, Inc.
Companies Agency of Illinois, Inc.
Companies Agency of Kentucky, Inc.
Companies Agency of Massachusetts, Inc.
Companies Agency of New York, Inc.
Companies Agency of Pennsylvania, Inc.
Companies Agency of Phoenix, Inc.
Countrywide Services Corporation
Lone Star General Agency Inc.
Nationwide Insurance Enterprise Foundation
Nationwide Indemnity Company
Nationwide Properties, Ltd.
Nationwide Realty Investors, Ltd.
NEA Valuebuilder Investor Services, Inc.
NEA Valuebuilder Investor Services of Alabama, Inc.
NEA Valuebuilder Investor Services of Arizona, Inc.
NEA Valuebuilder Investor Services of Montana, Inc.
NEA Valuebuilder Investor Services of Nevada, Inc.
NEA Valuebuilder Investor Services of Ohio, Inc.
NEA Valuebuilder Investor Services of Oklahoma, Inc.
NEA Valuebuilder Investor Services of Wyoming, Inc.
NEA Valuebuilder Services Insurance Agency, Inc.
MRM Investments, Inc.
NWE, Inc.
PEBSCO of Massachusetts Insurance Agency, Inc.
Pension Associates of Wausau, Inc.
Public Employees Benefit Services Corporation
Public Employees Benefit Services Corporation of Alabama
Public Employees Benefit Services Corporation of Arkansas
Public Employees Benefit Services Corporation of Montana
Public Employees Benefit Services Corporation of New Mexico
Scottsdale Indemnity Company
</TABLE>
C-12
<PAGE> 249
<TABLE>
<CAPTION>
<S> <C>
Scottsdale Insurance Company
Scottsdale Surplus Lines insurance Company
Wausau International Underwriters
Senior Vice President and General Counsel and Director
Nationwide Community Urban Redevelopment Corporation
General Counsel
Nationwide Insurance Golf Charities, Inc.
Rae Mercer Pollina Secretary
Nationwide Advisory Services, Inc.
Nationwide Investors Services, Inc.
Nationwide Investing Foundation
Nationwide Separate Account Trust
Nationwide Investing Foundation II
Financial Horizons Investment Trust
Nationwide Asset Allocation Trust
Peter J. Neckermann Vice President - Economic and Investment Services
Nationwide Mutual Insurance Company
Nationwide Mutual Fire Insurance Company
Nationwide General Insurance Company
Nationwide Property and Casualty Insurance Company
Nationwide Life Insurance Company
Nationwide Life and Annuity Insurance Company
Nationwide Indemnity Company
Vice President
Nationwide Advisory Services, Inc.
Director
Leben Direkt Insurance Company
Nationwide Investors Services, Inc.
Neckura Holding Company
Assistant Treasurer
Financial Horizons Investment Trust
National Casualty Company
National Premium and Benefit Administration Company
Nationwide Investing Foundation
Nationwide Investing Foundation II
Nationwide Separate Account Trust
Nationwide Asset Allocation Trust
Edwin P. McCausland, Jr. Vice President-Fixed Income Securities
Nationwide Mutual Insurance Company
Nationwide Mutual Fire Insurance Company
Nationwide General Insurance Company
Nationwide Property and Casualty Insurance
Company
Nationwide Life Insurance Company
</TABLE>
C-13
<PAGE> 250
<TABLE>
<CAPTION>
<S> <C>
Nationwide Life and Annuity Insurance Company
California Cash Management
Company Colonial Insurance
Company of Wisconsin
Employers Insurance of
Wausau A Mutual Company
Employers Life Insurance
Company of Wausau Farmland
Mutual Insurance Company
Financial Horizons
Investment Trust Gates,
McDonald & Company
GatesMcDonald Health Plus,
Inc. National Casualty
Company Nationwide
Agribusiness Insurance
Company Nationwide Cash
Management Company
Nationwide Indemnity
Company Nationwide
Insurance Enterprise
Foundation Scottsdale
Indemnity Company
Scottsdale Insurance
Company Scottsdale Surplus
Lines Insurance Company
Wausau Business Insurance
Company Wausau General
Insurance Company Wausau
Preferred Health Insurance
Company Wausau Service
Corporation Wausau
Underwriters Insurance Company
Vice President-Fixed Income
Nationwide Advisory Services, Inc.
Assistant Treasurer
Nationwide Asset Allocation Trust
Nationwide Investing Foundation
Nationwide Investing Foundation II
Nationwide Separate Account Trust
Joseph P. Rath Vice President-Product and Market Compliance
Nationwide Mutual Insurance Company
Nationwide Mutual Fire Insurance Company
Nationwide Property and Casualty Insurance
Company
Nationwide Life Insurance Company
Nationwide Life and Annuity Insurance Company
Vice President-Compliance
Nationwide Advisory Services, Inc.
Nationwide Investment Services Corporation
Vice President-Chief Compliance Officer
Nationwide Financial Services, Inc.
William G. Goslee Vice President
Nationwide Advisory Services, Inc.
Assistant Treasurer
Nationwide Asset Allocation Trust
</TABLE>
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<PAGE> 251
Except as otherwise noted, the principal business address of any company with
which any person specified above is connected in the capacity of director,
officer, employee, partner or trustee is One Nationwide Plaza, Columbus, Ohio
43215, except for the following companies:
Farmland Mutual Insurance Company
Nationwide Agribusiness Insurance Company
1963 Bell Avenue
Des Moines, Iowa 50315-1000
Colonial Insurance Company of Wisconsin
3455 Mill Run Drive, 5th Floor
Hilliard, Ohio 43026
Employers Insurance of Wausau A Mutual Company
2000 Westwood Drive
Wausau, Wisconsin 54401-7881
Scottsdale Insurance Company
8877 North Gainey Center Drive
P.O. Box 4110
Scottsdale, Arizona 85261-4110
National Casualty Company
8877 North Gainey Center Drive
P.O. Box 4110
Scottsdale, Arizona 85261-4110
Lone Star General Agency, Inc.
P.O. Box 14700
Austin, Texas 78761
Auto Direkt Insurance Company
Columbus Insurance Brokerage and Service, GMBH
Leben Direkt Insurance Company
Neckura General Insurance Company
Neckura Holding Company
Neckura Insurance Company
Neckura Life Insurance Company
John E. Fisher Str. 1
61440 Oberursel/Ts.
Germany
Public Employees Benefit Services Corporation
Two Nationwide Plaza
Columbus, Ohio 43215
Nationwide Advisory Services, Inc.
Nationwide Investors Services, Inc.
Three Nationwide Plaza, Columbus, Ohio 43215
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<PAGE> 252
(b) Information for the Subadvisers of the Small Company Fund
(1) The Dreyfus Corporation
The Dreyfus Corporation ("Dreyfus") acts as subadvisor to the Small
Company Fund and the Small Cap Value Fund and as adviser or
subadviser to a number of other registered investment companies. The
list required by this Item 28 of officers and directors of Dreyfus,
together with information as to their other business, profession,
vocation or employment of a substantial nature during the past two
years, is incorporated by reference to Schedule A and D of Form ADV
filed by Dreyfus (SEC File No. 801-8147).
(2) Neuberger & Berman L.P.
Neuberger & Berman, L.P. ("Neuberger & Berman") acts as subadviser to
the Small Company Fund of the Registrant and investment adviser or
subadviser to a number of other registered investment companies. The
list required by this Item 28 of officers and directors of Neuberger
& Berman, together with information as to their other business,
profession, vocation or employment of a substantial nature during the
past two years, is incorporated by reference to Schedules A and D of
Form ADV filed by Neuberger & Berman (SEC File No. 801-3908).
(3) Strong Capital Management, Inc.
Strong Capital Management, Inc. ("Strong"), acts as subadviser to the
Small Company Fund, the Strategic Growth Fund and the Strategic Value
Fund. Strong began conducting business in 1974, provides continuous
investment supervision for individuals and institutional accounts,
such as pension funds and profit-sharing plans. Strong also acts as
investment adviser for each of the mutual funds within the Strong
Family of Funds, as well as acting as dividend-disbursing agent and
transfer agent for the Strong Family of Funds.
<TABLE>
<CAPTION>
Officers and Directors of Strong Other Business
<S> <C>
Richard S. Strong Chairman and Director:
Chairman, Director and Strong Holdings, Inc.
Chief Investment Officer Strong Funds Distributors, Inc.
Heritage Reserve Development Corporation
Strong Family of Funds
John Dragisic President and Director:
President and Director Strong Holdings, Inc.
Strong Family of Funds
President and Chief Executive Officer:
(From 1987 to July 1994)
Grunau Company
Milwaukee, Wisconsin
Lawrence A. Totsky Vice President of Strong (from December
Senior Vice President 1992 to September 1994)
Vice President:
Strong Family of Funds
President:
</TABLE>
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<PAGE> 253
<TABLE>
<CAPTION>
<S> <C>
Strong Funds Distributors, Inc.
Vice President:
Strong Holdings, Inc.
Thomas P. Lemke Resident Counsel for Funds Management at J.P.
Senior Vice President, Secretary Morgan & Co., Inc. (from April 1992 to September
and General Counsel 1994
Vice President:
Strong Family of Funds
Thomas M. Zoeller Treasurer:
Treasurer Strong Funds Distributors, Inc.
</TABLE>
(4) Van Eck Associates
Van Eck Associates Corporation ("VEAC") acts as subadviser to the Small
Company Fund and as investment adviser to a number of investment companies
including Van Eck Worldwide Insurance Trust. Listed below are the officers
and directors of VEAC and their positions with some of the VEAC
affiliates.
<TABLE>
<CAPTION>
Name Position with Van Eck
Associates Corporation
<S> <C>
John C. Van Eck Chairman of the Board
Philip DeFeo President, Chief Executive
Officer and Director
Fred M. Van Eck Director
Sigrid S. Van Eck Director, Vice President &
Assistant Treasurer
Derek S. Van Eck Director, Executive Vice President
Director, - Global Investments
Jan F. Van Eck Director
Henry J. Bingham Executive Managing Director
Lucille Palermo Associate Director, Mining
Research
William A. Trebilcock Director, Mining Research
Madis Senner Director, Global Fixed Income
Kevin Reid Director, Real Estate Research
Charles Cameron Director, Trading
Michael G. Dootley Sr. Vice President, Treasurer,
Controller and Chief Financial
Officer
</TABLE>
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<PAGE> 254
<TABLE>
<CAPTION>
<S> <C>
Bruce J. Smith Senior Managing Director,
Portfolio Accounting
Thaddeus Leszczynski Vice President, General
Counsel and Secretary
</TABLE>
(5) Pictet International Management Limited
The information concerning Pictet International Management Limited
("PIML") and its officers and directors is incorporated by reference to
the information contained under "Management of the Fund" in the Small
Company Fund's prospectus and to Schedules A and D of Form ADV filed by
PIML (SEC File No. 801-15143).
(6) Warburg, Pincus Counsellors, Inc.
Warburg, Pincus Counsellors, Inc. ("Warburg") acts as subadviser to the
Small Company Fund and investment adviser to a number of other registered
investment companies. Warburg renders investment advice to a wide variety
of individual and institutional investors. The list required by this Item
28 of officers and directors of Warburg, together with information as to
their other business, profession, vocation or employment of a substantial
nature during the past two years, is incorporated by reference to
Schedules A and D of Form ADV filed by Warburg (SEC File No. 801-07321).
(c) Information for the Subadvisers of the Income Fund
(1) NCM Capital Management Group, Inc.
NCM Capital Management Group, Inc. ("NCM") is a registered
investment adviser which provides investment advisory services
to individuals and institutional clients, including acting as
subadviser to the Income Fund. NCM also serves as subadviser
to other investment companies registered under the Investment
Company of 1940; these investment companies are unaffiliated
with NCM except as a result of these subadvisory
relationships.
MACEO K. SLOAN*
Chairman, President & CEO and Director
CONXUS Communications (formerly PCS Development Corporation)-
Wireless Communications
Chairman
Sloan Communications-Wireless Communications
Chairman & CEO
TIAA/CREF-Insurance
Director
Mechanics & Farmers Bank-Banking
Director
New Africa Advisers-Investment Management
Chairman
Sloan Financial Group-Holding Company
Chairman, President & CEO
C-18
<PAGE> 255
Calvert New Africa Fund-Investment Management
Director/Portfolio Manager
JUSTIN F. BECKETT*
Executive Vice President and Director
CONXUS Communications (formerly PCS Development Corporation)-
Wireless Communications
Director
New Africa Advisers-Investment Management
President & CEO/Director
Sloan Communications-Wireless Communications
President
Sloan Financial Group-Holding Company
Executive Vice President/Director
Calvert New Africa Fund-Investment Management
Portfolio Manager
CLIFFORD D. MPARE*
Director of Investments
New Africa Advisers-Investment Management
Director/Chief Investment Officer
Calvert New Africa Fund-Investment Management
Portfolio Manager
EDITH H. NOEL*
Corporate Secretary/Treasurer
Sloan Financial Group-Holding Company
Corporate Secretary/Treasurer
PETER JON ANDERSON**
Director
American Express Financial Corporation
Director and Senior Vice President
IDS Advisory Group Inc.
Director, Chairman and CIO
American Express Financial Advisers
Senior Vice President
IDS International, Inc.
Director, Chairman and Executive Vice President
American Express Securities Service
Vice President
C-19
<PAGE> 256
MORRIS GOODWIN, JR.**
Director
American Express Financial Advisors Inc.
Vice President and Corporate Treasurer
American Express Financial Corporation
Vice President and Corporate Treasurer
IDS Advisory Group Inc.
Vice President and Treasurer
IDS International, Inc.
Vice President and Treasurer
American Express Securities Service
Vice President and Treasurer
*The principal business address for Messers Sloan, Beckett and Mpare
and Ms. Noel is 103 West Main Street, Durham, NC., 27701
**The principal business address for Messers. Anderson and Goodwin is
IDS Tower 10, Minneapolis, MN., 55440
(2) Smith Graham & Co. Asset Managers, L.P.
Smith Graham & Co. Asset Managers, L.P. ("Smith Graham") acts as
subadviser to the Income Fund and is a registered investment adviser
which offers investment advisory services to corporations, pension and
profit sharing plans, as well as foundations, Taft Hartley plans,
banks, thrift institutions, trust, estates and/or charitable
organizations and individuals. Smith Graham also serves as subadviser
to the American Odyssey Short-Term Bond Fund, an investment company
registered under the Investment Company of 1940; this investment
company is unaffiliated with Smith Graham except as a result of this
subadvisory relationship.
The following is a list of the individuals who are the principal
officers and management committee for Smith Graham and their principal
occupations for the last two years:
<TABLE>
<CAPTION>
<S> <C>
Gerald B. Smith Chairman and Chief Executive Officer of Smith Graham
Ladell Graham President and Chief Investment Officer of Smith Graham
Jamie G. House Executive Vice President and Chief Financial Officer of Smith Graham
Gilbert A. Carcia Executive Vice President and Director of Marketing of Smith Graham
from January 1996 to present
President of Cisneros Asset Management Company until December
1995
Edward B. VanWijk Executive Vice President-Director of Global & International
Investments, July 1996 to Present
Robeco Administrative MijBu Rotterdam, The Netherlands
October 1989 to June 1996
</TABLE>
(d) Information for the Subadviser of the Strategic Growth Fund
C-20
<PAGE> 257
(1) Strong Capital Management, Inc. - See Item 28 (b) (3)
(e) Information for the Subadviser of the Strategic Value Fund
(1) Strong Capital Management, Inc. - See Item 28 (b) (3)
(2) Schafer Capital Management , Inc.
Schafer Capital Management, Inc., registrant's investment
adviser, also acts as investment adviser to certain other
clients.
David K. Schafer, a director and officer of Schafer Capital
Management, Inc., is also Chairman of the Board of Schafer
Cullen Capital Management, Inc., 645 Fifth Ave, New York, New
York 10022.
James D. Cullen, an officer of Schafer Capital Management Inc.,
is also President of Schafer Cullen Capital Management, Inc.
Schafer Cullen Capital Management , Inc. is a registered
investment adviser under the Investment Advisers Act of 1940,
as amended.
(f) Information for the Subadviser of the Equity Income Fund and High
Income Bond Fund
(1) Federated Investment Counseling
Federated Investment Counseling, the Subadviser to Nationwide Equity
Income Fund, is a registered investment adviser under the Investment
Advisers Act of 1940. It is a subsidiary to Federated Investors. The
Subadvisor serves as investment adviser to a number of investment
companies and private accounts. Total assets under management or
administered by the Subadviser and other subsidiaries of Federated
Investors is approximately $110 billion. The Trustees of the Subadviser
their position with the Subadviser and its affiliates is as follows:
<TABLE>
<CAPTION>
John F. Donahue J. Christopher Donahue John W. McGonigle Mark D. Olson
- --------------- ---------------------- ----------------- -------------
<S> <C> <C> <C>
Board Member: Board Member: Board Member: Board Member:
Federated Advisers Federated Advisers Federated Advisers Federated Advisers
Federated Global Research Federated Global Research Federated Global Research Federated Management
Corp. Corp. Corp.
Federated Management Federated Management Federated Management Federated Research
Federated Research Federated Research Federated Research Federated Administrative
Services
Federated Investment Federated Investment Federated Research Corp. Federated Investment
Counseling Counseling Counseling
Federated Research Corp. Federated Research Corp. Federated Financial Advanced Information
Services, Inc. Systems
Federated Investors, Inc. Federated Investors, Inc. Federated International Federated Investors
Management, Ltd.
Federated Investors Federated Investors Federated Shareholder Federated Shareholder
Building Corp. Building Corp. Services Services
Federated Investors Federated Investors FFSI Insurance Agency, Federated Shareholder
Management Company Management Company Inc. Services Company
Federated Investors Federated Investors Federated Investment Retirement Plan Services
Counseling Company of America
Federated Investors Federated Investors Federated Investors
Insurance, Inc. Insurance, Inc.
Federated Shareholder Federated Investors, Inc.
Services Company
Chairman: Federated Administrative Federated Investors
Services Building Corp.
Federated Advisers Federated Administrative
</TABLE>
C-21
<PAGE> 258
<TABLE>
<CAPTION>
<S> <C> <C>
Services, Inc. Federated Investors
Federated Global Research Federated Financial Federated Investors
Corp. Services, Inc. Management Company
Federated Management Federated International FII Holdings, Inc.
Management, Ltd.
Federated Research Federated Shareholder
Services President:
Federated Investors FFSI Insurance Agency, Federated Financial
Inc. Services, Inc.
Federated Research Corp. Retirement Plan Services Federated Investors
Company of America Insurance, Inc.
Passport Research Ltd. Edgewood Services, Inc. Federated Investors
Management Company
FS Holdings, Inc. FII Holdings, Inc.
Advanced Information FFSI Insurance Agency,
Systems Inc.
Federated Services
Company President & CEO:
Federated Bank and Trust Federated Investors
Building Corp.
President, CEO & COO:
Federated Advisers President & COO:
Federated Global Research Federated Investors, Inc.
Corp.
Federated Management Chairman, President &
CEO:
Federated Research Federated Shareholder
Services
Federated Research Corp.
Exec. Vice Pres. & Sec.:
President & COO: Federated Investors
Federated Investors
Chairman & CEO:
Federated Investors, Inc.
President:
Passport Research Ltd.
</TABLE>
The business address of the Trustees, with the exception of Mark D.
Olson, is Federated Investors Tower, Pittsburgh, Pennsylvania
15222-3779. Mark D. Olson is a partner with Wilson, Halbrook & Bayard,
107 W. Market Street, Georgetown, Delaware 19947.
The remaining Officers of the Sub-Adviser are: John B. Fisher,
President: William D. Dawson, III, Henry A. Frantzen and J. Thomas
Madden, Executive Vice Presidents; Peter R. Anderson, Drew J. Collins,
Jonathan C. Conley, Deborah A. Cunningham, Mark E. Durbiano, J. Alan
Minteer, Susan M. Nason, Mary Jo Ochson, Robert J. Ostrowski and
Charles A. Ritter, Senior Vice Presidents; J. Scott Albrecht, Joseph M.
Balestrino, Randall S. Bauer, David F. Belton, Christine A. Bosio,
David A. Briggs, Kenneth J. Cody, Alexandre de Bethmann, Michael P.
Donnelly, Michael J. Donnelly, Linda A. Duessel, Donald T. Ellenberger,
Kathleen M. Foody-Malus, Thomas M. Franks, Edward C. Gonzales, James E.
Grefenstette, Susan R. Hill, Stephen A. Keen, Robert K. Kinsey, Robert
M. Kozemchak, Marian R. Marinack, Sandra L. McInerney, Scott B.
Schermerhorn, Frank Semack, Aash M. Shah, Christopher J. Smith, William
F. Stotz, Tracy P. Stouffer, Edward J. Tiedge, Paige M. Wilhelm,and
Jolanta M. Wysocka, Vice Presidents; Stephen A. Keen, Secretary; and
Thomas R. Donahue, Treasurer. The business address of each of the
C-22
<PAGE> 259
Officers of the Subadviser is Federated Investors Tower, Pittsburgh,
Pennsylvania 15222-3779. These individuals are also officers of some of
the investments advisers to other mutual funds.
(g) Information for the Subadviser of the Balanced Fund and Multi Sector
Bond Fund
(1) Salomon Brothers Asset Management, Inc.
The list required by this Item 28 of officers and directors of
Salomon Brothers Asset Management, Inc.("SBAM") and Salomon
Brothers Asset Management Limited ("SBAM Limited"), together
with information as to any other business, profession, vocation
or employment of a substantial nature engaged in by such
officers and directors during the past two years is
incorporated by reference to Schedules A and D of Form ADV
filed by SBAM and SBAM Limited pursuant to the Investment
Advisers Act of 1940 (SEC File No. 801-32046 and 801-43335.)
(h) Information for the Subadviser of the Small Cap Value Fund
(1) The Dreyfus Corporation - See Item 28 (b) (1)
(i) Information for the Subadviser of the Global Equity Fund
(1) J.P. Morgan Investment Management, Inc.
J.P. Morgan Investment Management, Inc. ("JPMIM"), a registered
investment adviser, is a wholly owned subsidiary of J. P.
Morgan & Co. Incorporated. JPMIM manages employee benefit plans
for corporations and unions. JPMIM also provides investment
management services for a broad spectrum of other institutional
investors, including foundations, endowments, sovereign
governments, and insurance companies.
To the knowledge of the Registrant, none of the directors or
executive officers of JPMIM is or has been in the past two
fiscal years engaged in any other business or profession,
vocation or employment of a substantial nature, except that
certain officers and directors of JPMIM also hold various
positions with, and engage in business for, J.P. Morgan & Co.
Incorporated or Morgan Guaranty Trust Company of New York, a
New York trust company which is also a wholly owned subsidiary
of J.P. Morgan & Co. Incorporated.
(j) Information for the Subadvisers of the Select Advisers Mid Cap Fund
(1) Pilgrim Baxter & Associates, Ltd.
Other business, profession, vocation, or employment of a
substantial nature in which each director or principal officer
of Pilgrim Baxter & Associates, Ltd. and Newbold's Asset
Management, Inc. is or has been, at any time during the last
two fiscal years, engaged for his own account or in the
capacity of director, officer, employee, partner or trustee are
as follows:
<TABLE>
<CAPTION>
Name and Position with Pilgrim Baxter & Associates, Ltd. Name of Other Company
-------------------------------------------------------- ---------------------
<S> <C>
Harold J.Baxter PBHG Fund Services
Director, Chairman & Chief Executive Officer United Asset Management Corporation
Newbold's Asset Management, Inc.
Gary L. Pilgrim PBHG Fund Services
Director, President, Treasurer & Chief Investment Officer
Brian F. Bereznak PBHG Fund Services
Chief Operating Officer (from 1989 through 1996)
</TABLE>
C-23
<PAGE> 260
<TABLE>
<CAPTION>
<S> <C>
Eric C. Schneider Newbold's Asset Management, Inc.
Chief Financial Officer
</TABLE>
(2) Rice, Hall, James & Associates
<TABLE>
<CAPTION>
Name and Position with Subadvisor: Other Affiliations
---------------------------------- ------------------
<S> <C>
Thomas W. McDowell, Jr. none
President, Chief Executive Officer
Director of RHJ
Samuel R. Trozzo none
Chairman
Director of RHJ
Walter H. Beck none
Partner
Director of RHJ
Michelle P. Connell none
Partner
James D. Dickinson none
Partner
Charles G. King none
Partner
Mitchell S. Little none
Partner
Gary S. Rice none
Partner
David P. Tessmer none
Partner
Director of RHJ
Timothy A. Todaro none
Partner
Patricia A. Urbonya none
Partner
</TABLE>
(3) First Pacific Advisers, Inc.
During the last two fiscal years, First Pacific Advisors, Inc.,
the investment subadviser to Registrant ("Subadviser"), has not
engaged in any other business in a substantial nature except as
investment adviser to Source Capital, Inc. ("Source"), a
registered closed-end investment company; as investment adviser to
FPA Capital Fund, Inc.
C-24
<PAGE> 261
("Capital"), FPA New Income, Inc. ("New Income"), FPA Paramount
Fund, Inc. ("Paramount"), FPA Perennial Fund, Inc. ("Perennial"),
and UAM/FPA Crescent Portfolio, each a registered open-end
investment company; and as investment adviser to institutional
accounts. During the last two fiscal years, no director or officer
of the Subadviser has engaged for his own account or in the
capacity of director, officer, employee, partner or trustee, in
any other business, profession, vocation or employment of a
substantial nature except as set forth below.
<TABLE>
<CAPTION>
Name and Position with Subadviser Other Affiliations (1)
--------------------------------- ---------------------
<S> <C>
Julio J. de Puzo, Jr., Director and/or Officer of Source, Capital, New Income, .
Director, Principal & Chief Executive Officer Paramount, and Perennial.
Robert L. Rodriguez, Director and/or Officer of Source, Capital, New Income, .
Director, Principal & Chief Investment Officer Paramount, and Perennial.
William M. Samms, Officer of Paramount
Director & Principal
J. Richard Atwood, Officer of Source, Capital, New Income, Paramount,
Senior Vice President, Chief Financial Officer & and Perennial.
Treasurer
Eric S. Ende, Officer of Source, Capital, New Income, Paramount,
Senior Vice President and Perennial.
Steven T. Romick, Officer of Source
Senior Vice President
Andrewe C. Ward, ---
Senior Vice President
Daryl A. Weber ---
Senior Vice President
Christopher H. Thomas, Officer of Source, Capital, New Income, Paramount,
Vice President & Controller and Perennial.
Thomas H. Aneberry, ---
Vice President
Dennis M. Bryan, Officer of Capital.
Vice President
Steven R. Geist, Officer of Source and Perennial.
Vice President
Janet M. Pitman Officer of Source, Capital, New Income, Paramount,
Vice President and Perennial.
Mary S. Thomas, ---
Vice President
Sherry Sasaki, Officer of Source, Capital, New Income, Paramount,
</TABLE>
C-25
<PAGE> 262
<TABLE>
<CAPTION>
<S> <C>
Assistant Vice President & Secretary and Perennial.
Marie McAvenia ---
Assistant Vice President
</TABLE>
(1) The address of each company named is 11400 W. Olympic Boulevard, Suite 1200,
Los Angeles, CA 90064
ITEM 29. PRINCIPAL UNDERWRITERS
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
James F. Laird, Jr.
Nationwide Advisory Services, Inc.
Three Nationwide Plaza
Columbus, OH 43215
ITEM 31. MANAGEMENT SERVICES
Not applicable.
ITEM 32. UNDERTAKINGS
(a) The Trust undertakes to file a post-effective amendment, using
financial statements which need not be certified, within four to six
months of the effective date of the post-effective amendment to the
Registrant's Registration Statement adding the Strategic Growth Fund,
Strategic Value Fund, Equity Income Fund, High Income Bond Fund,
Balanced Fund, Multi Sector Bond Fund, Small Cap Value Fund, Global
Equity Fund and Select Advisers Mid Cap Fund.
C-26
<PAGE> 263
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Post-Effective
Amendment No. 24 to this Registration Statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Columbus, and State
of Ohio, on this 6th day of August 1997.
NATIONWIDE SEPARATE ACCOUNT TRUST
By: /s/ JAMES F. LAIRD, JR.
------------------------
James F. Laird, Jr., Treasurer
PURSUANT TO THE REQUIREMENT OF THE SECURITIES ACT OF 1933, THIS POST-EFFECTIVE
AMENDMENT NO. 24 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE
FOLLOWING PERSONS IN THE CAPACITIES INDICATED ON THE 6TH DAY OF AUGUST 1997.
Signature & Title
- -----------------
Principal Executive Officer
DIMON R. MCFERSON*
- -----------------------------
Dimon R. McFerson, Trustee and Chairman
Principal Accounting and Financial Officer
JAMES F. LAIRD, JR.
- -----------------------------
James F. Laird, Jr., Treasurer
JOHN C. BRYANT*
- -----------------------------
John C. Bryant, Trustee
ROBERT M. DUNCAN*
- -----------------------------
Robert M. Duncan, Trustee
THOMAS J. KERR, IV*
- -----------------------------
Thomas J. Kerr, IV, Trustee
* By: JAMES F. LAIRD, JR.
------------------------
James F. Laird, Jr., Attorney-In-Fact
<PAGE> 1
Exhibit 10
DRUEN, DIETRICH, REYNOLDS & KOOGLER
ATTORNEYS AT LAW
ONE NATIONWIDE PLAZA
COLUMBUS, OHIO 43216
(614) 249-7617
FACSIMILE: (614) 249-2418
<TABLE>
<S> <C> <C> <C>
BRIAN M. BACON ANGELA R. JETT CHRISTINA A. NESS THERESA R. SCHAEFER
THOMAS E. BARNES LEROY JOHNSTON, III PETER J. OESTERLING** W. JOSEPH SCHLEPPI
ROGER A. CRAIG MARK B. KOOGLER RANDALL L. ORR DAVID E. SIMAITIS
RAE ANN DANKOVIC* WALTER R. LEAHY ROBERT M. PARSONS KENT N. SIMMONS
ELIZABETH A. DAVIN GEORGE K. MACKLIN THOMAS J. PRUNTE LEE A. THORNBURY
THOMAS W. DIETRICH RANDALL W. MAY ARLENE L. REILLY PHILIP W. WHITAKER
W. SIDNEY DRUEN M. LINDA MAZZITTI LUCINDA A. REYNOLDS DAVID L. WHITE
JOHN D. GILLESPIE DAVID A. MEYER DANIEL R. RUPP STEVEN L. ZISSER
JEANNE A. GRIFFIN SANDRA L. NEELY ANNE DANZA SAXON
Practice limited to Nationwide Insurance Companies and their associated companies
* Practice limited to the State of Michigan ** Practice limited to the State of Pennsylvania
</TABLE>
August 6, 1997
Nationwide Separate Account Trust
Three Nationwide Plaza, 26th Floor
Columbus, Ohio 45215
Re: Nationwide Separate Account Trust
Post-Effective Amendment No. 24
SEC File Nos. 2-73024; 811-3213
Ladies and Gentlemen:
In connection with the filing of Post-Effective Amendment No. 24 to the
Registration Statement for Nationwide Separate Account Trust (the "Amendment"),
it is our opinion that, upon the effectiveness of the Amendment, the indefinite
number of units of beneficial interest of the following new funds, nine
separate investment portfolios of the Nationwide Separate Account Trust, when
issued for the consideration described in the Amendment, will be legally
issued, fully paid and nonassessable:
1. Nationwide Strategic Growth Fund
2. Nationwide Strategic Value Fund
3. Nationwide Select Advisers Mid Cap Fund
4. Nationwide Small Cap Value Fund
5. Nationwide Global Equity Fund
6. Nationwide Equity Income Fund
7. Nationwide Multi Sector Bond Fund
8. Nationwide High Income Bond Fund
9. Nationwide Balanced Fund
<PAGE> 2
Nationwide Separate Account Trust
August 5, 1997
Page 2
We hereby consent to the filing of this opinion as an exhibit to the Amendment.
Very truly yours,
DRUEN, DIETRICH, REYNOLDS & KOOGLER
