<PAGE> 1
'33 Act File No. 2-73024
'40 Act File No. 811-3213
As filed with the Securities and Exchange Commission on April 30, 1998
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 26 |X|
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 27 |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. Elizabeth A. Davin Druen, Dietrich, Reynolds & Koogler
One 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 May 1, 1998
pursuant to paragraph (b) of Rule 485.
<PAGE> 2
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
CROSS REFERENCE SHEET
N-1A Item No. Location
- ---------------------------------------------------------------
PART A
Item 1. Cover Page....................................Cover Page
Item 2. Synopsis......................................Summary of Fund Expenses
Item 3. Condensed Financial Information...............Financial Highlights
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............Net Income and
Distributions,
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.....................*
PART B
Item 10. Cover Page....................................Cover Page
Item 11. Table of Contents.............................Table of Contents
Item 12. General Information and History...............Investment Objectives
and Policies; General
Information and History
Item 13. Investment Objectives and Policies............Additional Information
on Portfolio Investments
and Investment Policies;
Investment Restrictions
Item 14. Management of the Registrant..................Trustees and Officers of
the Trust
Item 15. Control Persons and Principal
Holders of Securities.........................Major Shareholders
2
<PAGE> 3
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 - The
Money Market Fund;
Calculating Yield and
Total Return--Non-Money
Market Funds
Item 23. Financial Statements..........................Financial Statements
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.
- --------------------------------------------------------------------------------
* Not applicable or negative answer
3
<PAGE> 4
PROSPECTUS
MAY 1, 1998
SHARES OF BENEFICIAL INTEREST
NATIONWIDE SEPARATE ACCOUNT TRUST
TOTAL RETURN FUND
CAPITAL APPRECIATION FUND
GOVERNMENT BOND FUND
MONEY MARKET FUND
THREE NATIONWIDE PLAZA
COLUMBUS, OHIO 43215
FOR INFORMATION AND ASSISTANCE, CALL TOLL FREE
1 (800) 848-6331
Nationwide Separate Account Trust (the "Trust") is a diversified, 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 to the Total Return Fund, Capital
Appreciation Fund, Government Bond Fund and Money Market Fund (each a "Fund").
The shares of these funds may be sold to life insurance company separate
accounts to fund the benefits of variable insurance and annuity 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
Funds' investment advisor.
The investment objective of the Total Return Fund is to seek a reasonable,
long term return on invested capital from a flexible combination of current
return and capital gains.
The investment objective of the Capital Appreciation Fund is to provide
long-term growth, primarily through a diversified portfolio of the common stock
of companies which the investment manager determines have a better-than-average
potential for sustained capital growth over the long term.
The investment objective of the Government Bond Fund is to provide as high a
level of income as is consistent with the preservation of capital.
The investment objective of the Money Market Fund is to seek as high a level
of current income as is considered consistent with the preservation of capital
and liquidity.
INVESTMENTS IN THE MONEY MARKET FUND ARE NEITHER INSURED NOR GUARANTEED BY
THE U.S. GOVERNMENT AND THERE IS NO ASSURANCE THAT THE FUND WILL BE ABLE TO
MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
This Prospectus provides you with the basic information you should know
before investing in the Funds. You should read it and keep it for future
reference. A Statement of Additional Information, dated May 1, 1998, has been
filed with the Securities and Exchange Commission. You can obtain a copy without
charge by calling toll free 1 (800) 848-6331, or writing Nationwide Life
Insurance Company, One Nationwide Plaza, Columbus, Ohio 43216.
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, DATED MAY 1, 1998,
IS INCORPORATED HEREIN BY REFERENCE.
<PAGE> 5
SUMMARY OF FUND EXPENSES
The tables below summarize the various cost and expenses an investor will bear,
directly or indirectly when investing in the Funds based on actual expenses
incurred during the year ended December 31, 1997, restated to reflect current
fees.
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
<TABLE>
<CAPTION>
Capital Total Government Money
Appreciation Return Bond Market
------------ ------ ---------- ------
<S> <C> <C> <C> <C>
Advisory Fees .60% .60% .50% .40%
Administration Fees .05% .05% .05% .05%
All Other Expenses .04% .02% .03% .03%
---- ---- ---- ----
Total Fund Operating Expenses .69% .67% .58% .48%
==== ==== ==== ====
</TABLE>
Example:
You could pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return and (2) Redemption at the end of each
time period:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
1 year $ 7 $ 7 $ 6 $ 5
3 years $22 $21 $19 $15
5 years $38 $37 $32 $27
10 years $86 $83 $73 $60
</TABLE>
THE EXPENSES SHOWN IN THE CHART DO NOT INCLUDE VARIABLE CONTRACT CHARGES, IF
APPLICABLE. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIODS ENDED DECEMBER 31
<TABLE>
<CAPTION>
Net
Realized Distributions
Net Gain from Net Net
Asset (Loss) & Total Dividends Realized Asset
Value Net Unrealized From from Net Gain from Value
Beginning Investment Appreciation Investment Investment Investment Total End of Total
Of Period Income (Depreciation) Operations Income Transactions Distributions Period Return
-------------------------------------------------------------------------------------------------------
INCOME FROM
INVESTMENT OPERATIONS LESS DISTRIBUTIONS
-------------------------------------------------------------------------------------------------------
TOTAL RETURN FUND
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 6.49 $.28 $1.01 $1.29 $(.27) $(.07) $(.34) $7.45 20.05%
-------------------------------------------------------------------------------------------------------
7.45 .25 .74 .99 (.23) (.44) (.67) 7.77 13.22
-------------------------------------------------------------------------------------------------------
7.77 .31 (.94) (.63) (.28) (.12) (.40) (6.74) (8.03)
-------------------------------------------------------------------------------------------------------
6.74 .22 2.34 2.56 (.23) - (.23) 9.07 38.49
-------------------------------------------------------------------------------------------------------
9.07 .25 .48 .73 (.25) (.09) (.34) 9.46 8.18
-------------------------------------------------------------------------------------------------------
9.46 .23 .79 1.02 (.24) (.14) (.38) 10.10 10.92
-------------------------------------------------------------------------------------------------------
10.10 .21 (.10) .11 (.28) (.23) (.51) 9.70 1.07
-------------------------------------------------------------------------------------------------------
9.70 .31 2.49 2.80 (.31) (.65) (.96) 11.54 29.09
-------------------------------------------------------------------------------------------------------
11.54 .24 2.26 2.50 (.25) (.52) (.77) 13.27 21.84
-------------------------------------------------------------------------------------------------------
13.27 .23 3.65 3.88 (.23) (.54)* (.77) 16.38 29.43
-------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Net
Investment
Expenses Income to Net Assets
to Average Average Average at End of
Net Net Portfolio Commission Period
Assets Assets Turnover Rate Paid (000's) Year
------------------------------------------------------------------
RATIOS &
SUPPLEMENTAL DATA
------------------------------------------------------------------
TOTAL RETURN FUND
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
.54% 3.91% 89.8% $155,247 1988
------------------------------------------------------------------
.56 3.15 51.9 185,674 1989
------------------------------------------------------------------
.54 4.31 38.1 162,661 1990
------------------------------------------------------------------
.53 2.74 14.5 250,701 1991
------------------------------------------------------------------
.53 2.69 12.5 334,917 1992
------------------------------------------------------------------
.53 2.51 9.8 456,243 1993
------------------------------------------------------------------
.52 2.76 12.1 534,821 1994
------------------------------------------------------------------
.51 2.84 16.1 814,964 1995
------------------------------------------------------------------
.51 1.99 16.2 $.0476 1,179,876 1996
------------------------------------------------------------------
.54 1.54 13.9 .0452 1,849,241 1997
------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Net
Realized Distributions
Net Gain from Net Net
Asset (Loss) & Total Dividends Realized Asset
Value Net Unrealized From from Net Gain from Value
Beginning Investment Appreciation Investment Investment Investment Total End of Total
Of Period Income (Depreciation) Operations Income Transactions Distributions Period Return
-------------------------------------------------------------------------------------------------------
CAPITAL APRECIATION FUND
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$10.00 $.10 $.48 $ .58 $(.10) $(.02) $(.12) $10.46 10.92%
-------------------------------------------------------------------------------------------------------
10.46 .26 .74 1.00 (.26) - (.26) 11.20 9.61
-------------------------------------------------------------------------------------------------------
11.20 .18 (.28) (.10) (.18) - (.18) 10.92 (.90)
-------------------------------------------------------------------------------------------------------
10.92 .23 2.96 3.19 (.23) (.40) (.63) 13.48 29.35
-------------------------------------------------------------------------------------------------------
13.48 .21 3.29 3.50 (.22) (.48) (.70) 16.28 26.14
-------------------------------------------------------------------------------------------------------
16.28 .20 5.39 5.59 (.20) (.46) (.66) 21.21 34.49
-------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Net
Investment
Expenses Income to Net Assets
to Average Average Average at End of
Net Net Portfolio Commission Period
Assets Assets Turnover Rate Paid (000's) Year
------------------------------------------------------------------
RATIOS &
SUPPLEMENTAL DATA
------------------------------------------------------------------
CAPITAL APRECIATION FUND
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
.69% 1.95% 5.0% $18,800 1992+
------------------------------------------------------------------
.59 2.82 16.9 38,926 1993
------------------------------------------------------------------
.56 1.76 11.2 60,442 1994
------------------------------------------------------------------
.54 1.89 20.3 81,237 1995
------------------------------------------------------------------
.52 1.53 22.2 $.0586 211,474 1996
------------------------------------------------------------------
.56 1.10 10.9 .0593 481,738 1997
------------------------------------------------------------------
</TABLE>
2
<PAGE> 6
<TABLE>
<CAPTION>
Net
Realized Distributions
Net Gain from Net Net
Asset (Loss) & Total Dividends Realized Asset
Value Net Unrealized From from Net Gain from Value
Beginning Investment Appreciation Investment Investment Investment Total End of Total
Of Period Income (Depreciation) Operations Income Transactions Distributions Period Return
-------------------------------------------------------------------------------------------------------
INCOME FROM
-------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS LESS DISTRIBUTIONS
-------------------------------------------------------------------------------------------------------
GOVERNMENT BOND FUND
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$10.01 $.89 $(.10) $ .79 $(.89) - $(.89) $ 9.91 8.06%
-------------------------------------------------------------------------------------------------------
9.91 .95 .38 1.33 (.93) - (.93) 10.31 13.97
-------------------------------------------------------------------------------------------------------
10.31 .88 .06 .94 (.85) - (.85) 10.40 9.49
-------------------------------------------------------------------------------------------------------
10.40 .86 .82 1.68 (.84) - (.84) 11.24 16.70
-------------------------------------------------------------------------------------------------------
11.24 .98 (.14) .84 (.93) (.23) (1.16) 10.92 7.87
-------------------------------------------------------------------------------------------------------
10.92 .71 .32 1.03 (.66) (.03) (.69) 11.26 9.52
-------------------------------------------------------------------------------------------------------
11.26 .69 (1.06) (.37) (.69) - (.69) 10.20 (3.23)
-------------------------------------------------------------------------------------------------------
10.20 .71 1.16 1.87 (.71) - (.71) 11.36 18.74
-------------------------------------------------------------------------------------------------------
11.36 .69 (.32) .37 (.69) - (.69) 11.04 3.49
-------------------------------------------------------------------------------------------------------
11.04 .69 .34 1.03 (.69) - (.69) 11.38 9.67
-------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Net
Investment
Expenses Income to Net Assets
to Average Average at End of
Net Net Portfolio Period
Assets Assets Turnover (000's) Year
-------------------------------------------------------
RATIOS &
-------------------------------------------------------
SUPPLEMENTAL DATA
-------------------------------------------------------
GOVERNMENT BOND FUND
-------------------------------------------------------
<S> <C> <C> <C> <C>
.55% 8.82% 113.1% $ 65,962 1988
-------------------------------------------------------
.57 9.18 200.0 83,299 1989
-------------------------------------------------------
.55 8.70 127.8 113,399 1990
-------------------------------------------------------
.55 8.07 77.7 198,769 1991
-------------------------------------------------------
.53 8.75 73.8 301,841 1992
-------------------------------------------------------
.53 5.91 175.4 433,584 1993
-------------------------------------------------------
.51 6.46 111.4 391,253 1994
-------------------------------------------------------
.51 6.45 97.1 454,016 1995
-------------------------------------------------------
.51 6.23 33.8 459,247 1996
-------------------------------------------------------
.53 6.19 68.6 475,392 1997
-------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Net
Realized Distributions
Net Gain from Net Net
Asset (Loss) & Total Dividends Realized Asset
Value Net Unrealized From from Net Gain from Value
Beginning Investment Appreciation Investment Investment Investment Total End of Total
Of Period Income (Depreciation) Operations Income Transactions Distributions Period Return
-------------------------------------------------------------------------------------------------------
MONEY MARKET FUND
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$1.00 $.07 - $.07 $(.07) - $(.07) $1.00 6.61%
-------------------------------------------------------------------------------------------------------
1.00 .09 - .09 (.09) - (.09) 1.00 9.11
-------------------------------------------------------------------------------------------------------
1.00 .08 - .08 (.08) - (.08) 1.00 8.03
-------------------------------------------------------------------------------------------------------
1.00 .06 - .06 (.06) - (.06) 1.00 5.84
-------------------------------------------------------------------------------------------------------
1.00 .03 - .03 (.03) - (.03) 1.00 3.40
-------------------------------------------------------------------------------------------------------
1.00 .03 - .03 (.03) - (.03) 1.00 2.76
-------------------------------------------------------------------------------------------------------
1.00 .04 - .04 (.04) - (.04) 1.00 3.88
-------------------------------------------------------------------------------------------------------
1.00 .06 - .06 (.06) - (.06) 1.00 5.66
-------------------------------------------------------------------------------------------------------
1.00 .05 - .05 (.05) - (.05) 1.00 5.12
-------------------------------------------------------------------------------------------------------
1.00 .05 - .05 (.05) - (.05) 1.00 5.26
-------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Net
Investment
Expenses Income to Net Assets
to Average Average at End of
Net Net Portfolio Period
Assets Assets Turnover (000's) Year
-------------------------------------------------------
RATIOS &
-------------------------------------------------------
SUPPLEMENTAL DATA
-------------------------------------------------------
MONEY MARKET FUND
-------------------------------------------------------
<S> <C> <C> <C> <C>
.55% 7.12% - $181,699 1988
-------------------------------------------------------
.57 8.73 - 216,498 1989
-------------------------------------------------------
.55 7.74 - 330,586 1990
-------------------------------------------------------
.54 5.65 - 363,502 1991
-------------------------------------------------------
.53 3.36 - 330,011 1992
-------------------------------------------------------
.53 2.72 - 351,798 1993
-------------------------------------------------------
.54 4.00 - 828,027 1994
-------------------------------------------------------
.52 5.51 - 737,408 1995
-------------------------------------------------------
.51 5.00 - 983,529 1996
-------------------------------------------------------
.51 5.16 - 993,597 1997
-------------------------------------------------------
</TABLE>
+ Period from April 15, 1992 (date of commencement of operations) through
December 31, 1992. Ratio percentages are annualized for periods of less
than twelve months. Total return is not annualized.
* Includes $.01 distribution from Paid In Capital and $.01 distribution in
excess of net investment income.
The information for the year ended Decmber 31, 1997 has been audited by
Coopers & Lybrand LLP, Independent Auditors, whose reports thereon insofar
as it relates to the year ended December 31, 1997 together with the
financial statements, appearing in the Annual Report for the Trust, is
incorporated by reference in the Statement of Additional Information.
Information for the years December 31, 1996 and prior were audited by other
auditors. The Statement of Additional Information and the Annual Report for
the Funds, which contains further information about the Funds' performance
may be obtained free of charge by calling toll free 1(800)848-6331.
SALE OF FUND SHARES
Shares of the Funds are sold primarily to life insurance 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 Funds' investment advisor. The Accounts
purchase shares of the Trust in accordance with variable account allocation
instructions received from owners of the Contracts. Each Fund then uses the
proceeds to buy securities for its portfolios. The investment adviser manages
the portfolios from day to day to accomplish a Fund's investment objectives. The
kinds of investments and the way they are managed depend on what is happening in
the economy and the financial marketplaces. Each of the Accounts, as a
shareholder, has an ownership in the Trust's investments. The Trust also offers
to buy back (redeem) shares of the Trust from the Accounts at any time at net
asset value.
INVESTMENT OBJECTIVES AND POLICIES
Investments in each Fund are made in many different securities which provide
diversification to minimize risk. While there is careful selection and constant
supervision by a team of professional investment managers, there can be no
guarantee that the Funds' objectives will be achieved. The fundamental policies
of each Fund do not require shareholder approval to change a Fund's investment
objective.
3
<PAGE> 7
-TOTAL RETURN FUND
The investment objective of this Fund is to obtain a reasonable, long term
total return (i.e. earnings growth plus potential dividend yield) on invested
capital from a flexible combination of current return and capital gains through
investments in common stocks, convertible issues, money market instruments, and
bonds, with a primary emphasis on common stocks.
By investing in securities that are subject to market risk, the Fund is
subject to more fluctuations in its market value and involves the assumption of
a higher degree of risk as compared to a portfolio seeking stability of
principal, such as a money market portfolio or a portfolio investing in
corporate debt securities, United States and Canadian government obligations and
commercial paper.
While it is the Fund's intention to invest in common stocks or in issues
convertible to common stock, there are no restrictive provisions covering the
proportion of one or another class of securities that may be held, other than
those stated in the Statement of Additional Information.
Portfolio Manager: John M. Schaffner, MBA, CFA,is the portfolio manager for
the Total Return Fund. He has been with Nationwide since 1977 and has managed
the Total Return Fund since 1982. He also manages the Nationwide Growth Fund and
the Nationwide Mid Cap Growth Fund. He graduated with a Bachelor of Arts in
Economics from Occidental College. He received his Masters of Business
Administration degree from the University of Michigan and is a Chartered
Financial Analyst.
-CAPITAL APPRECIATION FUND
The Fund is designed for investors who are interested in long-term growth.
The Fund seeks to meet its objectives primarily through a diversified portfolio
of the common stock of companies which the investment manager determines have a
better-than-average potential for sustained capital growth over the long term.
While it is the Fund's intention to invest in common stocks or in issues
convertible to common stock, there are no restrictive provisions covering the
proportion of one or another class of securities that may be held, other than
those stated in the Statement of Additional Information.
The investment manager will focus mainly on a company's or industry's
potential for long-term growth, with dividend and interest income being
secondary in importance. The manager's evaluation of a company or industry will
be based more on probable future earnings, relative financial strength and
competitive position. The manager believes this approach will provide a greater
return potential over the long run than simply seeking current dividend or
interest income. The Fund's portfolio will not be limited to any particular type
of company or industry.
Portfolio Manager: Charles Bath, MBA, CFA, CPA, is the portfolio manager of
the Capital Appreciation Fund. Charles joined Nationwide as a securities analyst
in 1982 and has managed the Capital Appreciation Fund since 1992. He has also
managed the Nationwide Fund since 1985. He graduated with a Bachelor of Science
in Accounting from Miami University. He received his Master of Business
Administration degree in Finance from The Ohio State University and is a
Certified Public Accountant and a Chartered Financial Analyst.
-GOVERNMENT BOND FUND
The investment objective of this Fund is to provide as high a level of income
as is consistent with the preservation of capital. It seeks to achieve its
objective by investing in a diversified portfolio of securities issued or backed
by the U.S. Government, its agencies or instrumentalities. These securities are
of varying maturities and types. They include direct obligations of the U.S.
Government backed by the full faith and credit of the United States, such as
U.S. Treasury bills, notes and bonds. Bills mature in one year or less, notes in
one to ten years, and bonds in ten years or more.
In addition, the Fund will hold securities issued by U.S.
Government-chartered agencies and instrumentalities. These securities are
usually either guaranteed by the U.S. Treasury or are supported by the issuer's
rights to borrow from the Treasury and backed by the issuer's own credit.
Examples of such securities include but are not limited to, the following:
o 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;
o the Federal Home Loan Banks, whose securities are supported by
the right of the agency to borrow from the U. S. Treasury;
o the Federal National Mortgage Association ("FNMA"), whose
securities are supported by discretionary authority of the
U.S. Government to purchase certain obligations of the agency
or instrumentality; and
o the Federal Home Loan Mortgage Corporation ("Freddie Mac") and
the Student Loan Marketing Association, whose securities are
supported only by the credit of such agencies.
4
<PAGE> 8
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 because the market
value of all debt obligations, including U. S. Government securities, is
affected by changes in the prevailing interest rates. The market value of such
obligations 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. In general, the longer the maturity of
a debt obligation, the greater its sensitivity to changes in interest rates.
Although the flucuation in the price of bonds is normally less than that of
common stocks, in the past there have been extended periods of cyclical
increases in interest rates that have caused significant declines in the price
of bonds in general and have caused the effective maturity of securities with
prepayment features to be extended, thus effectively converting short and
intermediate term securities (which tend to be less volatile in price) into
longer term securities (which tend to be more volatile in price).
The Fund may invest in mortgage-related securities which represent part
ownership in a pool of mortgage loans. The Fund may acquire securities
representing an interest in a pool of mortgage loans that are issued or
guaranteed by GNMA, FNMA or Freddie Mac. Certain government agencies also issue
collateralized mortgage obligations ("CMOs") that are fully collateralized
directly or indirectly by a pool of mortgages on which payments or principal and
interest are dedicated to payment of principal and interest on the CMOs. These
securities differ from typical bonds because principal is repaid monthly over
the term of the loan rather than returned in a lump sum at maturity. In
addition, most mortgage-related securities are "pass-through" instruments,
through which the holder receives a share of all interest and principal payments
from the mortgages underlying the certificate. Because the prepayment
characteristics of the underlying mortgages vary, it is not possible to
accurately predict the average life or realized yield of a particular issue of
pass-through certificates. During periods of declining interest rates,
prepayment of mortgages underlying mortgage-related securities can be expected
to accelerate. When the mortgage obligations are prepaid, the Fund may have to
reinvest in securities with a lower yield. Moreover, prepayment of mortgages
which underlie securities purchased at a premium could result in capital losses.
The Fund may also invest in zero-coupon securites that are direct
obligations of the U. S. Government and its agencies and instrumentalities.
Short-term securities of the Fund will include obligations with remaining
maturities of less than one year issued by the U. S. Government, its agencies
and instrumentalities and in repurchase agreements collateralized by securities
in which the Fund could otherwise invest.
Portfolio Managers: Together, Wayne Frisbee and Gary Hunt are the portfolio
managers for the Government Bond Fund. Mr. Frisbee joined Nationwide in 1981 as
a securities analyst and has managed the Government Bond Fund since its
inception in 1986. He received a Bachelor of Science from The Ohio State
University and is a Chartered Financial Analyst. He is also co-manager of the
Nationwide Long-Term U.S. Government Bond Fund and the Nationwide Intermediate
U.S. Government Bond Fund. Mr. Hunt joined Nationwide in 1992 as a securities
analyst. Mr. Hunt became co-manager of the Government Bond Fund on May 1, 1997.
In his career at Nationwide, Mr. Hunt has been responsible for the analysis of
agency CMOs and U.S. treasury securities. In addition, Mr. Hunt has managed the
commercial mortgage-back securities sector for Nationwide Life Insurance Company
and its affiliates. Mr. Hunt received a Bachelor of Science in Finance and a
Master of Business Administration from The Ohio State University. He is also
co-manager of the Nationwide Long-Term U.S. Government Bond Fund and Nationwide
Intermediate U.S. Government Bond Fund.
-MONEY MARKET FUND
The investment objective of the Fund is to seek as high a level of current
income as is considered consistent with the preservation of capital and
liquidity by investing primarily in money market instruments, including U.S.
government securities, obligations of larger banks, prime commercial paper, high
grade, short term corporate obligations (with remaining maturities of 397 days
or less), U.S. dollar denominated obligations of foreign governments and
securities of foreign issuers and foreign branches of U.S. banks.
Pursuant to its objectives of maintaining a fixed one dollar share price, the
Fund will not purchase securities with a remaining maturity of more that 397
days and will maintain a dollar weighted average portfolio maturity of 90 days
or less.
Yields on such short-term instruments are very sensitive to short-term
lending conditions. The principal value of such instruments tends to decline as
interest rates rise and conversely tends to rise as interest rates decline. In
addition, there is an element of risk in such money market instruments that the
issuer may become insolvent and default in meeting interest and principal
payments.
The Money Market Fund's yield and compound yield for the last seven days of
its most recent fiscal year ended December 31, 1997, was 5.36% and 5.51%
respectively. This yield quotation may be of limited use for comparative
purposes because it does not reflect charges imposed at the Account level which,
if included, would decrease the yield. For the current yield of the Fund, please
call (614) 249-5134.
Portfolio Manager: Karen G. Mader, is the portfolio manager of the Money
Market Fund. Karen received a Bachelor of Arts degree in Political Science and a
Masters degree in International Business and Political Science, both from The
Ohio State University. She has managed the Money Market Fund since 1987.
5
<PAGE> 9
MANAGEMENT OF THE TRUST
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.
Under the terms of the Investment Advisory Agreement, Nationwide Advisory
Services, Inc. ("NAS" or "Adviser"), Three Nationwide Plaza, Columbus, Ohio
43215, manages the investment of the assets and, subject to the supervision of
the Trustees, provides various administrative services and supervises the daily
business affairs of the Trust. NAS, 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 of 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 Trust pays NAS the following fees expressed as an annual percentage of
average daily net assets based on each Fund's average annual daily net assets:
Fund Advisory Fees
- ---- -------------
Total Return Fund and 0.60% on assets up to $1 billion
Capital Appreciation Fund 0.575% on assets of $1 billion and more but
less than $2 billion
0.55% on assets of $2 billion and more but
less than $5 billion
0.50% for assets of $5 billion and more
Government Bond Fund 0.50% on assets up to $1 billion
0.475% on assets of $1 billion and
more but less than $2 billion
0.45% on assets of $2 billion and more but
less than $5 billion
0.40% for assets of $5 billion and more
Money Market Fund 0.40% on assets up to $1 billion
0.38% on assets of $1 billion and more but
less than $2 billion
0.36% on assets of $2 billion and more but
less than $5 billion
0.34% for assets of $5 billion and more
In addition, fund accounting and administrative services for the Funds are
provided by NAS under a separate Fund Administration Agreement. Under terms of
the Fund Administration Agreement, NAS receives a fee from each Fund, calculated
daily and paid monthly, at an annual rate of 0.05% of each Fund's average daily
net assets up to $1 billion and 0.04% on assets of $1 billion and more.
NAS, through its wholly-owned subsidiary, Nationwide Investors Services, Inc.
("NIS"), also serves as transfer and dividend disbursing agent for the Funds
pursuant to a Transfer and Dividend Disbursing Agent Agreement. Under the terms
of the agreement, effective November 1, 1997, NISI receives a fee, calculated
daily and paid monthly, at an annual rate of 0.01% of each Fund's average daily
net assets.
MANAGEMENT DISCUSSION OF FUND PERFORMANCE
TOTAL RETURN FUND
For the year ended December 31, 1997, the Fund had a total return of 29.4%
compared to a return of 33.4% for the S&P 500. Performance this year was
influenced by strong gains in the drug and financial sectors, while the
technology names we hold, particularly service providers First Data and
Electronic Data detracted from results. Other individual names, such as Waste
Management and Olsten, also had sub-par performance.
6
<PAGE> 10
The final quarter of 1997 saw weakness in both the technology sector and in
energy stocks, particularly natural gas. Regarding technology, turmoil in Asia
was the cause, while in energy, slowing demand growth in Asia coupled with a
warm winter in North America led to falling prices. The Total Return Fund does
not have a lot of exposure to technology, but did take advantage of the weakness
to add to its holdings of both Hewlett Packard and First Data. On the other
hand, the Fund does have a significant exposure to energy, being over 15% of
assets at the end of 1997. Again though, stock weakness was used as a buying
opportunity, as this is a sector we like long term. We added to Royal Dutch, and
because natural gas stocks were particularly weak, also added to Union Pacific
Resources, and added Burlington Resources as a new holding.
The strategy of the Fund has not changed. It is a conservative strategy, in that
we are trying to take a less than average amount of risk with the Fund's
investments, both in terms of business risk of the underlying companies, and the
valuation of the stocks. Strong companies with good long-term growth potential
are what we look for, and many of the Fund's holdings also have good potential
for dividend growth. The strategy as a whole has been applied consistently since
the inception of the Fund in 1982.
COMPARISON OF A RETURN ON A HYPOTHETICAL $10,000 INVESTMENT
IN THE TOTAL RETURN FUND AND THE S&P 500
Total Return S&P 500
------------ -------
1/1/88 $10,000 $10,000
1988 $12,005 $11,656
1989 $13,592 $15,341
1990 $12,500 $14,866
1991 $17,311 $19,385
1992 $18,727 $20,860
1993 $20,772 $22,954
1994 $20,995 $23,256
1995 $27,102 $31,985
1996 $33,022 $39,324
1997 $42,740 $52,440
Total Return Fund
Average Annual Total Return
Period ended 12/31/97
1 Year 5 Years 10 Years
------ ------- --------
29.4% 17.9% 15.6%
The S&P 500 is a broad based, unmanaged index of securities, and unlike Fund
returns, does not reflect any fees or expenses. Past performance is not
predictive of future performance.
CAPITAL APPRECIATION FUND
The total return for the Capital Appreciation Fund for the 4th quarter of
1997 was 3.52% vs. 2.87% for the S&P 500 and -0.80% for the peer group averages,
Lipper Variable Insurance - Related Analysis of Underlying Funds (Growth Funds).
For 1997 the Capital Appreciation Fund returned 34.49% vs. 33.35% for the S&P
500 and 25.36% for the peer group averages. The performance of the Capital
Appreciation Fund was led by the strong pharmaceutical stocks. The large
weightings in Schering-Plough and Warner-Lambert were very important in the
outperformance of the portfolio. The financial stocks were market leaders in
1997. Mellon Bank and Fannie Mae were the two largest financial holdings and
they performed very well. The best performing financial stocks were the banks
which were acquired in 1997. CoreStates Financial, U.S. Bancorp, and Barnett
Banks were all acquired during the year at substantial premiums to their market
prices. Last year also saw the acquisition of one of the most successful
investments ever owned in the Capital Appreciation Fund. Morningstar Group
shares were acquired in 1995 at prices as low as 6-5/8. Following the
announcement of their acquisition by Suiza Foods, a partial position was sold at
44-1/2. I anticipate the remaining shares of Suiza will be sold in 1998.
7
<PAGE> 11
After several years of strong performance, I am often asked if the financial
stocks appear fully valued. I feel there are still good opportunities in this
sector, and the group remains overweighted. It has been my thesis that the
financial stocks are undervalued due to concerns that are no longer relevant.
Specifically, investors are overly cautious due to asset quality problems which
were prevelent in the 1970s and 1980s, but are less common today. Therefore, I
feel financial stocks are being revalued upward on a secular basis. Because of
my confidence in the attractive valuation of the financial stocks, the group
remains overweighted in the portfolio.
COMPARISON OF A RETURN ON A HYPOTHETICAL $10,000 INVESTMENT
IN THE CAPITAL APPRECIATION FUND AND THE S&P 500
Capital Appreciation S&P 500
-------------------- -------
1/1/92 $10,000 $10,000
1992 $10,728 $10,726
1993 $11,759 $11,803
1994 $11,653 $11,958
1995 $15,074 $16,446
1996 $19,015 $20,220
1997 $25,573 $26,964
Initial Public Offering Commenced May 1, 1992
Capital Appreciation Fund
Average Annual Total Return
Period ended 12/31/97
1 Year 5 Years Since Inception
------ ------- ---------------
34.5% 19.0% 18.0%
The S&P 500 is a broad based, unmanaged index of securities, and unlike Fund
returns, does not reflect any fees or expenses. Past performance is not
predictive of future performance.
GOVERNMENT BOND FUND
The total return for the Government Bond Fund for 1997 was 9.67%. The Merrill
Lynch Government Master Index, an index designed to reflect the performance of
the broad government and agency market, returned 9.60% during the same period.
The year ended December 31, 1997 was a good one for investors. The 30 year
treasury yield fell 72 basis points, largely as a result of a flight to quality
during the fourth quarter brought about by the Asian crisis. Intermediate
treasury notes turned in a strong showing, with the 2 year falling 23 basis
points while the 10 year yield fell 67 basis points.
The Government Bond Fund successfully shifted assets during the year into
noncallable agency notes and long zero coupon instruments The resulting barbell
of short and long securities took advantage of the continued flattening of the
curve. Also, the fund did well during the first nine months of the year by being
invested in Collateralized Mortgage Obligations ("CMO's"). CMO exposure,
however, was a drag on returns in the fourth quarter as treasury yields fell and
concern over prepayments increased. Although current CMO holdings have been
impacted by the increased prepayment volatility, the yield on these investments
make them attractive on a long-term basis.
Approximately 57% of portfolio assets are invested in treasury and agency
obligations, 34% of the portfolio assets are invested in the CMO market and the
remainder of assets are invested in repurchase agreements.
8
<PAGE> 12
COMPARISON OF A RETURN ON A HYPOTHETICAL $10,000 INVESTMENT IN
THE GOVERNMENT BOND FUND AND THE MERRILL LYNCH GOVERNMENT MASTER INDEX
Merrill Lynch
Government Bond Fund Gov't Master Index
-------------------- ------------------
1/1/88 $10,000 $10,000
1988 $10,806 $10,709
1989 $12,316 $12,222
1990 $13,485 $13,301
1991 $15,737 $15,324
1992 $16,975 $16,429
1993 $18,590 $18,175
1994 $17,990 $17,588
1995 $21,362 $20,808
1996 $22,107 $21,382
1997 $24,244 $23,435
Government Bond Fund
Average Annual Total Return
Period ended 12/31/97
1 Year 5 Years 10 Years
------ ------- --------
9.7% 7.4% 9.3%
The Merrill Lynch Government Master Index is an index of unmanaged groups of
bonds which unlike Fund returns, does not reflect any fees or expenses. Past
performance is not predictive of future performance.
MONEY MARKET FUND
At December 31, 1997, the Money Market Fund had assets of $993.6 million
with an average maturity of 34 days. For all periods reviewed, the Fund
performed favorably against its benchmark, the Lipper Variable Insurance Money
Market Index.
First-tier commercial paper accounted for 95% of the portfolio followed by
U.S. Government/Agency securities at 5%. The largest portfolio weightings were
in those industries which offer favorable spreads compared to other segments.
This includes consumer finance, broker/dealers, and the banking segment.
Operating expenses totaled .51%. The Fund's seven day effective yield for the
period ended December 31, 1997 was 5.51%.
During 1997, Fed officials changed rates just one time back in March by
increasing the Fed Funds rate by 25 basis points to 5.50% from 5.25%. Throughout
the year, the economy continued to grow with low unemployment and inflation.
Many analysts believe that the Federal Reserve would have increased rates in the
fourth quarter if the Asian financial crisis had not occurred.
The Money Market Fund is the only money market fund in a number of
Nationwide's variable annuity and variable life insurance products. As a result,
cash flow can fluctuate as investors switch fund options. This has been more
pronounced during the last several months with the uncertainty over Asia's
financial situation.
9
<PAGE> 13
COMPARISON OF A RETURN ON A HYPOTHETICAL $10,000 INVESTMENT IN
THE MONEY MARKET FUND AND THE CONSUMER PRICE INDEX
Money Market Fund Consumer Price Index
----------------- --------------------
1/1/88 $10,000 $10,000
1988 $10,661 $10,441
1989 $11,632 $10,925
1990 $12,566 $11,608
1991 $13,300 $11,953
1992 $13,752 $12,308
1993 $14,132 $12,645
1994 $14,681 $12,973
1995 $15,511 $13,310
1996 $16,305 $13,760
1997 $17,162 $13,993
Money Market Fund
Average Annual Total Return
Period ended 12/31/97
1 Year 5 Years 10 Years
------ ------- --------
5.3% 4.5% 5.5%
The Consumer Price Index is a broad index reflecting price changes in a market
basket of consumer goods, and unlike Fund returns, does not reflect any fees or
expenses. Past performance is not predictive of future performance.
INVESTMENT IN FUND SHARES
An insurance company purchases the 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 Trust. There is no sales charge. All shares
are sold at net asset value.
Shares of the Funds may be sold to the Accounts to fund the benefits of
Contracts issued by Nationwide Life Insurance and Nationwide Life and Annuity
Insurance Companies, as well as to Funds of Funds created by Nationwide Advisory
Services, Inc., the Funds' investment advisor.
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. Initial
and subsequent purchase payments allocated to a specific Fund are subject to the
limits applicable to the policies.
SHARE REDEMPTION
An Account redeems shares to make benefit or surrender payments under the
terms of its Contracts. 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 the New York Stock Exchange (usually 4:00 P.M. Eastern Time) on
each business day the New York Stock Exchange is open and on such other days as
the Board determines and on any other day during which there is a sufficient
degree of trading in a 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, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, and Thanksgiving. 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.
10
<PAGE> 14
In determining net asset value, portfolio securities listed on national
exchanges are valued at the last quoted sale price on the principal exchange, or
if there is no sale on that day, the securities are valued at the prior day's
closing price as provided by an independent pricing organization. Securities
traded in the over-the-counter market are valued at the last quoted sales price,
or if there is no sale that day, the quoted bid price as provided by an
independent pricing organization. Other portfolio securities, except securities
in the Money Market Fund, 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 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, or for which an independent pricing organization does not provide a
value or provides a value that does not represent fair market value in the
judgement of the Adviser, are valued at fair value in accordance with procedures
adopted by the Board of Trustees. Portfolio securities in the Money Market Fund
are valued at amortized cost in compliance with procedures adopted under Rule
2a-7. Expenses and fees are accrued daily. The Trust may suspend the right of
redemption only under the following unusual circumstances:
o when the New York Stock Exchange is closed (other than weekends
and holidays) or trading is restricted;
o when an emergency exists, making disposal of portfolio securities
or the valuation of net assets not reasonably practicable; or
o 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
-TOTAL RETURN FUND, CAPITAL APPRECIATION FUND AND GOVERNMENT BOND FUND
Substantially all of the net investment income, if any, of these Funds will
be distributed to shareholders quarterly in the form of additional shares of the
Fund. In those years in which sales of a Fund's portfolio securities result in
net realized capital gains, these gains will be declared and cause to be paid to
shareholders in December.
-MONEY MARKET FUND
The net income of the Money Market Fund is determined once daily, as of the
close of the New York Stock Exchange (currently 4:00 P.M. Eastern Time) on each
business day the Exchange is open. All the net income of the Fund, so
determined, is declared in shares as a dividend to shareholders of record at the
time of such determination. (Shares purchased become entitled to dividends
declared as of the first day following the date of investment.) Dividends are
distributed in the form of additional shares of the Fund on the last business
day of each month at the rate of one share (and fraction thereof) of the Fund
for each one dollar (and fraction thereof) of dividend income.
For this purpose, the net income of the Money Market Fund (from the time of
the immediately preceding determination thereof) shall consist of: (a) all
interest income accrued on the portfolio assets of the Fund, (b) less all actual
and accrued expenses, and (c) plus or minus net realized gains and losses on the
assets of the Fund determined in accordance with generally accepted accounting
principles. Interest income shall include discount earned (including both
original issue and market discount) on discount paper accrued ratably to the
date of maturity. Securities are valued at market or amortized cost which
approximates market, for purposes of complying with the Investment Company Act
of 1940.
Net income of the Fund is declared as a dividend each time the net income is
determined. This is one reason the net asset value per share (i.e., the value of
the net assets of the Fund divided by the number of shares outstanding) remains
at one dollar per share immediately after each such determination and dividend
declaration.
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 and currently has authorized 15 separate
funds. The shares of each fund participate equally in the earnings, dividends,
and assets of that particular fund. 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.
11
<PAGE> 15
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. Generally, amendment may be made
to the Declaration of Trust without the affirmative vote of a majority of the
outstanding voting securities 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;
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, when issued, are fully
paid and nonassessable. In regard to termination, sale of assets, or changes of
fundamental investment restrictions, the right to vote is limited to the holders
of shares of the particular fund affected by the proposal. However, shares of
all funds would vote together, and not by fund, in the election of Trustees. If
an issue must be approved by a majority as defined by the 1940 Act a "majority
of the outstanding voting securities" means the lesser of (i) 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 (ii) more than 50% of the
outstanding shares. For the election of Trustees only a plurality is required.
PERFORMANCE ADVERTISING FOR THE FUNDS
The Funds may use historical performance in advertisements, sales literature,
and the prospectus. Such figures will include quotations of average 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.
The Government Bond Fund may advertise yield which is calculated daily
dividing the net investment income per share earned during a 30-day period by
the maximum offering price per share on the last day of the period.
The Money Market Fund may advertise current seven-day yield quotations
computed by determining the net change, exclusive of capital changes, in the
value of a hypothetical pre-existing account having a balance of one share at
the beginning of the base period to obtain a base period return and then
multiplying the base period return by (365/7), or (366/7) in a leap year. For
purposes of this calculation, the net change in account value reflects the value
of additional shares purchased with dividends from the original share, and
dividends declared on both the original share and any such additional shares.
The Fund's effective yield represents a compounding on an annualized basis of
the current yield quotation of the Fund.
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 intends to qualify as a regulated investment company and to meet
the requirements of Subchapter M of the Internal Revenue Code of 1986, as
amended, and therefore must distribute substantially all its taxable net
investment income and capital gains to shareholders annually. In general, if a
Fund distributes all of its net investment income, it is not 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 a 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.
12
<PAGE> 16
CONTENTS PAGE
-------- ----
Summary of Fund Expenses 2
Financial Highlights 2
Sale of Fund Shares 3
Investment Objectives and Policies 3
Management of the Trust 6
Management Discussion of Fund Performance 6
Investment in Fund Shares 10
Share Redemption 10
Net Income and Distributions 11
Additional Information 11
Performance Advertising for the Funds 12
Tax Status 12
INVESTMENT ADVISER
Nationwide Advisory Services, Inc.
Three Nationwide Plaza
Columbus, Ohio 43215
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Nationwide Investors Services, Inc.
P. O. Box 1492
Three Nationwide Plaza
Columbus, Ohio 43216
INDEPENDENT AUDITORS
Coopers & Lybrand L.L.P
100 East Broad Street
Columbus, Ohio 43215
LEGAL COUNSEL
Druen, Dietrich, Reynolds & Koogler
One Nationwide Plaza
Columbus, Ohio 43215
<PAGE> 17
PROSPECTUS
MAY 1, 1998
SHARES OF BENEFICIAL INTEREST
NATIONWIDE SMALL COMPANY FUND
NATIONWIDE SEPARATE ACCOUNT TRUST
THREE NATIONWIDE PLAZA
COLUMBUS, OHIO 43215
FOR INFORMATION AND ASSISTANCE, CALL TOLL FREE
1 (800) 848-6331
Nationwide Small Company 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 fifteen separate mutual funds, each with its own investment objective. This
Prospectus relates only one of those Funds, Nationwide Small Company Fund (the
"Fund"). The shares of the Fund may be sold to life insurance company separate
accounts to fund the benefits of variable insurance and annuity 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
Fund's investment advisor. Nationwide Advisory Services, Inc. may from time to
time use one or more subadvisers to manage the Fund's portfolios as part of a
multi-manager structure (see "Investment Management of the Fund").
The Fund seeks long-term growth of capital. The Fund invests primarily in equity
securities of small capitalization companies.
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 May 1,1998, has been filed with the
Securities and Exchange Commission. You can obtain a copy without charge by
calling toll free 1 (800) 848-6331, 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, DATED MAY 1, 1998,
IS INCORPORATED HEREIN BY REFERENCE.
<PAGE> 18
SUMMARY OF FUND EXPENSES
The table below summarizes various costs and expenses an investor will bear,
directly or indirectly when investing in the Fund based on actual expenses
incurred during the year ended December 31, 1997:
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Advisory Fees 1.00%
Other Expenses 0.12%
-----
Total Fund Operating Expenses 1.12%
=====
Example:
You could 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 5 Years 10 Years
------ ------- ------- --------
$11 $35 $61 $134
The expenses shown above in the chart and example do not include
variable contract charges, if applicable.
THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
2
<PAGE> 19
FINANCIAL HIGHLIGHTS
Selected data for each share
outstanding throughout each period
Small Company Fund
<TABLE>
<CAPTION>
Period from
October 23, 1995
(commencement of
Operations)
Year Ended Year Ended through
December 31, December 31, December 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
NET ASSET VALUE - BEGINNING OF PERIOD $ 13.89 $ 11.42 $ 10.00
Net investment income 0.01 0.06 0.02
Net realized gain and unrealized appreciation on
investments and translation of assets and
liablities in foreign curencies 2.40 2.55 1.42
-------- -------- -------
Total from investment operations 2.41 2.61 1.44
-------- -------- -------
Distributions from net investment income -- (0.06) (0.02)
Distributions from net realized gain from investments
and foreign currencies (0.45) -- --
Distributions in excess of net realized gain from
investment transactions and foreign currencies -- (0.08) --
-------- -------- -------
Total distributions (0.45) (0.14) (0.02)
-------- -------- -------
Net increase in net asset value 1.96 2.47 1.42
-------- -------- -------
NET ASSET VALUE - END OF PERIOD $ 15.85 $ 13.89 $ 11.42
======== ======== =======
Total Return 17.35% 22.83% 14.38%
Ratios and supplemental data:
Net Assets, end of period (000) $343,808 $180,840 $17,155
Ratio of expenses to average net assets 1.11% 1.20% 1.25%*
Ratio of expenses to average net assets** -- 1.20% 1.74%*
Ratio of net investment income to average net assets 0.05% 0.60% 1.32%*
Ratio of net investment income to average net assets** -- 0.60% 0.83%*
Portfolio turnover 134.38% 136.74% 9.03%
Average commission rate paid*** $ .0218 $ .0288 --
- ----------------------------------
</TABLE>
* Ratios for partial years are annualized. Total return is not annualized.
** Ratios calculated as if no fees were waived or expenses reimbursed.
*** Represents the total amount of commissions paid in portfolio equity
transactions divided by the total number of shares purchased and sold by the
Fund for which commissions were charged.
The information in the Financial Highlights for the year ended December 31, 1997
has been audited by Coopers & Lybrand L.L.P., independent auditors, whose report
thereon together with the financial statements, appearing in the Annual Report
of the Trust, is incorporated by reference in the Statement of Additional
Information. Information for the years ended December 31, 1996 and prior were
audited by other auditors. The Statement of Additional information and the
Annual
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<PAGE> 20
Report for the Fund which contains further information about the Fund's
performance may be obtained free of charge by calling toll free
1 (800) 848-6331.
SALE OF FUND SHARES
Shares of the Fund are sold to life insurance company separate accounts
(the "Accounts") to fund the benefits of variable life insurance policies or
annuity contracts (the "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 Fund's investment adviser (the
"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 investment
adviser, together with a group of subadvisers, manages the portfolio from day to
day to accomplish the Fund's investment objective. The types of investments and
the way they are managed depend on what is happening in the economy and the
financial marketplaces. Each of the Accounts, as a shareholder, has an ownership
in the Fund's investments. The Fund also offers to buy back (redeem) shares of
the Fund from the Accounts at any time at net asset value.
INVESTMENT OBJECTIVE AND POLICIES
Nationwide Small Company Fund seeks long-term growth of capital. The
Fund invests primarily in equity securities of small market capitalization
companies ("small company stocks"). Market capitalization means the total market
value of a company's outstanding common stock. The Fund anticipates that under
normal market conditions, the Fund will invest at least 65% of its assets in
equity securities of domestic and foreign companies with market capitalizations
of less than $1 billion at the time of purchase. The equity securities in which
the Fund may invest include common stocks, preferred stocks (both convertible
and non-convertible), warrants and rights. It is anticipated that the Fund will
invest primarily in companies whose securities are traded on foreign or domestic
stock exchanges or in the over-the-counter market ("OTC"). The Fund may also
invest in securities of emerging growth companies, some of which may have market
capitalizations over $1 billion. Emerging growth companies are companies which
have passed their start-up phase and which show positive earnings and prospects
of achieving significant profit and gain in a relatively short period of time.
The Fund may purchase an unlimited number of foreign securities,
including securities of companies in emerging markets. The Fund may also invest
in foreign securities indirectly through American Depository Receipts ("ADRs")
and other similar instruments as described below in "INVESTMENT TECHNIQUES,
CONSIDERATIONS AND RISK FACTORS - Foreign Securities and Currencies".
Under normal conditions, the Fund intends to invest primarily in small
company stocks; however, the Fund is also permitted to invest up to 35% of its
assets in equity securities of domestic and foreign issuers with a market
capitalization of more than $1 billion at the time of purchase, debt obligations
and domestic and foreign money market instruments, including bankers
acceptances, certificates of deposit and discount notes of U.S. Government
securities. In addition, for temporary or emergency purposes, the Fund can
invest up to 100% of total assets in cash, cash equivalents, U.S. Government
securities, commercial paper and certain other money market instruments, as well
as repurchase agreements collateralized by these types of securities.
At various times the Fund may invest in derivative instruments for
hedging or risk management purposes or for any other permissable purpose. See
"INVESTMENT TECHNIQUES, CONSIDERATIONS AND RISK FACTORS - Derivative
Instruments" 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 fundamental policies of the Fund do not require
shareholder approval to change the Fund's investment objective.
MANAGEMENT OF THE FUND
Nationwide Advisory Services, Inc. has employed a group of subadvisers
(each, a "Subadviser"), each of which 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 such assets and any capital
appreciation attributable to them. In addition, it is anticipated that the
Adviser will maintain a portion of the Fund's assets in cash or money market
instruments.
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<PAGE> 21
The Adviser has chosen the Subadvisers because they utilize a number of
different investment styles when investing in small company stocks. 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 hopes to increase
prospects for investment return and to reduce market risk and volatility.
The following is a brief description of the investment strategies for
each of the Subadvisers:
THE DREYFUS CORPORATION ("Dreyfus") primarily seeks out domestic and
foreign small company stocks that have the potential for significant growth.
Dreyfus believes these companies to be characterized by new or innovative
products or services which should enhance prospects for growth in future
earnings. Dreyfus will also make investments based on prospective economic or
political changes and will invest in securities relating to special situations,
such as corporate restructurings, mergers or acquisitions, thereby seeking out
undervalued securities.
NEUBERGER & BERMAN, LLC. ("Neuberger & Berman") tries to enhance the
potential for appreciation and limit the risk of decline in the value of the
small company stocks that it purchases for the Fund by employing a
value-oriented investment approach. Neuberger & Berman seeks securities that
appear to be underpriced and are issued by companies with proven management,
sound finances and strong potential for market growth. It focuses on the
fundamentals of each smaller company, instead of trying to anticipate what
changes might occur in the stock market or in the economy or the political
environment; in doing so, the Fund's securities will be selected in the belief
that they are currently undervalued, based on existing conditions.
STRONG CAPITAL MANAGEMENT, INC. ("Strong") invests 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 which are perceived to be undervalued. In identifying companies
with favorable growth prospects, Strong considers factors such as prospects for
above-average sales and earnings growth; high return on invested capital;
overall financial strength; competitive advantages, including innovative
products and services; effective research, product development and marketing;
and stable, capable management.
PICTET INTERNATIONAL MANAGEMENT LIMITED ("PIML") AND VAN ECK ASSOCIATES
("VEAC") together invest internationally in small company stocks. PIML and VEAC
will primarily choose securities of issuers whose individual market
capitalizations would place them at the time of purchase in the same size range
as companies in approximately the lowest 20% by total market capitalization of
companies that have equities listed on major U.S. exchanges or traded in the
NASDAQ system. These companies will typically have individual market
capitalizations below $500 million. Because this policy is applied on an
international basis, the Fund may invest in companies that may rank above the
lowest 20% by total market capitalization in local markets and in some countries
such companies might rank among the largest companies in terms of
capitalization. When considering where assets will be allocated abroad, VEAC and
PIML will assess where opportunities for long-term capital appreciation are
greatest. In making specific stock selections, VEAC and PIML will invest in
quality, growth-oriented smaller companies that are relatively inexpensive.
WARBURG, PINCUS ASSET MANAGEMENT, INC. ("Warburg") invests primarily in
domestic small company stocks. Warburg may choose securities of small companies
which may be in the developmental stage, may be older companies that appear to
be entering a new stage of growth owing to factors such as management changes or
development of new technology, products or markets or may be companies providing
products or services with a high unit volume growth rate. Warburg may also
select securities of emerging growth companies, which can be either small- or
medium-sized companies that have passed their start-up phase and that show
positive earnings and prospects of achieving significant profit and gain in a
relatively short period of time. Emerging growth companies generally stand to
benefit from new products or services, technological developments or changes in
management and other factors and include smaller companies experiencing unusual
developments affecting their market value.
MANAGEMENT DISCUSSION OF FUND PERFORMANCE
The total return for the Nationwide Small Company Fund was +17.4% for the 12
month period through December 31, 1997. This compares to the Russell 2000 Index
which was up to +20.5%, respectively, for the same period. Small-cap stocks
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<PAGE> 22
performed very strong in the second and third quarters, but ended 1997 on a weak
note. The strongest sectors were led by technology, energy and consumer goods.
Foreign stocks, however, remained under pressure for much of the year.
At the end of the year, the Fund held a very diversified portfolio of 567
issues. It had 14.5% of net assets in foreign stocks, as compared to 18.7% 12
months prior. Overall, the Funds top sectors were: Oil & Gas/Energy (7.8%),
Financial Services (7.0%), (these first two sectors were very strong
performers), Health Care (5.8%), Communications/Media (5.8%), and Computer
Software (4.9%).
We maintain a positive outlook over the next twelve months. We should continue
to see positive factors influencing the economy and small-cap markets including:
low inflation, stable interest rates, and rising productivity. Small-cap
earnings trends are expected to stand superior to those of the S&P 500
companies. Also positive for our Fund is the recent reduction in the
capital-gains tax-rate. These factors teamed together should increase the
potential for improved performance in our small-cap markets.
COMPARISON OF A RETURN ON A HYPOTHETICAL $10,000 INVESTMENT
IN THE SMALL COMPANY FUND AND RUSSELL 2000
Small Company Fund Russell 2000
------------------ ------------
10/23/95 $10,000 $10,000
1995 $11,438 $10,470
1996 $14,049 $12,201
1997 $16,486 $14,914
* Initial public offering commenced October 23, 1995.
Small Company Fund
Average Annual Total Return
1 Year Life*
------ -----
17.4% 25.6%
The Russell 2000 is a broad based, unmanaged index of securities, and unlike
Fund returns does not reflect any fees or expenses. Past performance is not
predictive of future performance.
INVESTMENT TECHNIQUES, CONSIDERATIONS AND RISK FACTORS
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, they 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.
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<PAGE> 23
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 depositary 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.
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.)
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<PAGE> 24
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.
CONVERTIBLE SECURITIES
A convertible security is a fixed income security or preferred stock
that may be converted at either a stated price or stated rate into underlying
shares of common stock. 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.
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.
DEBT OBLIGATIONS
In General - Debt obligations in which the Fund may invest will be
investment-grade debt obligations, although the Fund may invest up to 5% of its
assets in non-investment-grade debt obligations. The market value of all debt
obligations is affected by changes in the prevailing interest rates. 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. In general, the longer the maturity of
a debt obligation, the greater its sensitivity to changes in interest rates.
Investment-grade debt obligations 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 ("Standard & Poor's")); 2) U.S. government
securities (as described below); 3) commercial paper rated in one of the three
highest ratings categories of any NRSRO; 4) short-term bank obligations that are
rated in one of the three highest categories by any NRSRO, with respect to
obligations maturing in one year or less; 5) repurchase agreements involving
investment-grade debt obligations; or 6) unrated debt obligations which are
determined by the Adviser or a Subadviser to be of comparable quality.
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. Securities rated in the fourth highest category by an
NRSRO, although considered investment-grade, have speculative characteristics
and may be subject to greater fluctuations in value than higher-rated
securities. Non-investment-grade debt obligations include 1) securities rated as
low as C
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<PAGE> 25
by Standard & Poor's or its equivalents; 2) commercial paper rated as low as C
by Standard & Poor's or its equivalents; or 3) unrated debt securities judged to
be of comparable quality by the Adviser or a Subadviser.
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. See "Repurchase Agreements" in the Statement of
Additional Information.
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 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 and the Tennessee Valley Authority, 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 Federal Home Loan
Mortgage Corporation, 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, for example,
securities, currencies, or reference indices. 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 corresponding losses due to 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 due to 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.
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<PAGE> 26
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
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. 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 ("SEC"), the Fund will set aside permissible liquid
assets or securities positions that substantially correlate to the market
movements of the derivatives transactions 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
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 AGAINST THE BOX
The Fund may also engage in short selling against the box as long as no
more than 15% of the value of the Fund's net assets is in deposits on short
sales against the box at any one time.
HARD ASSET SECURITIES
The Fund may invest in equity securities of issuers which are directly
or indirectly engaged to a significant extent in the exploration, development or
distribution of one or more of the following: precious metals; ferrous and
non-ferrous metals; gas, petroleum, petrochemical and/or other hydrocarbons;
forest products; real estate and other basic non-agricultural commodities
(collectively, "Hard Assets"). The production and marketing of Hard Assets may
be affected by actions and changes in governments. In addition, Hard Asset
securities may be cyclical in nature. During periods of economic or financial
instability, the securities of some Hard Asset companies may be subject to broad
price fluctuations, reflecting the volatility of energy and basic materials
prices and the possible instability of supply of various Hard Assets. In
addition, some Hard Asset companies may also be subject to the risks generally
associated with extraction of natural resources, such as the risks of mining and
oil drilling, and the risks of the hazards associated with natural resources,
such as fire, drought, increased regulatory and environmental costs, and others.
Securities of Hard Asset companies may also experience greater price
fluctuations than the relevant Hard Asset. In periods of rising Hard Asset
prices, such securities may rise at a faster rate, and, conversely, in time of
falling Hard Asset prices, such securities may suffer a greater price decline.
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
10
<PAGE> 27
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. Each Subadviser will determine the liquidity
of the Fund's securities, under the supervision of the Trust's trustees.
RESTRICTED SECURITIES, NON-PUBLICLY TRADED SECURITIES AND RULE 144A SECURITIES
Each Portfolio 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, therefore, subject to the Fund's 15%
limitation on 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, some restricted securities
and Rule 144A securities may be considered liquid.
WHEN-ISSUED AND DELAYED-DELIVERY TRANSACTIONS
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 or delayed-delivery securities
allows the Fund to lock in a fixed price or yield on a security it intends to
purchase. However, when the Fund purchases securities on such a basis, 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 or delayed-delivery securities may involve the
additional risk that the yield or market price 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 them for the purpose of actually
acquiring the securities, unless after entering into the commitment a sale
appears desirable for investment reasons. When required by SEC guidelines, the
Fund will set aside permissible liquid assets in a segregated account to secure
its outstanding commitments for these types of securities.
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 cash or liquid
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<PAGE> 28
high-grade debt 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
decision. Reverse repurchase agreements are considered to be borrowings under
the Investment Company Act of 1940 (the "1940 Act").
LENDING PORTFOLIO SECURITIES
From time to time, the Fund may lend its portfolio securities to
brokers, dealers and other financial institutions needing 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
As a fundamental policy, the Fund is permitted to borrow to the extent
permitted under the 1940 Act. However, the Fund currently intends to borrow
money only for temporary or emergency purposes (but not for leverage or the
purchase of investments, except when entering into reverse repurchase agreements
as described above), in an amount up to 33-1/3% of the value of the 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 a 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 Fund's portfolio turnover rate for the year ended December 31, 1997
was approximately 134%. 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 for the Fund may vary
greatly from year to year and within a particular year.
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<PAGE> 29
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 and, subject to the supervision of
the Trustees, provides various administrative services 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 Subadvisers. The Adviser is also authorized to
select and place portfolio investments on behalf of the Fund; however, the
Adviser generally intends to limit its direct portfolio management to the
investment of a portion of the Fund's assets in cash or money market
instruments.
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 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 and the Trust have received from the Securities and
Exchange Commisson an exemptive order for the multi-manager structure which
allows the Adviser to hire, replace or terminate subadvisers for the Fund
without the approval of shareholders; the order would also allow the Adviser to
revise a subadvisory agreement without shareholder approval. If a new subadviser
is hired, the change will be communicated to shareholders within 90 days of such
change 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 Adviser. The order is intended to facilitate the efficient operation of the
Fund and afford the Trust increased management flexibility.
The Adviser, an Ohio corporation, is a wholly owned subsidiary of
Nationwide Life Insurance Company, which is wholly 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 outstanding Class B Common Stock) to control NFS. Nationwide
Corporation is also a holding company in the Nationwide Insurance Enterprise.
The Fund pays to the Adviser a fee at the annual rate of 1.00% of the Fund's
average daily net assets. The Adviser has voluntarily agreed to waive all or
part of its fees in order to limit the Fund's total operating expenses to not
more than 1.25% of the Fund's average daily net assets on an annual basis. These
fee waivers are voluntary and may be terminated at any time.
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 for investment management. For the investment management
services they provide to the Fund, each Subadviser receives a fee from the
Adviser at the annual rate of .60% of the average daily net assets of the
portion of the Fund managed by that Subadviser.
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<PAGE> 30
Below is a brief description of each of the subadvisers.
THE DREYFUS CORPORATION. Dreyfus, located at 200 Park Avenue, New York,
New York 10166, was formed in 1947 and serves as one of the Fund's Subadvisers.
Dreyfus is a wholly-owned subsidiary of Mellon Bank, N.A., which is a
wholly-owned subsidiary of Mellon Bank Corporation ("Mellon"). As of March 31,
1998, Dreyfus managed or administered approximately $100 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 $233 billion in assets as of December 31, 1997,
including approximately $104 billion in proprietary mutual fund assets. As of
December 31, 1997, various subsidiaries of Mellon provided non-investment
services, such as custodial or administration services, for approximately $1.5
billion in assets including approximately $60 billion in mutual fund assets.
The primary portfolio managers of the portion of the Fund's portfolio
managed by Dreyfus are Paul Kandel and Hilary R. Woods. Paul Kandel serves as a
Senior Sector Manager for the technology and telecommunications industries in
the Small Capitalization Equity Group. Prior to joining Dreyfus in October 1994,
Mr. Kandel was a manager at Ark Asset Management where he researched and
recommended stocks and IPOs in the telecommunications, technology and selected
media industries. From 1988 to 1992, he was an Assistant Vice President at
Bankers Trust Company responsible for the telecommunications, electric utility,
cellular and technology industries. Mr. Kandel is a member of the Software
Analyst and Communication Technology Investment Analysts Splinter Groups. He
earned his B.A. in Economics from Harvard College and his M.B.A. with a
concentration in Finance from Columbia University Graduate School of Business.
Ms. Woods serves as a Sector Manager for the capital goods industries
in the Small Capitalization Equity Group. She has held this position and worked
in the Dreyfus Equity Research Department since 1988. Ms. Woods joined Dreyfus
in 1987 as a Senior Securities Analyst for value securities and the capital
goods industries. Previously, Ms. Woods was with Neuberger & Berman for 6-1/2
years most recently as an Assistant Portfolio Manager and Analyst. Ms. Woods
received a B.S. in History from Franklin & Marshall College and is a Chartered
Financial Analyst (CFA) and a member of the Machinery Analysts of New York, Inc.
NEUBERGER & BERMAN LLC. Neuberger & Berman also serves as a sub-adviser
to the Fund. Neuberger & Berman and its predecessor firms have specialized in
the management of no-load mutual funds since 1950.
Neuberger & Berman and its affiliates manage securities accounts that
had over $52 billion of assets as of December 31, 1997. Neuberger & Berman is a
member firm of the NYSE and other principal exchanges and acts as the Fund's
principal broker in the purchase and sale of their securities for that portion
of the Fund's portfolio managed by Neuberger & Berman.
Judith M. Vale, who has been a member of the Small Cap Group since
1992, and Robert D'Alelio, who has been a member of the Small Cap Group since
1996, are responsible for the day-to-day management of Nueberger & Berman's
advisory activities for the Fund. Ms. Vale and Mr. D'Alelio also have primary
responsibility for the day-to-day management of the Neuberger & Berman Genesis
Portfolio. Ms. Vale was a portfolio manager for another investment management
group from 1990 to 1992, and was a senior fund analyst at another prominent
investment adviser from 1987 to 1990. Mr. D'Alelio was a senior portfolio
manager for another investment management group from 1992 to 1996.
STRONG CAPITAL MANAGEMENT, INC. Strong, which also serves as one of the
Subadvisers for the Fund, 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 February 28, 1998, Strong had over $29
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.
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<PAGE> 31
Ronald C. Ognar is responsible for Strong's portfolio management
activities for the Fund. Mr. 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. He
received his bachelor's degree in accounting from the University of Illinois in
1968. In addition to his portfolio management duties for the Fund, he also
manages the Strong Growth Fund , Strong Growth Fund II and co-manages the Strong
Total Return Fund, and the Strong Asset Allocation.
PICTET INTERNATIONAL MANAGEMENT LIMITED AND VAN ECK ASSOCIATES
CORPORATION. VEAC and PIML will together manage a portion of the Fund. VEAC is
located at 99 Park Avenue, New York, New York 10016. PIML is located at Cutlers
Gardens, 5 Devonshire Square, London, United Kingdom EC2M 4LD. PIML is primarily
responsible for managing the portion of the Fund's assets allocated to the PIML
and VEAC. PIML determines which securities are to be bought and sold. VEAC,
however, makes recommendations to PIML regarding Hard Asset securities. VEAC
will also make recommendations regarding the allocation among each of the Hard
Asset sectors. PIML is not obligated to act on VEAC's recommendation's and the
amount, if any, allocated to Hard Assets will be determined by PIML. VEAC will
also assist PIML on issues regarding determining the liquidity of securities,
portfolio diversification and matters involving United States federal securities
and tax law as they apply to management of the Fund.
PIML is an affiliate of Pictet & Cie ("Pictet"). Pictet was founded in
1805 and is the largest Private Swiss Bank as well as the leading specialist
investment bank domiciled in Europe. Pictet has a worldwide network of offices
employing over 200 investment professionals in Geneva, London, Zurich,
Luxembourg, Hong Kong, Tokyo, Montreal and Nassau. PIML has access to all of
Pictet's investment infrastructure. As of December 31, 1997, total assets under
management by Pictet and its affiliates, including PIML, on behalf of all
clients, was in excess of $52 billion.
In performing its investment management duties, PIML assigns a team of
managers led by a Chief Investment Officer. The primary portfolio managers for
the Fund are listed below. This team also performs similar functions for the Van
Eck Worldwide Insurance Trust, Worldwide Small Cap Fund and the Van Eck Funds
Global Small Cap Fund.
Nicholas Johnson is the Chief Investment Officer and Chief Investment
Officer for the portion of the Fund managed by PIML. Mr. Johnson is responsible
for all aspects of the investment process including global asset allocation.
Prior to joining PIML in 1993, Mr. Johnson specialized in Japanese and Asian
investments at Invesco MIM, where he had been head of international investment
responsible for investment operations outside of North America.
Jonathan Neill is a Senior Investment Manager for the portion of the
Fund managed by PIML. Mr. Neill is jointly responsible for worldwide small
companies and emerging markets. Prior to joining PIML in 1990, Mr. Neill worked
for two years with Mercury Asset Management as an investment manager responsible
for specialist international funds.
Douglas Polunin is also a Senior Investment Manager for the portion of
the Fund managed by PIML. Mr. Polunin joined PIML in 1989 and is jointly
responsible for worldwide small companies and emerging markets. Prior to joining
PIML, Mr. Polunin spent two and a half years with the Union Bank of Switzerland
in London where he was in charge of the Discretionary Portfolio Management
section. Before that, he spent four years as an equity analyst with UBS in
Switzerland.
Richard Yarlott is a Senior Investment Manager within the small
companies and emerging markets team and for the portion of the Fund managed by
PIML. His main responsibilities currently include asset allocation and
securities analysis on an international basis. Prior to joining PIML in 1994,
Mr. Yarlott worked for over ten years in banking, strategic consulting and
private investment. In 1985 he joined JP Morgan where he worked in structured
finance and merger and acquisition roles until 1990. He spent two years as a
principal for a private investment company, and subsequently worked for Marakom
Associates, a value-based consulting firm.
For VEAC, Derek van Eck assists PIML regarding the Hard Asset sector.
He is an Analyst and is Director of Global Investments and Executive Vice
President of VEAC. Mr. van Eck is also an officer and portfolio manager of other
mutual funds advised by VEAC, including Worldwide Hard Assets Fund.
WARBURG, PINCUS ASSET MANAGEMENT, INC. The Fund also employs Warburg as
a Subadviser to the Fund. Warburg is a professional investment counselling firm
which provides investment services to investment companies, employee benefit
plans, endowment funds, foundations and other institutions and individuals. As
of March 31, 1998, Warburg managed
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<PAGE> 32
approximately $22 billion of assets including approximately $10.9 billion of
investment company assets. Incorporated in 1970, Warburg is a wholly owned
subsidiary of Warburg, Pincus Counsellors G.P. ("Warburg G.P."), a New York
general partnership which itself is controlled by Warburg, Pincus & Co. ("W P &
Co."), also a New York general partnership. Lionel I.Pincus, the managing
partner of W P & Co., may be deemed to control, both W P & Co. and Warburg.
Warburg G.P. has no business other than being a holding company of Warburg and
its subsidiaries. Warburg's address is 466 Lexington Avenue, New York, New York
10017-3147.
The portfolio managers for Warburg's portion of the Fund are Elizabeth
B. Dater and Stephen J. Lurito. Ms. Dater and Mr. Lurito are also co-portfolio
managers of Warburg, Pincus Emerging Growth Fund and Warburg, Pincus Small
Company Growth Portfolio, a portfolio of Warburg, Pincus Trust. Ms. Dater is a
managing director of EMW and has been a portfolio manager of Warburg since 1978.
Mr. Lurito is a managing director of EMW and has been with Warburg since 1987,
before which time he was a research analyst at Sanford C. Bernstein & Company,
Inc.
OTHER SERVICES
The Transfer and Dividend Disbursing Agent, Nationwide Investors
Services, Inc., ("NIS"), Three Nationwide Plaza, Columbus, Ohio 43215, serves as
transfer agent and dividend disbursing agent for the Trust. NIS is a wholly
owned subsidiary of NAS. For these services, NIS receives a fee, calculated
daily and paid monthly, at an annual rate of .01% of the Fund's average daily
net asets.
INVESTMENT IN FUND SHARES
An insurance company purchases the shares of the Fund at the Fund's net
asset value using purchase payments received on Contracts issued by Accounts.
These Accounts are funded by shares of the Fund. There is no sales charge.
All shares are sold at net asset value.
Shares of the Funds may be sold to the Accounts to fund the benefits of
Contracts issued by Nationwide Life Insurance and Nationwide Life and Annuity
Insurance Companies, as well as to Funds of Funds created by Nationwide Advisory
Services, Inc., the Fund's investment advisor.
All investments in the Fund are credited to the Accounts 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 policies.
SHARE REDEMPTION
An Account redeems shares to make benefit or surrender payments under
the terms of its Contracts. 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 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, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, and Thanksgiving. 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, or if
there is no sale on that day, the securities are valued at the prior day's
closing price as provided by an independent pricing organization. Securities
traded in the over-the-counter market are valued at the last quoted sales price,
or if there is no sale on that day, the quoted bid price as provided by an
independent pricing organization. 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 other comparable securities in a matrix
of such securities. The pricing
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<PAGE> 33
service activities and results are reviewed by an officer of the Trust.
Securities for which market quotations are not readily available, or for which
an independent pricing organization does not provide a value or provides a value
that does not represent fair market value in the judgement of the Adviser, 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:
o when the New York Stock Exchange is closed (other than weekends
and holidays) or trading is restricted;
o when an emergency exists, making disposal of portfolio securities
or the valuation of net assets not reasonably practicable; or
o 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 distributed to shareholders quarterly in the form of additional shares
of the Fund. In those years in which sales of the Fund's portfolio securities
result in net realized capital gains, these gains will be declared and cause to
be paid to shareholders in December.
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 that Fund with each other share. The Trust reserves the right to
create and issue shares for a number of different Funds and currently has
authorized 15 separate funds. The shares of each Fund would participate equally
in the earnings, dividends, and assets of that particular Fund. 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. Generally, 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:
o designate series of the Trust;
o change the name of the Trust; or
o 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, when issued,
are fully paid and nonassessable, except as set forth below. In regard to
termination, sale of assets, or changes of fundamental investment restrictions,
the right to vote is limited to the holders of shares of the particular Fund
affected by the proposal. However, shares of all Funds would vote together, and
not by Fund, in the election of Trustees. If an issue must be approved by a
majority as defined by the 1940 Act a "majority of the outstanding voting
securities" means the lesser of (i) 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 (ii) more than 50% of the outstanding shares. For
the election of Trustees, only a plurality is required.
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> 34
ADVERTISING PERFORMANCE 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 Fund intends to qualify as a regulated investment company and to
meet the requirements of Subchapter M of the Internal Revenue Code of 1986, as
amended, and therefore must distribute substantially all its taxable net
investment income and capital gains to shareholders annually. In general, if a
fund distributes all of its net investment income, it is not 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 from those of
other funds of the Trust 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.
Dividends and interest received by the Fund may be subject to
withholding and other taxes imposed by foreign countries. However, tax
conventions between certain countries and the United States may reduce or
eliminate such taxes. Contract 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 Contracts.
The tax treatment of payments made by an Account to a Contractholder is
described in the separate account prospectus.
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<PAGE> 35
CONTENTS PAGE
- -------- ----
Summary of Fund Expenses 2
Financial Highlights 3
Sale of Fund Shares 4
Investment Objective and Policies 4
Management of the Fund 4
Management Discussion of Fund Performance 5
Investment Techniques, Considerations and Risk Factors 6
Management of the Trust 13
Investment in Fund Shares 16
Share Redemption 16
Net Income and Distributions 17
Additional Information 17
Advertising Performance for the Fund 18
Tax Status 18
INVESTMENT ADVISER
Nationwide Advisory Services, Inc.
Three Nationwide Plaza
Columbus, Ohio 43215
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Nationwide Investors Services, Inc.
P.O. Box 1492
Three Nationwide Plaza
Columbus, Ohio 43216
INDEPENDENT AUDITORS
Coopers & Lybrand L.L.P.
100 East Broad Street
Columbus, Ohio 43215
LEGAL COUNSEL
Druen, Dietrich, Reynolds & Koogler
One Nationwide Plaza
Columbus, Ohio 43215
<PAGE> 36
PROSPECTUS
MAY 1, 1998
SHARES OF BENEFICIAL INTEREST
NATIONWIDE INCOME FUND
NATIONWIDE SEPARATE ACCOUNT TRUST
THREE NATIONWIDE PLAZA
COLUMBUS, OHIO 43215
FOR INFORMATION AND ASSISTANCE,
CALL TOLL FREE 1(800) 848-6331
Nationwide Income 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 fifteen separate mutual funds, each with its own investment objective. This
Prospectus relates only to only one of those funds, Nationwide Income Fund (the
"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. Nationwide Advisory
Service, Inc. may from time to time use one or more subadvisers to manage the
Fund's portfolio as part of a multi-manager structure (See "Investment
Management of the Fund").
The Fund seeks to provide as high a level of income as is consistent with
reasonable concern for safety of principal. The Fund intends to pursue its
investment objective by investing in investment grade corporate and U.S.
Government debt 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 May 1, 1998, has been filed with the
Securities and Exchange Commission. You can obtain a copy without charge by
calling toll free 1 (800) 848-6331, 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 OR ANY STATE SECURITIES 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 MAY 1, 1998, IS
INCORPORATED BY REFERENCE.
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SALE OF FUND SHARES
Shares of the Fund are 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. Each Fund of Funds and
Accounts, as a shareholder, has an ownership in the Fund's investments. The Fund
also offers to buy back (redeem) shares of the Fund from the Fund of Funds or
the Accounts at any time at net asset value.
The Adviser, together with a group of subadvisers, manages the portfolio from
day to day to accomplish the Fund's investment objective. The types of
investments and the way they are managed depend on what is happening in the
economy and the financial marketplaces.
SUMMARY OF EXPENSES
Shareholder Transaction Expenses None
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees 0.45%
Other Expenses (after voluntary fee reductions) 0.30%
---------
Total Fund Operating Expenses (after voluntary fee reductions) 0.75%
=========
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.
Other Expenses is based on estimated amounts for the fiscal year ending December
31, 1998. The Advisor has agreed to reimburse the Fund total expenses in excess
of 0.75% for the fiscal year ending December 31, 1998.
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
------ -------
$8 $24
THE EXAMPLE SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
For more information on Fund expenses, see "Management of the Trust".
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INVESTMENT OBJECTIVE AND POLICIES
Nationwide Income Fund seeks to provide as high a level of income as is
consistent with reasonable concern for safety of principal. The Fund intends to
pursue its investment objective by investing at least 65% of its assets, under
normal market conditions, in investment grade corporate and U.S. Government debt
obligations. Under normal market conditions, the Fund may invest up to 35% of
its assets in cash or cash equivalents, commercial paper and certain other money
market instruments, as well as repurchase agreements collateralized by these
types of securities (collectively, "short-term money market obligations"). For a
further discussion of the types of debt obligations in which the Fund may
invest, see "INVESTMENT TECHNIQUES, CONSIDERATIONS AND RISK FACTORS" below.
In addition, for temporary or emergency purposes, the Fund can invest up to 100%
of total assets in short-term money market obligations.
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 has employed two subadvisers (each, a "Subadviser") each of which
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 assets that are invested in the Fund and will generally
retain management of such assets and any capital appreciation attributable to
them.
The Adviser has chosen the Subadvisers because they approach investing in debt
obligations 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 for each of
the Subadvisers:
NCM CAPITAL MANAGEMENT GROUP, INC. ("NCM Capital") manages fixed income
securities by selecting a diversified portfolio of investment grade issues in
which overall credit risk is minimized. NCM Capital established the average
maturity and duration of a portfolio based on the intermediate and longer-term
outlook of interest rates, the economy and the financial markets. No attempt is
made to manage portfolios based on daily or short-term fluctuations in interest
rates or economic statistics.
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Subsequent to establishing the average maturity and duration of a portfolio, NCM
Capital determines which sectors of the fixed income market offer the most
attractive potential returns. Over a market cycle, individual sectors are either
emphasized or de-emphasized based on their relative value after analyzing the
current and prospective developments in the economy and the financial markets.
After determining the sector to be emphasized or de-emphasized, NCM Capital
selects the specific issues which offer the greatest potential returns over a
selected time horizon.
SMITH GRAHAM & CO. ASSET MANAGERS, L.P. ("Smith Graham") Smith Graham's
investment process centers around maximizing stable cash flows across the yield
curve. Cash flows in this context consist of coupon income on fixed income
securities, prepayments from mortgage securities and the reinvestment of income
and prepayments. Smith Graham begins by analyzing the characteristics that
determine performance and then utilizes proprietary software models to identify
the least expensive segments of the yield curve. Incremental performance is also
obtained by investing in undervalued sectors and undervalued securities.
INVESTMENT TECHNIQUES, CONSIDERATIONS AND RISK FACTORS
DEBT OBLIGATIONS - Debt obligations in which the Fund may invest generally will
be investment grade debt obligations, although the Fund may invest up to 35% of
its assets in high-quality short-term money market obligations. The Fund's risk
and return potential 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. Although the fluctuation in the price of bonds is normally
less than that of common stocks, in the past there have been extended periods of
cyclical increases in interest rates that have caused significant declines in
the price of bonds in general and have caused the effective maturity of
securities with prepayment features to be extended, thus effectively converting
short and intermediate term securities (which tend to be less volatile in price)
into longer term securities (which tend to be more volatile in price).
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) 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 the Fund could purchase directly; or 6) unrated debt
obligations which are determined by the Adviser or a Subadviser to be of
comparable quality.
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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 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 and the Tennessee Valley Authority, 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 Federal Home Loan
Mortgage Corporation, 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- 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 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
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governmental guarantee of the underlying mortgage assets but with some form of
non-governmental credit enhancement.
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 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 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.
The Fund may invest in stripped mortgage- or asset-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 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 the Fund
failing to recover all or a portion of its investment, even though the
securities are rated investment grade.
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
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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. See "Repurchase Agreements" in the Statement of Additional Information.
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).
WHEN-ISSUED OR DELAYED-DELIVERY 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 or delayed-delivery securities allows the Fund to
lock in a fixed price or yield on a security it intends to purchase. However,
when the Fund purchases securities on such a basis, 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 or delayed-delivery securities may involve the additional
risk that the yield or market price 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 them 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 these types of
securities.
LENDING PORTFOLIO SECURITIES - From time to time, the Fund may lend its
portfolio securities to brokers, dealers and other financial institutions
needing 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.
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BORROWING MONEY - The Fund may borrow money from banks limited by any investment
restrictions to 33-1/3% of its total assets. 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.
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 a 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 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 for the Fund may vary greatly from year to year and
within a particular year.
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 determines the allocation of assets among the Subadvisers and
evaluates and monitors the performance of 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 received from the Securities and Exchange
Commission an exemptive order for the multi-manager structure which allows the
Adviser to hire, replace or terminate subadvisers without the approval of
shareholders; the order also allows the Adviser to revise a subadvisory
agreement without shareholder approval. If a new subadviser is hired, the change
will be communicated to shareholders within 90 days of such change, and all
changes will be approved by the Trust's Board of Trustees, including a majority
of the Trustees who are interested
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<PAGE> 44
persons of the Trust or the Adviser. The order is intended to facilitate the
efficient operation of the Fund and afford the Trust increased management
flexibility.
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 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. The Fund pays to the
Adviser a fee at the annual rate of 0.45% 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 makes investment decisions
for the Fund and in connection with such investment decisions places 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 for
investment management. For the investment management services they provide to
the Fund, each Subadviser receives an annual fee from the Adviser based on the
average daily net assets of the portion of the Fund managed by that Subadviser
as specified below:
Subadvisory Fees Average Daily Net Assets
---------------- ------------------------
0.25% on the first $100 million
0.15% on assets in excess of $100
million
The fees for each of the Subadvisers are subject to the following annual minimum
fees: $15,000 for NCM Capital and $25,000 for Smith Graham.
Below is a brief description of each of the subadvisers.
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NCM Capital Management Group, Inc. NCM Capital was founded in 1986 and serves as
one of the Fund's Subadvisers. As of December 31, 1997, NCM Capital had
approximately $4.2 billion in assets under management.
NCM Capital's Chairman of the Board, President and Chief Executive Officer is
Maceo K. Sloan. Other directors are Justin F. Beckett, Executive Vice President;
Peter J. Anderson, Chairman and Chief Investment Officer of American Express
Asset Management Group Inc.; and Morris Goodwin, Jr., Vice President, Corporate
Treasurer, American Express Financial Advisers Inc.
NCM Capital is a wholly-owned subsidiary of Sloan Financial Group, Inc. Both NCM
Capital and Sloan Financial Group, Inc. are located at 103 West Main Street, 4th
Floor, Durham, North Carolina 27701. Sloan Financial Group, Inc. is a
corporation of which Maceo K. Sloan, CFA, Chairman, President and Chief
Executive Officer of NCM Capital, owns 43%; Justin F. Beckett, Executive Vice
President and director of NCM Capital, owns 17%; and IDS Financial Services
Inc., a wholly-owned subsidiary of American Express Company owns 40% as of
December 31, 1997.
The primary portfolio manager of the portion of the Funds' portfolio managed by
NCM Capital is Paul L. Van Kampen, CFA. Mr. Van Kampen joined NCM Capital as
Senior Vice President and the Director of Fixed Income Research. Prior to
joining NCM Capital, he was an Executive Director of Aon Advisors, Inc. Mr. Van
Kampen has both an M.A. and B.S. from the University of Alabama and has over 28
years of investment experience.
Smith Graham & Co. Asset Managers, L.P. Smith Graham also serves as a subadviser
to the Fund. Its corporate offices are located at 6900 Texas Commerce Tower, 600
Travis Street, Houston, Texas 77002-3007. Smith Graham serves as an investment
adviser to a variety of corporate, foundation, public, Taft Hartley and mutual
fund clients. The firm provides global and international money management
through its affiliate Smith Graham Robeco Global Advisers. As of December 31,
1997, Smith Graham managed approximately $2 billion of assets.
Smith Graham is 60% owned by its Managing General Partner, Smith Graham & Co.,
Inc., while 40% of the firm is owned by the Dutch based Robeco Group. Smith
Graham & Co., Inc. is wholly owned by Gerald B. Smith, Ladell Graham and Jamie
G. House.
The management group of Smith Graham consists of Gerald B. Smith, Chairman and
Chief Executive Officer; Ladell Graham, President and Chief Investment Officer;
Jamie G. House, Executive Vice President and Chief Financial Officer; and
Gilbert A. Garcia, Executive Vice President and Director of Marketing.
The primary portfolio manager of the portion of the Fund's portfolio managed by
Smith Graham is Mark Delaney. Mr. Delaney joined Smith Graham in November 1994
and currently serves as a Portfolio Manager. From July 1988 to November 1994, he
was a Senior Portfolio Manager for
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<PAGE> 46
Transamerica Fund Management. Mr. Delaney has over 15 years of experience in
fixed income investing.
OTHER SERVICES
Under the terms of an Administrative Services Agreement, the Adviser also
provides various administrative and accounting services to the Fund, including
daily valuation of the Fund's shares, preparation of financial statements,
taxes, and regulatory reports. For these services the Fund pays to the Adviser a
fee at the annual rate of 0.07% of the Fund's average daily net assets up to
$250 million in assets, 0.05% on the next $750 million and 0.04% on assets of $1
billion and more.
The Transfer and Dividend Disbursing Agent, Nationwide Investors Services, Inc.,
("NIS"), Three Nationwide Plaza, Columbus, Ohio 43215, serves as transfer agent
and dividend disbursing agent for the Trust. NIS is a wholly owned subsidiary of
the Adviser. For these services, the Fund pays NIS a fee at the annual rate of
.01% of the Fund's average daily net assets.
In addition to paying for the advisory, fund administration and transfer agency
services described above, the Fund pays its own expenses including services
provided by its custodian, the Trust's independent accountants and legal
counsel, charges and expenses of dividend and capital gain distributions, a
portion of the compensation paid to the Trust's Trustees who are not "interested
persons" of the Adviser and of the expenses of Trustees' meetings, brokerage
commissions and other expenses related to securities transactions, taxes,
insurance and bonding premiums, association membership dues, and expenses
relating to shareholders' meetings and to the printing and distributing of
prospectuses to current shareholders.
INVESTMENT IN FUND SHARES
An insurance company may purchase the shares of the Fund at the Fund's net asset
value 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. 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 Contracts and to
affiliated Fund of Funds. The address for each of these entities is One
Nationwide Plaza, Columbus, Ohio 43216.
All investments in the Fund are credited to the Accounts 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.
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<PAGE> 47
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 as of the close of
regular trading on the New York Stock Exchange (usually 4 p.m. Eastern Time),
each day the exchange is open and on such other days as the Board of Trustees
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 Fund
does not compute net asset value on customary national business holidays,
including the following: Christmas, New Year's Day, Martin Luther King, Jr. Day,
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 quoted sale price on the principal exchange, or
if there is no sale on that day, the securities are valued at the prior day's
closing price as provided by an independent pricing organization. Securities
traded in the over-the-counter market are valued at the last quoted sale price,
or if there is no sale on that day the quoted bid price as provided by an
independent pricing organization.. 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, or for which an independent pricing organization does not
provide a value or provides a value that does not represent fair value in the
judgement of the Adviser 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:
o when the New York Stock Exchange is closed (other than weekends and
holidays) or trading is restricted;
o when an emergency exists, making disposal of portfolio securities or
the valuation of net assets not reasonably practicable; or
o during any period when the Securities and Exchange Commission has by
order permitted a suspension of redemption for the protection of
shareholders.
12
<PAGE> 48
NET INCOME AND DISTRIBUTIONS
Substantially all of the net investment income, if any, of the Funds will be
paid as dividends quarterly in the form of additional shares of the Fund. In
those years in which sales of the Fund's portfolio securities result in net
realized capital gains, these gains will be declared and cause to be paid to
shareholders in December.
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 that
Fund with each other share. The Trust reserves the right to create and issue
shares from a number of different Funds and currently has authorized 15 separate
funds. The shares of each Fund participate equally in the earnings, dividends,
and assets of that particular Fund. 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. Generally, 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:
o designate series of the Trust;
o change the name of the Trust; or
o 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, when issued, are fully
paid and nonassessable, except as set forth below. In regard to termination,
sale of assets, or changes of fundamental investment restrictions, the right to
vote is limited to the holders of shares of the particular Fund affected by the
proposal. However, shares of all Funds would vote together, and not by fund, in
the election of Trustees. If an issue must be approved by a majority as defined
by the 1940 Act, a "majority of outstanding voting securities" means the lesser
of (I) 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 (ii)
more than 50% of the outstanding shares. For the election of Trustees only a
plurality is required.
13
<PAGE> 49
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.
The Fund may also advertise its SEC yield. The SEC yield is based on a 30-day
period. This yield takes into account the yields to maturity on all debt
instruments and all dividends accrued on equity securities since equity
securities do not have maturity dates. The SEC yield is computed by dividing the
net investment income per share earned during the 30-day period by the maximum
offering price per share on the last day of the period.
TAX STATUS
The Trust's policy is 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, or substantially all, its taxable net income and
capital gains to shareholders, and therefore, will not be required to pay any
federal income taxes.
Because the Fund 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 from those of other funds of the Trust 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.
14
<PAGE> 50
CONTENTS PAGE
Sale of Fund Shares 2
Summary of Expenses 2
Investment Objective and Policies 3
Investment Techniques, Considerations and Risk Factors 4
Management of the Trust 8
Investment in Fund Shares 11
Share Redemption 12
Net Income and Distributions 13
Additional Information 13
Performance Advertising for the Fund 14
Tax Status 14
INVESTMENT ADVISER AND ADMINISTRATOR
Nationwide Advisory Services, Inc.
Three Nationwide Plaza
Columbus, Ohio 43215
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Nationwide Investors Services, Inc.
P.O. Box 1492
Three Nationwide Plaza
Columbus, Ohio 43215
AUDITORS
Coopers & Lybrand L.L.P.
100 East Broad Street
Columbus, Ohio 43215
LEGAL COUNSEL
Druen, Dietrich, Reynolds & Koogler
One Nationwide Plaza
Columbus, Ohio 43215
15
<PAGE> 51
PROSPECTUS
MAY 1, 1998
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 TOLL FREE 1-800-848-6331
Nationwide Select Advisers Mid Cap 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
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 one of those funds,
Nationwide Select Advisers Mid Cap Fund (the "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. Nationwide Advisory Services, Inc. may from time
to time use one or more subadvisers to manage the Fund's portfolios as a part of
a multi-manager structure (see "Investment Management of the Fund").
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 May 1, 1998, has been filed with the
Securities and Exchange Commission. You can obtain a copy without charge by
calling 1-800-848-6331, 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 FUND, DATED MAY 1, 1998, IS
INCORPORATED HEREIN BY REFERENCE.
<PAGE> 52
SALE OF FUND SHARES
Shares of the Fund are 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. 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.
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.
<TABLE>
<CAPTION>
SUMMARY OF EXPENSES
<S> <C>
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 (after voluntary fee reductions) 0.15%
-----
Estimated Total Fund Operating Expenses (after voluntary fee reductions)(1) 1.20%
=====
</TABLE>
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, 1998.
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
------ -------
$12 $38
THE EXAMPLE SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS 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 if necessary to limit the total
expense ratio of the Fund to a maximum of 1.20% through April 30, 1999.
<PAGE> 53
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD
PERIOD FROM
OCTOBER 31, 1997
(COMMENCEMENT
OF OPERATIONS)
THROUGH DECEMBER 31,
1997
----
NET ASSET VALUE--BEGINNING OF
PERIOD $ 10.00
Net investment income 0.02
Net realized gain (loss) and unrealized
appreciation (depreciation) on investments (0.06)
Total from investment operations (0.04)
Dividends from net investment income (0.02)
Net increase (decrease) in net asset value (0.06)
NET ASSET VALUE--END OF PERIOD $ 9.94
=======
Total Return (0.36)%
Ratios and supplemental data:
Net Assets, end of period (000) $ 3,214
Ratio of expenses to average net assets 1.20%*
Ratio of expenses to average net assets** 3.31%*
Ratio of net investment income to average
net assets 1.55%*
Ratio of net investment income to average
net assets** (0.56)%*
Portfolio turnover 7.81%
Average commission rate paid*** $ .0647
- --------------------------------------------------------------------------------
*Ratios are annualized for periods of less than one year. Total return and
portfolio turnover are not annualized.
**Ratios calculated as if no fees were waived or expenses reimbursed.
***Represents the total amount of commissions paid in portfolio equity
transactions divided by the total number of shares purchased and sold by
the Fund for which commissions were charged.
The information in the Financial Highlights has been audited by Coopers &
Lybrand L.L.P., Independent Auditors, whose report thereon, together with the
financial statements appearing in the Annual Report for the Trust, are
incorporated by reference in the Statement of Additional Information. The
Trust's Statement of Additional Information and the Annual Report may be
obtained free of charge by calling 1-800-848-6331.
3
<PAGE> 54
INVESTMENT OBJECTIVE AND POLICIES
Nationwide Select Advisers Mid Cap 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.
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.
4
<PAGE> 55
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
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 assets 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:
o High return on capital
o Solid balance sheet
o Meaningful cash flow
o Active share repurchase program
o Insider buying
o Superior management seeking to maximize shareholder value
o 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
5
<PAGE> 56
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 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
6
<PAGE> 57
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 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
7
<PAGE> 58
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 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; 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 generally invests only in securities that are regularly traded
on recognized exchanges or in the over-the-counter market ("OTC"), from time to
time, foreign securities may be difficult to liquidate rapidly without adverse
price effects. Certain costs attributable to foreign investing,
8
<PAGE> 59
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 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
9
<PAGE> 60
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.
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 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.
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<PAGE> 61
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
- - the Student Loan Marketing Association and Federal Home Loan Mortgage
Corporation ("FHLMC"), 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,
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<PAGE> 62
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 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
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<PAGE> 63
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
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.
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<PAGE> 64
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 of 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
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<PAGE> 65
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
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
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<PAGE> 66
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 OR DELAYED-DELIVERY 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 or delayed-delivery securities allows the Fund to
lock in a fixed price or yield on a security it intends to purchase. However,
when the Fund purchases securities on such a basis, 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 or delayed-delivery securities may involve the additional
risk that the yield or market price 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 them 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 these types of
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 - 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.
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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.
PERFORMANCE INFORMATION
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.
The average annual total return for the Select Advisers Mid Cap Fund for the
period October 31, 1997 (date of commencement of operations) through March 31,
1998 was 8.50%. 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
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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").
THE INVESTMENT PERFORMANCE OF THE SUBADVISER HISTORICAL PERFORMANCE DOES NOT
REPRESENT THE FUND'S PERFORMANCE, NOR SHOULD IT BE INTERPRETED AS INDICATIVE OF
THE FUND'S FUTURE PERFORMANCE.
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.
<TABLE>
<CAPTION>
ANNUALIZED TOTAL RETURN
FOR PERIODS ENDING MARCH 31, 1998
(NET OF FEES)
Since
1 year 3 years 5 years 10 years Inception*
------ ------- ------- -------- ----------
<S> <C> <C> <C> <C> <C>
FPA Crescent Portfolio 25.96% 23.74% 18.87%
Pilgrim Baxter Mid Cap 31.23% 19.96% 16.02% 15.34%
Rice, Hall Small-Mid 43.54% 29.82% 22.42% 18.27%
</TABLE>
*Inception date for the FPA Crescent Portfolio was 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.
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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 1.48% based on the FPA Crescent
Portfolio's operations during the fiscal year ended March 31, 1998, 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.
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 A SUBADVISER WOULD RESULT IN DIFFERENT PERFORMANCE DATES.
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 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 received from the Securities and Exchange
Commission an exemptive order for the multi-manager structure which allows the
Adviser to hire, replace or
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<PAGE> 70
terminate subadvisers without the approval of shareholders; the order also
allows the Adviser to revise a subadvisory agreement without shareholder
approval. If a new subadviser is hired, the change will be communicated to
shareholders within 90 days of such change, 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 is intended to
facilitate the efficient operation of the Fund and afford the Trust increased
management flexibility.
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 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 makes investment decisions
for the Fund, and in connection with such investment decisions places 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% on assets up to $50 million managed by such Subadviser
and 0.50% on assets of $50 million and more managed by a Subadviser. These fees
are calculated at an annual rate based on the average daily net assets managed
by each Subadviser. 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
20
<PAGE> 71
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 826
Duportail Road, Wayne, Pennsylvania 19087.
Jeffrey A. Wrona manages mid cap growth portfolios, has additional equity
research responsibilities for those portfolios and serves as manager for that
portion of the Fund allocated to Pilgram Baxter. Mr. Wrona joined Pilgrim Baxter
from Munder Capital Management, where he worked as a Senior Portfolio Manager
for seven years. There, he co-founded Munder's Mid Cap Growth product and
managed both mutual fund and separate account portfolios. His prior industry
experience includes securities analysis at Drexel Burnham Lambert. He began his
business career as a product design engineer with Ford Motor Company. Mr. Wrona
received his BS in engineering and MBA from the University of Michigan, and is a
Chartered Financial Analyst.
RICE, HALL, JAMES & ASSOCIATES
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 has approximately $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 that portion of the Fund allocated to Rice, Hall 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.
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<PAGE> 72
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 a wholly-owned subsidiary of United
Asset Management Holdings, Inc., which is a 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,
Massachusetts 02100.
OTHER SERVICES
Under the terms of a Fund Administration Agreement, the Adviser also provides
various administrative and accounting services to the Fund, 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% on assets up to $250 million, 0.05% on the
next $750 million and 0.04% on assets of $1 billion and more. These fees are
calculated at an annual rate based upon the Fund's average daily net assets.
The Transfer and Dividend Disbursing Agent, Nationwide Investors Services, Inc.,
("NIS"), Three Nationwide Plaza, Columbus, Ohio 43215, 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.
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<PAGE> 73
In addition to paying for the advisory, fund administration and transfer agency
services described above, the Fund pays its own expenses including services
provided by its custodian, the Trust's independent accountants and legal
counsel, charges and expenses of dividend and capital gain distributions, a
portion of the compensation paid to the Trust's Trustees who are not "interested
persons" of the Adviser and of the expenses of Trustees' meetings, brokerage
commissions and other expenses related to securities transactions, taxes,
insurance and bonding premiums, association membership dues, and expenses
relating to the issuance, registration and qualification of the Fund's
securities. The Fund may also pay for certain expenses relating to shareholders'
meetings and to the printing and distributing of prospectuses to current
shareholders.
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 Contracts and to
affiliated Fund of Funds. Substantially all of the Fund's shares were owned by
separate accounts of Nationwide Life Insurance Company and Nationwide Life and
Annuity Insurance Company as of April 1, 1998. The address for each of these
entities is One Nationwide Plaza, Columbus, Ohio 43215.
All investments in the Fund are credited to the Accounts 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 Fund does not compute net
asset value on customary national business holidays, including the following:
Christmas, New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, and Thanksgiving Day. The net
asset value per share is
23
<PAGE> 74
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, or if
there is no sale on that day, the securities are valued at the prior day's
closing prices provided by an independent pricing organization. Securities
traded in the over-the-counter market are valued at the last quoted sale price,
or if there is no sale on that day, the quoted bid price as provided by an
independent pricing organization. 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, or for which an independent pricing organization does not
provide a value or provides a value that does not represent fair value in the
judgement of the Adviser, 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 in the form of additional shares of the
Fund. 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, and currently has authorized 15 separate
funds. The shares of each fund participate equally in the earnings, dividends,
and assets of
24
<PAGE> 75
that particular fund. 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. Generally, amendment may be made
to the Declaration of Trust without the affirmative vote of a majority of the
outstanding voting securities 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;
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, when issued, are fully
paid and nonassessable. In regard to termination, sale of assets, or changes of
fundamental investment restrictions, the right to vote is limited to the holders
of shares of the particular fund affected by the proposal. However, shares of
all funds would vote together, and not by fund, in the election of Trustees. If
an issue must be approved by a majority as defined by the 1940 Act a "majority
of the outstanding voting shares" means the lesser of (i) 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 (ii) more than 50% of the
outstanding shares. For the election of Trustees only a plurality is required.
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.
TAX STATUS
The Trust's policy is to cause the 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, or substantially all, of
its taxable net income and capital gains to shareholders; therefore, it is
expected that the Fund will not be required to pay any federal income taxes on
its investment income.
Because the Fund 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 from those of other funds of the Trust 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.
25
<PAGE> 76
CONTENTS PAGE
Sale of Fund Shares 2
Summary of Expenses 2
Financial Highlights 3
Investment Objective and Policies 4
Investment Techniques, Considerations and
Risk Factors 7
Performance Information 17
Management of the Trust 19
Investment in Fund Shares 23
Share Redemption 23
Net Income and Distributions 24
Additional Information 24
Tax Status 25
INVESTMENT ADVISOR AND ADMINISTRATOR
Nationwide Advisory Services, Inc.
Three Nationwide Plaza
Columbus, Ohio 43215
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Nationwide Investors Services, Inc.
P. O. Box 1492
Three Nationwide Plaza
Columbus, Ohio 43216
AUDITORS
Coopers & Lybrand L.L.P.
100 East Broad Street
Columbus, Ohio 43215
LEGAL COUNSEL
Druen, Dietrich, Reynolds & Koogler
One Nationwide Plaza
Columbus, Ohio 43215
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<PAGE> 77
PROSPECTUS
MAY 1, 1998
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 TOLL-FREE 1-800-848-6331
Nationwide Global Equity 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 one of those funds, Nationwide Global
Equity Fund (the "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.
Nationwide Advisory Services, Inc. may from time to time use one or more
subadvisers to manage the Fund's portfolio as a part of a multi-manager
structure (see "Investment Management of the 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.
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 May 1, 1998, has been filed with the
Securities and Exchange Commission. You can obtain a copy without charge by
calling 1-800-848-6331, 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 FUND, DATED MAY 1, 1998, IS
INCORPORATED HEREIN BY REFERENCE.
<PAGE> 78
SALE OF FUND SHARES
Shares of the Fund are 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. 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.
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.
SUMMARY OF EXPENSES
<TABLE>
<S> <C>
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 (after voluntary fee reductions) 0.20%
----
Estimated Total Fund Operating Expenses (after voluntary fee reductions)(1) 1.20%
====
</TABLE>
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, 1998.
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
------ -------
$12 $38
THE EXAMPLE SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS 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 if necessary to limit the total
expense ratio of the Fund to a maximum of 1.20% through April 30, 1999.
2
<PAGE> 79
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD
PERIOD FROM
OCTOBER 31, 1997
(COMMENCEMENT
OF OPERATIONS)
THROUGH DECEMBER 31,
1997
----
NET ASSET VALUE--BEGINNING OF
PERIOD $10.00
Net investment income 0.02
Net realized gain (loss) and unrealized
appreciation (depreciation) on investments 0.10
----
Total from investment operations 0.12
----
Dividends from net investment income (0.02)
Net increase (decrease) in net asset value 0.10
NET ASSET VALUE--END OF PERIOD $10.10
Total Return 1.18%
Ratios and supplemental data:
Net Assets, end of period (000) $5,566
Ratio of expenses to average net assets 1.20%*
Ratio of expenses to average net assets** 2.84%*
Ratio of net investment income to average
net assets 1.00%*
Ratio of net investment income to average
net assets** (0.64)%*
Portfolio turnover 9.32%
Average commission rate paid*** $.0273
- --------------------------------------------------------------------------------
*Ratios are annualized for periods of less than one year. Total return and
portfolio turnover are not annualized.
**Ratios calculated as if no fees were waived or expenses reimbursed.
***Represents the total amount of commissions paid in portfolio equity
transactions divided by the total number of shares purchased and sold by
the Fund for which commissions were charged.
The information in the Financial Highlights has been audited by Coopers &
Lybrand L.L.P., Independent Auditors, whose report thereon, together with the
financial statements appearing in the Annual Report for the Trust, are
incorporated by reference in the Statement of Additional Information. The
Trust's Statement of Additional Information and the Annual Report may be
obtained free of charge by calling 1-800-848-6331.
3
<PAGE> 80
INVESTMENT OBJECTIVE AND POLICIES
Nationwide Global Equity 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 invest 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.
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.
4
<PAGE> 81
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%.
5
<PAGE> 82
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 Depository Receipts
("GDRs") or other similar securities of foreign issuers. ADRs are securities,
typically issued by a U.S. financial institution (a "depository"), 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 depository receipt generally bear all costs of the
unsponsored facility. The depository 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 exchanges, from time to time, foreign securities may be difficult to
liquidate rapidly without adverse price effects.
6
<PAGE> 83
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, 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
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<PAGE> 84
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,
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.
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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 Federal Home Loan
Mortgage Corporation, 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
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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 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.
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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 the over-the-counter
("OTC") 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 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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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 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
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<PAGE> 89
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 OR DELAYED-DELIVERY 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 or
delayed-delivery securities allows the Fund to lock in a fixed price or yield on
a security it intends to purchase. However, when the Fund purchases securities
on such a basis, 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 or delayed-delivery securities may involve the additional
risk that the yield or market price 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 or delayed-delivery 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 these types of 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
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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
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.
The average annual total return of the Global Equity Fund for the period October
31, 1997 (date of commencement of operations) through December 31, 1997 was
1.18%. 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.
In addition, holders of variable insurance contracts representing interests in
the Fund will be subject to expenses relating to such insurance contracts. None
of these performance figures reflect the expenses related to such variable
insurance contracts, and since such expenses will reduce the total return to
contract-holders, these performance figures may be of limited use for
comparative purposes.
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
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figures are time-weighted rates of return which include all income and accrued
income and realized and unrealized gains or losses.
Average Annual Total Returns
One Five Ten
Year Years Years
---- ----- -----
As of December 31, 1997
Private Account Composite... 15.40% 14.51% 10.81%
MSCI World Equity Trade..... 15.76% 15.34% 10.57%
<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>
Private Account
Composite..... 15.40% 15.02% 17.49% 2.90% 23.39% (4.03)% 19.48% (8.34)%
MSCI World Equity
Index......... 15.76% 13.48% 20.72% 5.07% 22.50% (5.23)% 18.29% (17.02)%
</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.
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.
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The Adviser and the Trust have received from the Securities and Exchange
Commission an exemptive order for the multi-manager structure which allows the
Adviser to hire, replace or terminate subadvisers without the approval of
shareholders; the order also allows the Adviser to revise a subadvisory
agreement without shareholder approval. If a new subadviser is hired, the change
will be communicated to shareholders within 90 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 is intended to facilitate the efficient operation of the Fund and afford
the Trust increased management flexibility.
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 1.00% 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 makes investment decisions for the Fund,
and in connection with such investment decisions places 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% on assets up to $50 million and 0.55% of assets of $50 million and over.
These fees are calculated at an annual rate based on the Fund's average daily
net assets. Below is a brief description of the Subadviser.
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
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uses a sophisticated, disciplined, collaborative process for managing all asset
classes. As of December 31, 1997, the Subadviser had assets under management of
approximately $255 billion, including approximately $25 billion in global equity
portfolios.
Paul Quinsee and Nigel Emmett 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. Nigel Emmett , Vice President, joined the
Subadviser in 1997 as a portfolio manager with the International Equity Group.
Previously, he worked as an international equity portfolio manager for two years
at Brown Brothers Harriman & Co. in New York and for four years at Gartmore
Investment Management in London. Mr. Emmett is an Associate Member of the
Institute of Investment Management Research (UK) and is a Chartered Financial
Analyst.
OTHER SERVICES
Under the terms of a Fund Administration Agreement, the Adviser also provides
various administrative and accounting services to the Fund, 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% on assets up to $250 million, 0.05% on the
next $750 million and 0.04% on assets of $1 billion and more. These fees are
calculated at an annual rate based upon the Fund's average daily net assets.
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.
In addition to paying for the advisory, fund administration and transfer agency
services described above, the Fund pays its own expenses including services
provided by its custodian, the Trust's independent accountants and legal
counsel, charges and expenses of dividend and capital gain distributions, a
portion of the compensation paid to the Trust's Trustees who are not "interested
persons" of the Adviser and of the expenses of Trustees' meetings, brokerage
commissions and other expenses related to securities transactions, taxes,
insurance and bonding premiums, association membership dues, and expenses
relating to the issuance, registration and qualification of the Fund's
securities. The Fund may also pay for certain expenses relating to shareholders'
meetings and to the printing and distributing of prospectuses to current
shareholders.
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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 Contracts and to
affiliated Fund of Funds. Substantially all of the Fund's shares were owned by
separate accounts of Nationwide Life Insurance Company and Nationwide Life and
Annunity Insurance Company as of April 1, 1998. The address for each of these
entities is One Nationwide Plaza, Columbus, Ohio 43215.
All investments in the Fund are credited to the Accounts 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 Fund does not compute net
asset value on customary national business holidays, including the following:
Christmas, New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, and Thanksgiving Day. Because
the Fund invests primarily in securities listed on foreign exchanges which may
operate on days on which the Fund is not priced, the securities held by the fund
will be traded and the net asset value of the Fund's shares may be significantly
affected on days when investors have no access to the Fund. 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, or if
there is no sale on that day, the securities are valued at the prior day's
closing price as provided by an independent pricing organization; if the
securities are traded only in the over-the-counter market, they are valued at
the last quoted sale price, or if there is no sale on that day, the quoted bid
prices as provided by an independent
18
<PAGE> 95
pricing organization. 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 , or for which an independent pricing organization does not provide a
value or provides a value that does not represent fair value in the judgement of
the Adviser, 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 in the form of additional shares of the
Fund. 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 and currently has authorized 15 separate
funds. The shares of each fund participate equally in the earnings, dividends,
and assets of that particular fund. 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. Generally, amendment may be made
to the Declaration of Trust without the affirmative vote of a majority of the
outstanding voting securities 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;
19
<PAGE> 96
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, when issued, are fully
paid and nonassessable. In regard to termination, sale of assets, or changes of
fundamental investment restrictions, the right to vote is limited to the holders
of shares of the particular fund affected by the proposal. However shares of all
funds would vote together, and not by fund, in the election of Trustees. If an
issue must be approved by a majority as defined by the 1940 Act, a "majority of
the outstanding voting securities" it means the lesser of (i) 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 (ii) 50% of the
outstanding shares. For the election of Trustees only a plurality is required.
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.
TAX STATUS
The Trust's policy is to cause the 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, or substantially all, of
its taxable net income and capital gains to shareholders; therefore, it is
expected that the fund will not be required to pay any federal income taxes on
its investment income.
Because the Fund 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 from those of other funds of the Trust 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.
20
<PAGE> 97
CONTENTS PAGE
Sale of Fund Shares 2
Summary of Expenses 2
Financial Highlights 3
Investment Objective and Policies 4
Investment Techniques, Considerations and
Risk Factors 6
Performance Information 14
Management of the Trust 15
Investment in Fund Shares 18
Share Redemption 18
Net Income and Distributions 19
Additional Information 19
Tax Status 20
INVESTMENT ADVISOR AND ADMINISTRATOR
Nationwide Advisory Services, Inc.
Three Nationwide Plaza
Columbus, Ohio 43215
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Nationwide Investors Services, Inc.
P.O. Box 1492
Three Nationwide Plaza
Columbus, Ohio 43216
AUDITORS
Coopers & Lybrand L.L.P.
100 East Broad Street
Columbus, Ohio 43215
LEGAL COUNSEL
Druen, Dietrich, Reynolds & Koogler
One Nationwide Plaza
Columbus, Ohio 43215
<PAGE> 98
PROSPECTUS
MAY 1, 1998
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 TOLL-FREE 1-800-848-6331
Nationwide Strategic Value Fund and Nationwide Strategic Growth 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 currently offers shares in 15 separate mutual
funds, each with its own investment objective. This Prospectus relates only to
two of those funds, Nationwide Strategic Value Fund and Nationwide Strategic
Growth Fund (collectively, the "Funds" and individually a "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 Advisory Services, Inc. may
from time to time use one or more subadvisers to manage the Fund's portfolios as
a part of a multi-manager structure (see "Investment Management of the Fund").
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 May 1, 1998, has been filed with the
Securities and Exchange Commission. You can obtain a copy without charge by
calling 1-800-848-6331, 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 FUNDS, DATED MAY 1, 1998, IS
INCORPORATED HEREIN BY REFERENCE.
<PAGE> 99
SALE OF FUND SHARES
Shares of the Funds are 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. 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.
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.
SUMMARY OF EXPENSES
<TABLE>
<CAPTION>
Value Fund Growth Fund
<S> <C> <C>
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 (after voluntary fee reductions) .10% .10%
Estimated Total Fund Operating Expenses (after voluntary fee reductions)(1) 1.00% 1.00%
</TABLE>
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, 1998.
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
------ -------
Value Fund $10 $32
Growth Fund $10 $32
THE EXAMPLE SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
- --------
(1) The Adviser has agreed with the Trust to waive management fees or to
reimburse expenses incurred by each Fund if necessary to limit the
total expense ratio of each Fund to a maximum of 1.00% through April
30, 1999.
2
<PAGE> 100
For more information on Fund expenses, see "MANAGEMENT OF THE TRUST" below.
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD
<TABLE>
<CAPTION>
STRATEGIC VALUE STRATEGIC GROWTH
FUND FUND
--------------- ----------------
PERIOD FROM PERIOD FROM
OCTOBER 31, 1997 OCTOBER 31, 1997
(COMMENCEMENT (COMMENCEMENT
OF OPERATIONS) OF OPERATIONS)
THROUGH DECEMBER 31, THROUGH DECEMBER 31,
1997 1997
---- ----
<S> <C> <C>
NET ASSET VALUE--BEGINNING OF
PERIOD $10.00 $10.00
Net investment income 0.01 0.01
Net realized gain and unrealized appreciation on investments 0.15 0.21
------ ------
Total from investment operations 0.16 0.22
------ ------
Dividends from net investment income (0.01) (0.01)
------ ------
Net increase in net asset value 0.15 0.21
------ ------
NET ASSET VALUE - END OF PERIOD $10.15 $10.21
====== ======
Total Return 1.63% 2.20%
Ratios and supplemental data:
Net Assets, end of period (000) $1,469 $1,347
Ratio of expenses to average net assets 1.00%* 1.00%*
Ratio of expenses to average net assets** 5.54%* 6.33%*
Ratio of net investment income to average net assets 0.96%* 0.68%*
Ratio of net investment income to average net assets** (3.58)%* (4.65)%*
Portfolio turnover 5.38% 27.32%
Average commission rate paid*** $.0603 $.0620
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
*Ratios are annualized for periods of less than one year.
**Ratios calculated as if no fees were waived or expenses reimbursed.
***Represents the total amount of commissions paid in portfolio equity
transactions divided by the total number of shares purchased and sold by
the Fund for which commissions were charged.
The information in the Financial Highlights has been audited by Coopers &
Lybrand L.L.P., Independent Auditors, whose report thereon together with the
financial statements appearing in the Annual Report for the Trust, are
incorporated by reference in the Statement of Additional Information. The
Trust's Statement of Additional Information and the Annual Report, which
contains further information about the Funds' performance, may be obtained free
of charge by calling 1-800-848-6331.
3
<PAGE> 101
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 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.
4
<PAGE> 102
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.
GENERAL
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.
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
5
<PAGE> 103
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 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.
6
<PAGE> 104
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
depository receipts. Depository 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 invest only in securities that are regularly traded
on recognized exchanges or in the over-the-counter market ("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.
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
7
<PAGE> 105
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 - Each Fund may invest in 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 - Each 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.
8
<PAGE> 106
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 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 Growth 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
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<PAGE> 107
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, 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
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<PAGE> 108
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 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 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 Federal Home Loan
Mortgage Corporation, 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 each of 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 losses
that result from adverse
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<PAGE> 109
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 in which the Fund sells a security 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.
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.
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<PAGE> 110
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.
REAL ESTATE SECURITIES - Although the Funds will not invest in real estate
directly, each 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").
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<PAGE> 111
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 of 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.
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 - Each of 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
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<PAGE> 112
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 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 - Each 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, each 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 a 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. Such 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 OR DELAYED-DELIVERY 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. Purchasing when-issued or
delayed-delivery securities allows a Fund to lock in a fixed price or yield on a
security it intends to purchase. However, when a Fund purchases securities on
such a basis, 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 or delayed-delivery securities may involve the additional
risk that the yield or market price 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 them for the purpose of actually acquiring the
securities, unless after entering into the commitment a sale appears desirable
for
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<PAGE> 113
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 these types of
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.
PERFORMANCE INFORMATION
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.
The average annual total return for the Strategic Growth Fund and the Strategic
Value Fund for the period from October 31, 1997 (date of commencement of
operations) through December 31, 1997, was 2.20% and 1.63%, respectively. 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
show 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 as 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 1.30% as of December 31,
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 1.21%
as of December 31, 1997. The Value
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<PAGE> 114
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 December 31, 1997
Strong Growth Fund 19.05% 23.85%
Strong Schafer Value Fund 29.31% 20.45% 19.32% 16.81%
</TABLE>
* Strong Growth Fund commenced operations on 12/31/93.
Strong Schafer Value Fund commenced operations on 10/22/85.
<TABLE>
<CAPTION>
ANNUAL TOTAL RETURNS FOR THE YEAR ENDED DECEMBER 31
1997 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C> <C>
Strong Growth Fund 19.05% 19.52% 41.00% 17.27% ----- -----
Strong Schafer Value Fund 29.31% 23.17% 34.15% (4.28)% 23.98% 18.67%
</TABLE>
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 DIFERENT 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.
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<PAGE> 115
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 received from the Securities and Exchange
Commission an exemptive order for the multi-manager structure which allows the
Adviser to hire, replace or terminate subadvisers for the Growth Fund without
the approval of shareholders; the order would also allow the Adviser to revise a
subadvisory agreement without shareholder approval. If a new subadviser is
hired, the change will be communicated to shareholders within 90 days of such
change 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 is intended to facilitate the efficient operation of
the Fund and afford the Trust increased management flexibility. The Adviser and
the Trust intend to apply for an amendment to this exemptive order in order to
extend the relief to the Value Fund .
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, through 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, 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% on assets of each
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<PAGE> 116
Fund up to $500 million and 0.45% on assets of each Fund of $500 million and
more. These fees are calculated at an annual rate based on each Fund's average
daily net assets. 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.
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 is 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. Strong
provides investment management services for mutual funds and other investment
portfolios representing assets of over $29 billion.
Ronald C. Ognar, a Chartered Financial Analyst with more than 25 years of
investment experience is primarily responsible for the day-to-day management of
the Growth Fund's portfolio. Mr. Ognar 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. He
also manages the Strong Growth Fund, Strong Growth Fund II and Strong Growth 20
Fund, and co-manages the Strong Total Return Fund.
OTHER SERVICES
Under the terms of a Fund Administration Agreement, the Adviser also provides
various administrative and accounting services to the Funds, 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% on assets up to $250 million, 0.05% on the
next $750 million and 0.04% on assets of $1 billion and more. These fees are
calculated at an annual rate based upon each Fund's average daily net assets.
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. Each Fund pays to NIS a fee for
such services at the annual rate of 0.01% of each Fund's average daily net
assets. NIS is a wholly owned subsidiary of the Adviser.
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In addition to paying for the advisory, fund administration and transfer agency
services described above, each Fund pays its own expenses including services
provided by its custodian, the Trust's independent accountants and legal
counsel, charges and expenses of dividend and capital gain distributions, a
portion of the compensation paid to the Trust's Trustees who are not "interested
persons" of the Adviser and of the expenses of Trustees' meetings, brokerage
commissions and other expenses related to securities transactions, taxes,
insurance and bonding premiums, association membership dues, and expenses
relating to the issuance, registration and qualification of such Fund's
securities. Each Fund may also pay for certain expenses relating to
shareholders' meetings and to the printing and distributing of prospectuses to
current shareholders.
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 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 Contracts and to
affiliated Funds of Funds. Substantially all of each Fund's shares were owned by
separate accounts of Nationwide Life Insurance Company and Nationwide Life and
Annuity Insurance Company of April 1, 1998. The address for each of these
entities is One Nationwide Plaza, Columbus, Ohio 43215.
All investments in the Funds are credited to the Accounts 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 that Fund's
portfolio securities that the net asset value of such Fund is materially
affected by changes in the value of portfolio securities. The Funds do not
compute net asset value on customary national business holidays, including the
following: Christmas, New Year's Day, Martin Luther King, Jr. Day, 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.
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<PAGE> 118
In determining net asset value, portfolio securities listed on national
exchanges are valued at the last sales price on the principal exchange, or if
there is no sale on that day, the securities are valued at the prior day's
closing prices as provided by an independent pricing organization. Securities
traded in the over-the-counter market, are valued at the last quoted sales
price, or if there is no sale on that day, the quoted bid price as provided by
an independent pricing organization. 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, or for which an independent pricing
organization does not provide a value or provides a value that does not
represent fair market value in the judgement of the Adviser, 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 Funds will be
declared and paid as dividends quarterly in the form of additional shares of
each Fund. 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 and currently has authorized 15 separate
funds. The shares of each fund participate equally in the earnings, dividends,
and assets of that particular fund. 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. Generally, amendment may be made
to the Declaration of Trust without the affirmative vote of a majority of the
outstanding voting securities of the Trust. The Trustees may, however, amend the
Declaration of Trust without the vote or consent of shareholders to:
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<PAGE> 119
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, when issued, are fully
paid and nonassessable. In regard to termination, sale of assets, or changes of
fundamental investment restrictions, the right to vote is limited to the holders
of shares of the particular fund affected by the proposal. However, shares of
all funds would vote together, and not by fund, in the election of Trustees. If
an issue must be approved by a majority as defined by the 1940 Act a "majority
of the outstanding voting securities" means the lesser of (i) 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 (ii) more than 50% of the
outstanding shares. For the election of Trustees only a plurality is required.
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.
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, or substantially all, of
its taxable net income and capital gains to shareholders; therefore, it is
expected that the Funds will not be required to pay any federal income taxes on
their investment income.
Because each Fund 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 from those of other funds of the Trust 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> 120
CONTENTS PAGE
Sale of Fund Shares 2
Summary of Expenses 2
Financial Highlights 3
Investment Objective and Policies 4
Investment Techniques, Considerations
and Risk Factors 6
Performance Information 16
Management of the Trust 17
Investment in Fund Shares 20
Share Redemption 20
Net Income and Distributions 21
Additional Information 21
Tax Status 22
INVESTMENT ADVISER AND ADMINISTRATOR
Nationwide Advisory Services, Inc.
Three Nationwide Plaza
Columbus, Ohio 43215
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Nationwide Investors Services, Inc.
P.O. Box 1492
Three Nationwide Plaza
Columbus, Ohio 43216
AUDITORS
Coopers & Lybrand L.L.P.
100 East Broad Street
Columbus, OH 43215
LEGAL COUNSEL
Druen, Dietrich, Reynolds & Koogler
One Nationwide Plaza
Columbus, Ohio 43215
<PAGE> 121
PROSPECTUS
MAY 1, 1998
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 TOLL FREE 1-800-848-6331
Nationwide Balanced 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 one of those funds, Nationwide Balanced Fund (the
"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. Nationwide Advisory
Services, Inc. may from time to time use one or more subadvisers to manage the
Fund's portfolio as a part of a multi-manager structure (See "Investment
Management of the Fund").
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 May 1, 1998, has been filed with the
Securities and Exchange Commission. You can obtain a copy without charge by
calling 1-800-848-6331, 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 FUND, DATED
MAY 1, 1998, IS INCORPORATED HEREIN BY REFERENCE.
<PAGE> 122
SALE OF FUND SHARES
Shares of the Fund are 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. 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.
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.
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, 1998.
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
------ -------
$9 $29
THE EXAMPLE SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS 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 if necessary to limit the total
expense ratio of the Fund to a maximum of 0.90% through April 30, 1999.
2
<PAGE> 123
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD
PERIOD FROM
OCTOBER 31, 1997
(COMMENCEMENT
OF OPERATIONS)
THROUGH DECEMBER 31
1997
----
NET ASSET VALUE--BEGINNING OF PERIOD $10.00
Net investment income 0.05
Net realized gain and unrealized
appreciation on investments 0.10
------
Total from investment operations 0.15
------
Dividends from net investment income (0.05)
------
Net increase in net asset value 0.10
------
NET ASSET VALUE--END OF PERIOD $10.10
======
Total Return 1.46%
Ratios and supplemental data:
Net Assets, end of period (000) $1,886
Ratio of expenses to average net assets 0.90%*
Ratio of expenses to average net assets** 4.90%*
Ratio of net investment income to average
net assets 4.08%*
Ratio of net investment income to average
net assets** 0.08%*
Portfolio turnover 0.19%
Average commission paid*** $.0583
- --------------------------------------------------------------------------------
* Ratios are annualized for periods of less than one year. Total return and
portfolio turnover are not annualized.
** Ratios calculated as if no fees were waived or expenses reimbursed.
*** Represents the total amount of commissions paid in portfolio equity
transactions divided by the total number of shares purchased and sold by
the Fund for which commissions were charged.
The information in the Financial Highlights has been audited by Coopers &
Lybrand L.L.P., Independent Auditors, whose report thereon, together with the
financial statements appearing in the Annual Report for the Trust, are
incorporated by reference in the Statement of Additional Information. The
Trust's Statement of Additional Information and the Annual Report may be
obtained free of charge by calling 1-800-848-6331.
3
<PAGE> 124
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 Depository 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.
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
4
<PAGE> 125
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. PIK
Bonds pay all or a portion of their interest in the form of debt or equity
securities. 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.
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.
5
<PAGE> 126
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 and have caused
the effective maturity of securities with prepayment features to be extended,
thus effectively converting short or intermediate term securities ( which tend
to be less volatile in price) into long term securities ( which tend to be more
volatile in price). 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 and intends to invest as much as 10% of its total assets in
foreign securities which are not publicly traded in the United States.
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; 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
6
<PAGE> 127
the Fund generally invests only in securities that are regularly traded on
recognized exchanges or in the over-the-counter market ("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.
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
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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 which are determined by the Adviser or the
Subadviser to be of comparable quality; or 6) money market mutual funds.
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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.
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.
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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.
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.
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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 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
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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 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."
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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 and the Federal Home Loan
Mortgage Corporation ("FHLMC"), 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,
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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 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
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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" (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.
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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.
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
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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 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
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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 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
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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 of 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
- - Additional
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Information on Portfolio Instruments and Investment Policies" 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").
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
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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.
WHEN-ISSUED OR DELAYED-DELIVERY 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 or delayed-delivery securities allows the Fund to
lock in a fixed price or yield on a security it intends to purchase. However,
when the Fund purchases securities on such a basis, 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 or delayed-delivery securities may involve the additional
risk that the yield or market price 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 them 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 these types of
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.
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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.
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.
PERFORMANCE INFORMATION
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.
The Fund may also advertise its SEC yield. The SEC yield is based on a 30-day
period. This yield takes into account the yields to maturity on all debt
instruments and all dividends accrued on equity securities, since equity
securities do not have maturity dates. The SEC yield is computed by dividing the
net investment income per share earned during the 30-day period by the maximum
offering price per share on the last day of the period.
The average annual total return of the Balanced Fund for the period October 31,
1997 (commencement of operations) through March 31, 1998 was 7.64%. The Fund's
portfolio manager is the same as, and its investment objective, policies and
strategies are 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 during the period
shown.
The investment performance of the SBAM Fund 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
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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 & Poor's
Index of 500 Stocks (the "S&P 500"), and 50% is composed of the performance of
the Salomon Smith Barney 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. If the Benchmark reflected the deduction of fees and
expenses, its performance would be lower.
The performance data shown below should be read in conjunction with the
information that follows.
<TABLE>
<CAPTION>
SBAM Fund Benchmark
Annualized Return Annualized Return
----------------- -----------------
<S> <C> <C>
Year Ending
March 31, 1998 25.12% 29.10%
Since October 1, 1995 20.84% 19.22%
(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 reflect
the deduction of advisory and other fees incurred by the SBAM Fund, at a total
annual rate of 0.50%. These fees are lower than the total operating expenses
that will be charged to and associated with investing in the Fund. The
performance of the SBAM Fund would have been lower if it had been subject to the
fees and expenses of the Fund. The performance results also 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.
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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 received from the Securities and Exchange
Commission an exemptive order for the multi-manager structure which allows the
Adviser to hire, replace or terminate subadvisers without the approval of
shareholders; the order also allows the Adviser to revise a subadvisory
agreement without shareholder approval. If a new subadviser is hired, the change
will be communicated to shareholders within 90 days of such change, 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 is intended to facilitate the efficient operation of the Fund and afford
the Trust increased management flexibility.
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 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
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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 makes investment decisions for the Fund,
and in connection with such investment decisions places 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% on assets up to $150 million, 0.30% on assets of $150 million and more but
less than $500 million, and 0.25% on assets of $500 million and more. These fees
are calculated as an annual rate based upon the Fund's average daily net assets.
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 Smith Barney Holdings, Inc. which
is, in turn, wholly-owned by Travelers Group, 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 March 31, 1998, the Subadviser and its worldwide investment
advisory affiliates managed approximately $27 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 to the Fund, 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% on assets up to $250 million, 0.05% on the
next $750 million and 0.04% on assets of $1 billion and more. These fees are
calculated at an annual rate based upon the Fund's average daily net assets.
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.
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In addition to paying for the advisory, fund administration and transfer agency
services described above, the Fund pays its own expenses including services
provided by its custodian, the Trust's independent accountants and legal
counsel, charges and expenses of dividend and capital gain distributions, a
portion of the compensation paid to the Trust's Trustees who are not "interested
persons" of the Adviser and of the expenses of Trustees' meetings, brokerage
commissions and other expenses related to securities transactions, taxes,
insurance and bonding premiums, association membership dues, and expenses
relating to the issuance, registration and qualification of the Fund's
securities. The Fund may also pay for certain expenses relating to shareholders'
meetings and to the printing and distributing of prospectuses to current
shareholders.
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 Contracts and to
affiliated Funds of Funds. Substantially all of the Fund's shares were owned by
separate accounts of the Nationwide Life Insurance Company and Nationwide Life
and Annuity Insurance Company as of April 1, 1998. The address for each of these
entities is One Nationwide Plaza, Columbus, Ohio 43215.
All investments in the Fund are credited to the Accounts 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 Fund does not compute net
asset value on customary national business holidays, including the following:
Christmas, New Year's Day, Martin Luther King, Jr. Day, 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
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<PAGE> 147
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 or if
there is no sale on that day, the securities are valued at the prior day's
closing price as provided by an independent pricing organization. Securities
traded in the over-the-counter market are valued at the last quoted sale price
or if there is no sale on that day, the quoted bid price as provided by an
independent pricing organization. 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, or for which an independent pricing organization does not
provide a value or provides a value that does not represent fair value in the
judgement of the Adviser, 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 in the form of additional shares. 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 and currently has authorized 15 separate
funds. The shares of each fund participate equally in the earnings, dividends,
and assets of that particular fund. Upon
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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. Generally, amendment may be made
to the Declaration of Trust without the affirmative vote of a majority of the
outstanding voting securities 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;
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, when issued are fully
paid and nonassessable. In regard to termination, sale of assets, or changes of
fundamental investment restrictions, the right to vote is limited to the holders
of shares of the particular fund affected by the proposal. However, shares of
all funds would vote together, and not by fund, in the election of Trustees. If
an issue must be approved by a majority as defined by the 1940 Act, a "majority
of the outstanding voting securities" means the lesser of (i) 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 (ii) more than 50% of the
outstanding shares. For the election of Trustees only a plurality is required.
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.
TAX STATUS
The Trust's policy is to cause the 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 or substantially all, of
its taxable net income and capital gains to shareholders; therefore, it is
expected that the Fund will not pay any federal income taxes on its investment
income.
Because the Fund 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 from those of other funds of the Trust 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.
28
<PAGE> 149
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.
29
<PAGE> 150
CONTENTS PAGE
- -------- ----
Sale of Fund Shares 2
Summary of Expenses 2
Financial Highlights 3
Investment Objective and Policies 4
Investment Techniques, Considerations and
Risk Factors 6
Performance Information 22
Management of the Trust 24
Investment in Fund Shares 26
Share Redemption 26
Net Income and Distributions 27
Additional Information 27
Tax Status 28
INVESTMENT ADVISOR AND ADMINISTRATOR
Nationwide Advisory Services, Inc.
Three Nationwide Plaza
Columbus, Ohio 43215
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Nationwide Investors Services, Inc.
P.O. Box 1492
Three Nationwide Plaza
Columbus, Ohio 43216
AUDITORS
Coopers & Lybrand L.L.P.
100 East Broad Street
Columbus, Ohio 43215
LEGAL COUNSEL
Druen, Dietrich, Reynolds & Koogler
One Nationwide Plaza
Columbus, Ohio 43215
<PAGE> 151
PROSPECTUS
MAY 1, 1998
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 TOLL-FREE 1-800-848-6331
Nationwide Small Cap Value 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 currently
offers shares in 15 separate mutual funds, each with its own investment
objective. This Prospectus relates only to one of those funds, Nationwide Small
Cap Value Fund (the "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.
Nationwide Advisory Services, Inc. may from time to time use one or more
subadvisers to manage the Fund's portfolio as part of a multi-manager structure
(see "Investment Management of the Fund").
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 May 1, 1998, has been filed with the
Securities and Exchange Commission. You can obtain a copy without charge by
calling 1-800-848-6331, 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 FUND, DATED
MAY 1, 1998, IS INCORPORATED HEREIN BY REFERENCE.
<PAGE> 152
SALE OF FUND SHARES
Shares of the Fund are 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. 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.
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.
SUMMARY OF EXPENSES
<TABLE>
<S> <C>
Shareholder Transaction Expenses None
Estimated Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees 0.90%
12b-1 Fees None
Other Expenses (after voluntary fee reductions) 0.15%
-----
Estimated Total Fund Operating Expenses (after voluntary fee reductions)(1) 1.05%
=====
</TABLE>
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, 1998.
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:
<TABLE>
<CAPTION>
1 year 3 years
------ -------
<S> <C>
$11 $33
</TABLE>
THE EXAMPLE SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS 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 if necessary to limit the total
expense ratio of the Fund to a maximum of 1.05% through April 30, 1999.
2
<PAGE> 153
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD
<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 31, 1997
(COMMENCEMENT
OF OPERATIONS)
THROUGH DECEMBER 31,
1997
<S> <C>
NET ASSET VALUE -- BEGINNING OF
PERIOD $ 10.00
Net investment income 0.01
Net realized gain (loss) and unrealized
appreciation (depreciation) on investments (0.17)
-----------
Total from investment operations (0.16)
-----------
Dividends from net investment income (0.01)
Dividends from net realized gain from -----------
investments and foreign currencies (0.04)
-----------
Total distributions (0.05)
-----------
Net increase (decrease) in net asset value (0.21)
-----------
NET ASSET VALUE -- END OF PERIOD $ 9.79
===========
Total Return (1.61)%
Ratios and supplemental data:
Net Assets, end of period (000) $ 2,069
Ratio of expenses to average net assets 1.05%*
Ratio of expenses to average net assets** 6.31%*
Ratio of net investment income to average
net assets 0.50%*
Ratio of net investment income to average
net assets** (4.76)%*
Portfolio turnover 8.38%
Average commission rate paid*** $ .0320
</TABLE>
* Ratios are annualized for periods of less than one year. Total return
and portfolio turnover are not annualized.
** Ratios calculated as if no fees were waived or expenses reimbursed.
*** Represents the total amount of commissions paid in portfolio equity
transactions divided by the total number of shares purchased and sold
by the Fund for which commissions were charged.
The information in the Financial Highlights has been audited by Coopers &
Lybrand L.L.P., Independent Auditors, whose report thereon, together with the
financial statements appearing in the Annual Report for the Trust, are
incorporated by reference in the Statement of Additional Information. The
Trust's Statement of Additional Information and the Annual Report may be
obtained free of charge by calling 1-800-848-6331.
3
<PAGE> 154
INVESTMENT OBJECTIVE AND POLICIES
Nationwide Small Cap Value 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.
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
4
<PAGE> 155
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.
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
5
<PAGE> 156
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
depository receipts. Depository 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; 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 generally invests only in securities that are regularly traded
on recognized exchanges or in the over-the-counter market ("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.
6
<PAGE> 157
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, 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
7
<PAGE> 158
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.
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
8
<PAGE> 159
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 Federal Home Loan
Mortgage Corporation, 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.
9
<PAGE> 160
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 of 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
10
<PAGE> 161
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 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
11
<PAGE> 162
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 OR DELAYED-DELIVERY 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 or delayed-delivery securities allows the Fund to lock in a fixed
price or yield on a security it intends to purchase. However, when the Fund
purchases securities on such a basis, 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 or delayed-delivery securities may involve the additional
risk that the yield or market price 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 them 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 these types of
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.
12
<PAGE> 163
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.
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 received from the Securities and Exchange
Commission an exemptive order for the multi-manager structure which allows the
Adviser to hire, replace or terminate subadvisers without the approval of
shareholders; the order also allows the Adviser to revise a subadvisory
agreement without shareholder approval. If a new subadviser is hired, the change
will be communicated to shareholders within 90 days of such change, 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 is intended to facilitate the efficient operation of the Fund and afford
the Trust increased management flexibility.
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
13
<PAGE> 164
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 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 makes investment decisions for the Fund,
and in connection with such investment decisions places 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% on assets up to $200 million and 0.45% of assets of $200 million and more.
These fees are calculated at an annual rate based on each Fund's average daily
net assets. 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 March
31, 1998, the Subadviser managed or administered approximately $100 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 $305 billion in assets as of December
31, 1997, including approximately $104 billion in mutual fund assets. As of
December 31, 1997, various subsidiaries of Mellon provided non-investment
services, such as custodial or administration services, for approximately $1.532
trillion in assets including approximately $60 billion in mutual fund assets.
14
<PAGE> 165
Peter I. Higgins has primary day-to-day responsibility for management of the
Fund's portfolio. He has held that position since the inception of the Fund, and
has been employed by the Subadviser since May 1996 pursuant to a dual employee
agreement between the Subadviser and The Boston Company Asset Management, Inc.
("TCB Asset Management"), an indirect wholly-owned subsidiary of Mellon Bank,
N.A., and thus an affiliate of the Subadviser. Mr. Higgins has been employed by
TCB Asset Management or its predecessor since May 1991. For more than five years
prior to joining TCB Asset Management, Mr. Higgins was a Vice President and
Senior Investment Officer for Boston Safe Deposit and Trust Company.
OTHER SERVICES
Under the terms of a Fund Administration Agreement, the Adviser also provides
various administrative and accounting services to the Fund, 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.
In addition to paying for the advisory, fund administration and transfer agency
services described above, the Fund pays its own expenses including services
provided by its custodian, the Trust's independent accountants and legal
counsel, charges and expenses of dividend and capital gain distributions, a
portion of the compensation paid to the Trust's Trustees who are not "interested
persons" of the Adviser and of the expenses of Trustees' meetings, brokerage
commissions and other expenses related to securities transactions, taxes,
insurance and bonding premiums, association membership dues, and expenses
relating to the issuance, registration and qualification of the Fund's
securities. The Fund may also pay for certain expenses relating to shareholders'
meetings and to the printing and distributing of prospectuses to current
shareholders.
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 Contracts and to
affiliated Fund of Funds. Substantially all of the Fund's shares were owned by
separate accounts of Nationwide Life Insurance Company
15
<PAGE> 166
and Nationwide Life and Annuity Insurance Company as of April 1, 1998. The
address for each of these entities is One Nationwide Plaza, Columbus, Ohio
43215.
All investments in the Fund are credited to the Accounts 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 Fund does not compute net
asset value on customary national business holidays, including the following:
Christmas, New Year's Day, Martin Luther King, Jr. Day, 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, or if
there is no sale on that day, the securities are valued at the prior day's
closing prices as provided by an independent pricing organization. Securities
traded only in the over-the-counter market are valued at the last quoted sale
price, or if there is no sale on that day, the quoted bid price as provided by
an independent pricing organization. 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, or for which an independent pricing
organization does not provide a value or provides a value that does not
represent fair value in the judgement of the Adviser, 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:
16
<PAGE> 167
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 in the form of additional shares of the
Fund. 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, and currently has authorized 15 separate
funds. The shares of each fund participate equally in the earnings, dividends,
and assets of that particular fund. 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. Generally, amendment may be made
to the Declaration of Trust without the affirmative vote of a majority of the
outstanding voting securities 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;
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, when issued are fully
paid and nonassessable. In regard to termination, sale of assets, or changes of
fundamental investment restrictions, the right to vote is limited to the holders
of shares of the particular fund affected by the proposal. However, shares of
all funds vote together, and not by Fund, in the election of Trustees. If an
issue must be approved by a majority as defined by the 1940 Act a
17
<PAGE> 168
"majority of the outstanding voting securities" means the lesser of (i)
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 (ii) more than 50% of the outstanding shares. For the election of
Trustees only a plurality is required.
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 the 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, or substantially all, of
its taxable net income and capital gains to shareholders; therefore, it is
expected that the Fund will not be required to pay any federal income taxes on
its investment income.
Because the Fund 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 from those of other funds of the Trust 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> 169
CONTENTS PAGE
Sale of Fund Shares 2
Summary of Expenses 2
Financial Highlights 3
Investment Objective and Policies 4
Investment Techniques, Considerations and
Risk Factors 5
Management of the Trust 13
Investment in Fund Shares 15
Share Redemption 16
Net Income and Distributions 17
Additional Information 17
Performance Advertising for the Fund 18
Tax Status 18
INVESTMENT ADVISER AND ADMINISTRATOR
Nationwide Advisory Services, Inc.
Three Nationwide Plaza
Columbus, Ohio 43215
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Nationwide Investors Services, Inc.
P. O. Box 1492
Three Nationwide Plaza
Columbus, Ohio 43216
AUDITORS
Coopers & Lybrand L.L.P.
100 East Broad Street
Columbus, Ohio 43215
LEGAL COUNSEL
Druen, Dietrich, Reynolds & Koogler
One Nationwide Plaza
Columbus, Ohio 43215
<PAGE> 170
PROSPECTUS
MAY 1, 1998
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 TOLL FREE 1-800-848-6331
Nationwide Equity Income 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 one of those funds, Nationwide Equity
Income Fund (the "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.
Nationwide Advisory Services, Inc. may from time to time use one or more
subadvisers to manage the Fund's portfolios as a part of a multi-manager
structure (see "Investment Management of the Fund").
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 May 1, 1998, has been filed with the
Securities and Exchange Commission. You can obtain a copy without charge by
calling 1-800-848-6331, 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 FUND, DATED
MAY 1, 1998, IS INCORPORATED HEREIN BY REFERENCE.
<PAGE> 171
SALE OF FUND SHARES
Shares of the Fund are 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. 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.
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.
SUMMARY OF EXPENSES
<TABLE>
<S> <C>
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 (after voluntary fee reductions) 0.15%
-----
Estimated Total Fund Operating Expenses(after voluntary fee reductions)(1) 0.95%
=====
</TABLE>
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, 1998.
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:
<TABLE>
<CAPTION>
1 year 3 years
------ -------
<S> <C>
$10 $30
</TABLE>
THE EXAMPLE SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS 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 if necessary to limit the total
expense ratio of the Fund to a maximum of 0.95% through April 30, 1999.
2
<PAGE> 172
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD
<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 31, 1997
(COMMENCEMENT
OF OPERATIONS)
THROUGH DECEMBER 31,
1997
<S> <C>
NET ASSET VALUE -- BEGINNING OF
PERIOD $10.00
Net investment income 0.02
Net realized gain and unrealized
appreciation on investments 0.16
------
Total from investment operations 0.18
------
Dividends from net investment income (0.02)
Net increase in net asset value 0.16
NET ASSET VALUE -- END OF PERIOD $10.16
======
Total Return 1.77%
Ratios and supplemental data:
Net Assets, end of period (000) $1,610
Ratio of expenses to average net assets 0.95%*
Ratio of expenses to average net assets** 5.63%*
Ratio of net investment income to average
net assets 1.34%*
Ratio of net investment income to average
net assets** (3.34)%*
Portfolio turnover 14.52%
Average commission paid*** $.0461
</TABLE>
* Ratios are annualized for periods of less than one year. Total return and
portfolio turnover are not annualized.
** Ratios calculated as if no fees were waived or expenses reimbursed.
*** Represents the total amount of commissions paid in portfolio equity
transactions divided by the total number of shares purchased and sold by
the Fund for which commissions were charged.
The information in the Financial Highlights has been audited by Coopers &
Lybrand L.L.P., Independent Auditors, whose report thereon, together with the
financial statements appearing in the Annual Report for the Trust, are
incorporated by reference in the Statement of Additional Information. The
Trust's Statement of Additional Information and the Annual Report may be
obtained free of charge by calling 1-800-848-6331.
3
<PAGE> 173
INVESTMENT OBJECTIVE AND POLICIES
Nationwide Equity Income 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.
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.
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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, through non-U.S. dollar denominated securities which are not
publicly traded in the United States, or indirectly through the use of
depository 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; 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 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.
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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.
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
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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 requires 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 obligations generally increases. If the prevailing interest rates
increase, the market value of debt obligations generally decreases.
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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, 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
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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 of revenues, sales or profits and thus enable the holder of
the security to share in the potential success of the venture).
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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 Federal Home Loan
Mortgage Corporation, 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
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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.
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
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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 of 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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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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WHEN-ISSUED OR DELAYED-DELIVERY 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 or delayed-delivery 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 security on such basis, 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 or delayed-delivery securities may involve the additional
risk that the yield or market price 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 them 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 these types of
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 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
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value at the end of the specific period. Average annual total return reflects
reinvestment of all distributions.
The average annual total return for the period from October 31, 1997 (date of
commencement of operations) through December 31, 1997 was 1.77%. 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 the 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
as 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 the Class A shares of the Federated Equity
Income Fund, Inc. reflect the deduction of its total annual operating expenses
of 1.11% as of December 31, 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 December 31, 1997
Federated Equity Income 25.11% 18.79% 16.91%
Fund, Inc., Class A
Standard and Poor's 500 Index 33.37% 20.27% 18.03%
</TABLE>
ANNUAL TOTAL RETURNS FOR THE YEAR ENDED DECEMBER 31
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Federated Equity
Income Fund, Inc. 25.11% 22.20% 33.84% (3.85)% 20.24% 9.80% 42.20% (12.45)%
Standard and Poor's
500 Index 33.37% 22.96% 37.58% 1.32% 10.08% 7.61% 30.42% (3.13)%
</TABLE>
15
<PAGE> 185
Standard & Poor's Daily Stock Price Index of 500 Common Stocks (S&P 500), an
unmanaged composite index of common stocks in industrial, transportation, and
financial and public utility companies, can be used to gauge general market
performance and to compare to the total returns of funds whose portfolios are
invested primarily in common stocks. In addition, the S&P 500 assumes
reinvestments of all dividends paid by stocks listed on its index, but the
performance does not reflect the deduction of management fees or transaction
costs.
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 received from the Securities and Exchange
Commission an exemptive order for the multi-manager structure which allows the
Adviser to hire, replace or terminate subadvisers without the approval of
shareholders; the order also allows the Adviser to revise a subadvisory
agreement without shareholder approval. If a new subadviser is hired, the change
will be communicated to shareholders within 90 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 is intended to facilitate the efficient operation of the Fund and afford
the Trust increased management flexibility.
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
16
<PAGE> 186
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 0.80% 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 makes investment decisions for the Fund,
and in connection with such investment decisions places 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% on
assets up to $50 million, 0.25% on assets of $50 million and more but less than
$250 million, 0.20% on assets of $250 million and more but less than $500
million, and 0.15% on assets of $500 million and more. These fees are calculated
at an annual rate based upon the Fund's average daily net assets.
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 $139 billion invested across more than 370 funds under
management and/or administration by its subsidiaries, as of December 31, 1997,
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 are 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
17
<PAGE> 187
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.
OTHER SERVICES
Under the terms of a Fund Administration Agreement, the Adviser also provides
various administrative and accounting services to the Fund, 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% on assets up to $250 million, 0.05% on the
next $750 million and 0.04% on assets of $1 billion and more. These fees are
calculated at an annual rate based upon the Fund's average daily net assets.
The Transfer and Dividend Disbursing Agent, Nationwide Investors Services, Inc.,
("NIS"), Three Nationwide Plaza, Columbus, Ohio 43215, 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.
In addition to paying for the advisory, fund administration and transfer agency
services described above, the Fund pays for its own expenses including services
provided by its custodian, the Trust's independent accountants and legal
counsel, charges and expenses of dividend and capital gain distributions, a
portion of the compensation paid to the Trust's Trustees who are not "interested
persons" of the Adviser and of the expenses of Trustees' meetings, brokerage
commissions and other expenses related to securities transactions, taxes,
insurance and bonding premiums, association membership dues, and expenses
relating to the issuance, registration and qualification of the Fund's
securities. The Fund may also pay for certain expenses relating to shareholders'
meetings and to the printing and distributing of prospectuses to current
shareholders.
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 Contracts and to
affiliated Funds of Funds. Substantially all of the Fund's shares were owned by
separate accounts of Nationwide Life Insurance Company and Nationwide Life and
Annuity Insurance Company as of April 1, 1998. The address for each of these
entities is One Nationwide Plaza, Columbus, Ohio 43215.
18
<PAGE> 188
All investments in the Fund are credited to the Accounts 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 set forth in 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 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.
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 Fund does not compute net
asset value on customary national business holidays, including the following:
Christmas, New Year's Day, Martin Luther King, Jr. Day, 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 or if
there is no sale on that day, the securities are valued at the prior day's
closing price as provided by an independent pricing organization. Securities
traded in the over-the-counter market are valued at the last quoted sale price
or if there is no sale on that day, the quoted bid price as provided by an
independent pricing organization. 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
19
<PAGE> 189
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, or for which an independent pricing
organization does not provide a value or provides a value that does not
represent fair value in the judgement of the Adviser, are valued at fair value
in accordance with procedures adopted by the Board of Trustees. Expenses and
fees are accrued daily.
NET INCOME AND DISTRIBUTIONS
Substantially all of the net investment income, if any, of the Fund will be
declared and paid as dividends quarterly in the form of additional shares of the
Fund. 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, and currently has authorized 15 separate
funds. The shares of each fund participate equally in the earnings, dividends,
and assets of that particular fund. 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. Generally, amendment may be made
to the Declaration of Trust without the affirmative vote of a majority of the
outstanding voting securities 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;
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, when issued, are fully
paid and nonassessable. In regard to termination, sale of assets, or changes of
fundamental investment restrictions, the right to vote is limited to the holders
of shares of the particular fund affected by the proposal. However, shares of
all funds would vote together, and not by fund, in the election of Trustees. If
an issue must be approved by a majority as defined by the 1940 Act, a "majority
of the outstanding voting securities" means the lesser of (i) 67% or more of the
20
<PAGE> 190
shares present at a meeting when the holders of more than 50% of the outstanding
shares are present or represented by proxy, or (ii) more than 50% of the
outstanding shares. For the election of Trustees only a plurality is required.
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.
TAX STATUS
The Trust's policy is to cause the 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, or substantially all, of
its taxable net income and capital gains to shareholders; therefore, it is
expected that the Fund will not be required to pay any federal income taxes on
its investment income.
Because the Fund 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 from those of other funds of the Trust 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.
21
<PAGE> 191
CONTENTS PAGE
Sale of Fund Shares 2
Summary of Expenses 2
Financial Highlights 3
Investment Objective and Policies 4
Investment Techniques, Considerations and
Risk Factors 4
Performance Information 14
Management of the Trust 16
Investment in Fund Shares 18
Share Redemption 19
Net Income and Distributions 20
Additional Information 20
Tax Status 21
INVESTMENT ADVISER AND ADMINISTRATOR
Nationwide Advisory Services, Inc.
Three Nationwide Plaza
Columbus, Ohio 43215
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Nationwide Investors Services, Inc.
P.O. Box 1492
Three Nationwide Plaza
Columbus, Ohio 43216
AUDITORS
Coopers & Lybrand L.L.P.
100 East Broad Street
Columbus, Ohio 43215
LEGAL COUNSEL
Druen, Dietrich, Reynolds, & Koogler
One Nationwide Plaza
Columbus, Ohio 43215
<PAGE> 192
PROSPECTUS
MAY 1, 1998
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 TOLL FREE 1-800-848-6331
Nationwide High Income Bond 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 one of those funds, Nationwide High
Income Bond Fund ("the 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.
Nationwide Advisory Services, Inc. may from time to time use one or more
subadvisers to manage the Fund's portfolio as a part of a multi-manager
structure (see "Investment Management of the Fund").
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 May 1, 1998, has been filed with the
Securities and Exchange Commission. You can obtain a copy without charge by
calling 1-800-848-6331, 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 FUND, DATED MAY 1, 1998, IS
INCORPORATED HEREIN BY REFERENCE.
<PAGE> 193
SALE OF FUND SHARES
Shares of the Fund are 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. 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.
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.
SUMMARY OF EXPENSES
<TABLE>
<S> <C>
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 (after voluntary fee reductions) 0.15%
----
Estimated Total Fund Operating Expenses (after voluntary fee reductions)1 0.95%
=====
</TABLE>
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, 1998.
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
------ -------
$10 $30
THE EXAMPLE SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
For more information on Fund expenses, see "Management of the Trust."
(1) The Adviser has agreed with the Trust to waive management fees or to
reimburse expenses incurred by the Fund if necessary to limit the total
expense ratio of the Fund to a maximum of 0.95% through April 30, 1999.
2
<PAGE> 194
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD
<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 31, 1997
(COMMENCEMENT
OF OPERATIONS)
THROUGH DECEMBER 31,
1997
----
<S> <C>
NET ASSET VALUE -- BEGINNING OF
PERIOD $10.00
Net investment income 0.11
Net realized gain and unrealized
appreciation on investments 0.12
----
Total from investment operations 0.23
----
Dividends from net investment income (0.11)
Net increase in net asset value 0.12
NET ASSET VALUE -- END OF PERIOD $10.12
======
Total Return 2.28%
Ratios and supplemental data:
Net Assets, end of period (000) $6,029
Ratio of expenses to average net assets 0.95%*
Ratio of expenses to average net assets** 2.18%*
Ratio of net investment income to average
net assets 6.96%*
Ratio of net investment income to average
net assets** 5.73%*
Portfolio turnover 7.37%
</TABLE>
* Ratios are annualized for periods of less than one year. Total return
and portfolio turnover are not annualized.
** Ratios calculated as if no fees were waived or expenses reimbursed.
*** Represents the total amount of commissions paid in portfolio equity
transactions divided by the total number of shares purchased and sold
by the Fund for which commissions were charged.
The information in the Financial Highlights has been audited by Coopers &
Lybrand L.L.P., Independent Auditors, whose report thereon, together with the
financial statements appearing in the Annual Report for the Trust, are
incorporated by reference in the Statement of Additional Information. The
Trust's Statement of Additional Information and the Annual Report may be
obtained free of charge by calling 1-800-848-6331.
3
<PAGE> 195
INVESTMENT OBJECTIVE AND POLICIES
Nationwide High Income Bond 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/IBCA Information 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.
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.
4
<PAGE> 196
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 and have caused the effective maturity of securities with prepayment
features to be extended, thus effectively converting short or intermediate term
securities (which tend to be less volatile in price) into longer term securities
(which tend to be more volatile in price).
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").
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
5
<PAGE> 197
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
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
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<PAGE> 198
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 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.
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<PAGE> 199
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 in the over-the-counter market ("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.
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
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<PAGE> 200
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, 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.
9
<PAGE> 201
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
- - the Student Loan Marketing Association and the Federal Home Loan
Mortgage Corporation, 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
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<PAGE> 202
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 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
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<PAGE> 203
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 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
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<PAGE> 204
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 OR DELAYED-DELIVERY 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 or delayed-delivery securities allows the Fund to lock in a fixed
price or yield on a security it intends to purchase. However, when the Fund
purchases securities on such a basis, 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 or delayed-delivery securities may involve the additional
risk that the yield or market price 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
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<PAGE> 205
delivery date, it will purchase them 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 these types of
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 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.
The average annual total return of the High Income Bond Fund for the period
October 31, 1997 (date of commencement of operations) through December 31, 1997
was 2.28%. 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 portfolios under their management, all of
which are registered investment companies. The chart below shows the historical
investment performance for a composite of all portfolios with a substantially
similar investment strategy managed by the Subadviser and its affiliates (the
"Federated High Yield Composite"). Only those portfolios with at least one
quarter's performance history are included in the Federated High Yield
Composite.
The investment performance of Federated High Yield 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.
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The investment performance results of Federated High Yield Composite reflects
the deduction of actual expenses. The composite's average total operating
expenses for the 12 month period ending December 31, 1997 is 1.24%. The Fund's
estimated total annual operating expenses are 0.95%, and are expected to be
lower than the average total annual operating expenses of Federated High Yield
Composite. Because the fund and the portfolios represented in the composite are
registered investment companies, each of the entities have similar fee
structures and are subject to similar types of fees. The Federated High Yield
Composite represents an asset weighted composite return after reinvesting all
income and capital gains distributions.
AVERAGE ANNUAL TOTAL RETURNS
----------------------------
<TABLE>
<CAPTION>
ONE FIVE TEN
YEAR YEARS YEARS
AS OF December 31, 1997
<S> <C> <C> <C>
Federated High Yield Composite 13.09% 11.90% 12.32%
Lehman Brothers High Yield 12.76% 11.65% 11.65%
</TABLE>
ANNUAL TOTAL RETURNS FOR THE YEAR ENDED DECEMBER 31
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Federated High
Yield 13.09% 13.52% 18.78% (2.02)% 17.44% 16.10% 56.49% (12.69)%
Lehman Brothers
High Yield 12.76% 11.35% 19.21% (1.03)% 17.12% 15.75% 46.17% (9.59)%
</TABLE>
Lehman Brothers High Yield Index covers the universe of fixed rate, publicly
issued, noninvestment grade debt registered with the SEC. All bonds included in
the High Yield Index must be dollar-denominated and nonconvertible and have at
least one year remaining to maturity and an outstanding par value of at least
$100 million. Generally securities must be rated Ba1 or lower by Moody's
Investors Service, including defaulted issues. If no Moody's rating is
available, bonds must be rated BB+ or lower by S&P; and if no S&P rating is
available, bonds must be rated below investment grade by Fitch. A small number
of unrated bonds is included in the index; to be eligible they must have
previously held a high yield rating or have been associated with a high yield
issuer, and must trade accordingly. If the High Yield Index reflected the
deduction of fees and expenses, its performance would be lower.
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.
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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 received from the Securities and Exchange
Commission an exemptive order for the multi-manager structure which allows the
Adviser to hire, replace or terminate subadvisers without the approval of
shareholders; the order also allows the Adviser to revise a subadvisory
agreement without shareholder approval. If a new subadviser is hired, the change
will be communicated to shareholders within 90 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 is intended to facilitate the efficient operation of the Fund and afford
the Trust increased management flexibility.
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
16
<PAGE> 208
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.
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 makes investment decisions for the Fund,
and in connection with such investment decisions places 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% on
assets up to $50 million, 0.25% on assets of $50 million and more but less than
$250 million, 0.20% on assets of $250 million and more but less than $500
million, and 0.15% of assets of $500 million and more. These fees are calculated
at an annual rate based upon the Fund's average daily net assets. 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 $139 billion invested across more than 370 funds under
management and/or administration by its subsidiaries, as of December 31, 1997,
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 have been primarily responsible for
the day-to-day management of the Fund's portfolio since its inception. 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 accounting services to the Fund, 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% on assets up to $250 million,
17
<PAGE> 209
0.05% on the next $750 million and 0.04% on assets of $1 billion and more. These
fees are calculated at an annual rate based upon the Fund's average daily net
assets.
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.
In addition to paying for the advisory, fund administration and transfer agency
services described above, the Fund pays its own expenses including services
provided by its custodian, the Trust's independent accountants and legal
counsel, charges and expenses of dividend and capital gain distributions, a
portion of the compensation paid to the Trust's Trustees who are not "interested
persons" of the Adviser and of the expenses of Trustees' meetings, brokerage
commissions and other expenses related to securities transactions, taxes,
insurance and bonding premiums, association membership dues, and expenses
relating to the issuance, registration and qualification of the Fund's
securities. The Fund may also pay for certain expenses relating to shareholders'
meetings and to the printing and distributing of prospectuses to current
shareholders.
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 Contracts and to
affiliated Fund of Funds. Substantially all of the Fund's shares were owned by
separate accounts of Nationwide Life Insurance Company and Nationwide Life and
Annuity Insurance Company as of April 1, 1998. The address for each of these
entities is One Nationwide Plaza, Columbus, Ohio 43215.
All investments in the Fund are credited to the Accounts 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.
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<PAGE> 210
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 Fund does not compute net
asset value on customary national business holidays, including the following:
Christmas, New Year's Day, Martin Luther King, Jr. Day, 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; in the
absence of recorded sales for equity securities, such securities are valued at
the mean between the last closing bid and asked prices. Unlisted equity
securities are valued at the latest mean prices. If no sale price from the
principal exchange is available, bonds and other fixed income securities are
valued at the quoted prices obtained from an independent pricing organization.
Short-term obligations are valued at the mean between bid and asked prices as
furnished by an independent pricing organization. Such pricing organizations
employ 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 in the form of additional shares of the
Fund. Net realized capital gains of the Fund, if any, will be distributed at
least annually.
19
<PAGE> 211
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, and currently has authorized 15 separate
funds. The shares of each fund participate equally in the earnings, dividends,
and assets of that particular fund. 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. Generally, amendment may be made
to the Declaration of Trust without the affirmative vote of a majority of the
outstanding voting securities 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;
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, when issued are fully
paid and nonassessable. In regard to termination, sale of assets, or changes of
fundamental investment restrictions, the right to vote is limited to the holders
of shares of the particular fund affected by the proposal. However, shares of
all funds would vote together, and not by fund, in the election of the Trustees.
If an issue must be approved by a majority as defined by the 1940 Act, a
"majority of the outstanding voting securities" means the lesser of (i) 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 (ii) more than 50% of
the outstanding shares. For the election of Trustees only a plurality is
required.
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.
TAX STATUS
The Trust's policy is to cause the 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, or substantially all, of
its taxable net income and capital gains to shareholders;
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<PAGE> 212
therefore, it is expected that the fund will not be required to pay any federal
income taxes on its investment income.
Because the Fund 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 from those of other funds of the Trust 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.
21
<PAGE> 213
CONTENTS
PAGE
Sale of Fund Shares 2
Summary of Expenses 2
Financial Highlights 3
Investment Objective and Policies 4
Investment Techniques, Considerations and
Risk Factors 5
Performance Information 14
Management of the Trust 16
Investment in Fund Shares 18
Share Redemption 18
Net Income and Distributions 19
Additional Information 20
Tax Status 20
INVESTMENT ADVISER AND ADMINISTRATOR
Nationwide Advisory Services, Inc.
Three Nationwide Plaza
Columbus, Ohio 43215
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Nationwide Investors Services, Inc.
P.O. Box 1492
Three Nationwide Plaza
Columbus, Ohio 43216
AUDITORS
Coopers & Lybrand L.L.P.
100 East Broad Street
Columbus, Ohio 43215
LEGAL COUNSEL
Druen, Dietrich, Reynolds & Koogler
One Nationwide Plaza
Columbus, Ohio 43215
<PAGE> 214
PROSPECTUS
MAY 1, 1998
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 TOLL-FREE 1-800-848-6331
Nationwide Multi Sector Bond 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 one of those funds, Nationwide Multi
Sector Bond Fund (the "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.
Nationwide Advisory Services, Inc. may from time to time use one or more
subadvisers to manage the Fund's portfolios as a part of a multi-manager
structure (see "Investment Management of the Fund").
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 May 1, 1998 has been filed with the
Securities and Exchange Commission. You can obtain a copy without charge by
calling 1-800-848-6331, 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 FUND, DATED
MAY 1, 1998, IS INCORPORATED HEREIN BY REFERENCE.
<PAGE> 215
SALE OF FUND SHARES
Shares of the Fund are 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. 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.
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.
SUMMARY OF EXPENSES
<TABLE>
<S> <C>
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 (after voluntary fee reductions) 0.15%
-----
Estimated Total Fund Operating Expenses (after voluntary fee reductions) (1) 0.90%
=====
</TABLE>
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, 1998.
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:
<TABLE>
<CAPTION>
1 year 3 years
------ -------
<S> <C>
$9 $29
</TABLE>
THE EXAMPLE SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
For more information on Fund expenses, see "MANAGEMENT OF THE TRUST."
(1) The Adviser has agreed with the Trust to waive management fees or to
reimburse expenses incurred by the Fund if necessary to limit the total
expense ratio of the Fund to a maximum of 0.90% through April 30, 1999.
2
<PAGE> 216
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD
<TABLE>
PERIOD FROM
OCTOBER 31, 1997
(COMMENCEMENT
OF OPERATIONS)
THROUGH DECEMBER 31,
1997
----
<S> <C>
NET ASSET VALUE -- BEGINNING OF
PERIOD $10.00
Net investment income 0.05
Net realized gain and unrealized
appreciation on investments 0.05
----
Total from investment operations 0.10
----
Dividends from net investment income (0.05)
Net increase in net asset value 0.05
NET ASSET VALUE -- END OF PERIOD $10.05
======
Total Return 1.04%
Ratios and supplemental data:
Net Assets, end of period (000) $2,032
Ratio of expenses to average net assets 0.90%*
Ratio of expenses to average net assets** 4.41%*
Ratio of net investment income to average
net assets 4.77%*
Ratio of net investment income to average
net assets** 1.26%*
Portfolio turnover 48.90%
</TABLE>
-----------------------------------------------------------------------------
* Ratios are annualized for periods of less than one year. Total return
and portfolio turnover are not annualized.
** Ratios calculated as if no fees were waived or expenses reimbursed.
*** Represents the total amount of commissions paid in portfolio equity
transactions divided by the total number of shares purchased and sold
by the Fund for which commissions were charged.
The information in the Financial Highlights has been audited by Coopers &
Lybrand L.L.P., Independent Auditors, whose report thereon, together with the
financial statements appearing in the Annual Report for the Trust, are
incorporated by reference in the Statement of Additional Information. The
Trust's Statement of Additional Information and the Annual Report may obtained
free of charge by calling 1-800-848-6331.
3
<PAGE> 217
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 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
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<PAGE> 218
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 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
5
<PAGE> 219
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 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
6
<PAGE> 220
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, and 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.
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.
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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 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.
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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 and have caused the effective maturity of securities with prepayment
features to be extended, thus effectively converting short and intermediate term
securities (which tend to be less volatile in price) into longer term securities
(which tend to be more volatile in price). 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
depository receipts and intends to invest as much as 10% of its total assets in
foreign securities which are not publicly traded in the United States.
Depository 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; 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 in the over-the-counter market ("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
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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.
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,
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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").
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
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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.
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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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 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
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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 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,
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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 and Federal Home Loan Mortgage
Corporation ("FHLMC"), 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- 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
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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 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
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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" (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
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"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 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,
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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 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
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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
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
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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 response to a specific economic event, such as deterioration
in the creditworthiness of the borrower.
The Board of Trustees may adopt 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 would delegate
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
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documentation. Pursuant to such procedures, the Board of Trustees would
periodically review 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. Until such
procedures are adopted, the Fund will consider such securities to be illiquid.
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 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.
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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 of 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
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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 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").
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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 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 OR DELAYED-DELIVERY 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 or delayed-delivery securities allows the Fund to
lock in a fixed price or yield on a security it intends to purchase. However,
when the Fund purchases securities on such a basis, it immediately assumes the
risk of ownership, including the risk of price fluctuation until the settlement
date.
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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 or delayed-delivery securities may involve the additional
risk that the yield or market price 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 them 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 these types of
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.
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.
PERFORMANCE INFORMATION
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,
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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.
The Fund may also advertise an SEC yield. The SEC yield is based on a 30-day
period. This yield takes into account the yields to maturity on all debt
instruments and all dividends accrued on equity securities, since equity
securities do not have maturity dates. The SEC yield is computed by dividing the
net investment income per share earned during the 30-day period by the maximum
offering price per share on the last day of the period.
The average annual total return of the Multi Sector Bond Fund for the period
October 31, 1997 (date of commencement of operations) through March 31, 1998 was
3.08%. 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. Under the
methodology employed by the Subadviser, each SBAM Fund was added to the SBAM
Composite once the SBAM Fund's assets had exceeded a minimum of $10 million.
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 range
of assets information is intended to provide potential investors with an
indication of the magnitude of assets managed by the Subadviser in a
substantially similar manner over the periods of time covered by the SBAM
Composite.
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. An estimate of the Fund's total
operating expenses for the fiscal year ending December 31, 1998 is provided
under "Summary of Expenses" above. The expense ratio for each of the SBAM Funds
included in the SBAM Composite for their most recently completed fiscal year
ranged from 0.85% to 1.50%.
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. The Lehman Index does
not include securities from certain asset classes in which the Fund and the SBAM
Funds may invest, including high yield securities. 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
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<PAGE> 242
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 13.17% 11.99%
March 31, 1998
Three Years Ending 15.43% 9.18%
March 31, 1998
Since SBAM 9.55% 6.95%
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
</TABLE>
29
<PAGE> 243
CHART B
<TABLE>
<CAPTION>
Number of SBAM Funds in Approximate Range of Assets
Time Period SBAM Composite Held by SBAM Composite
----------- -------------- ----------------------
<S> <C> <C>
09/01/96 - 10/3197 5 $296.1 million
to
$594.5 million
11/01/97 - 3/31/98 6 $663.8 million
to
$754.3 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 received from the Securities and Exchange
Commission an exemptive order for the multi-manager structure which allows the
Adviser to hire, replace or terminate subadvisers without the approval of
shareholders; the order also allows the Adviser to
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<PAGE> 244
revise a subadvisory agreement without shareholder approval. If a new subadviser
is hired, the change will be communicated to shareholders within 90 days of such
change, 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 is intended to facilitate the efficient operation of
the Fund and afford the Trust increased management flexibility.
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 makes investment decisions for the Fund,
and in connection with such investment decisions places 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% on
assets up to $50 million, 0.30% on assets of $50 million and more but less than
$200 million, 0.25% on assets of $200 million and more but less than $500
million, and 0.20% on assets of $500 million and more. These fees are calculated
at an annual rate based upon the Fund's average daily net assets. 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 Smith Barney Holdings Inc. which
is, in turn, wholly-owned by Travelers Group, 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
31
<PAGE> 245
providing such services, the Subadviser has access to Salomon Inc's more than
400 economists and mortgage, bond, sovereign and equity analysts. As of December
31, 1997, the Subadviser and its worldwide investment advisory affiliates
managed approximately $27 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. He is assisted by Roger Lavan. Mr.
Guterman joined the Subadviser in 1990 and is currently a Managing Director of
Salomon Brothers, Inc. ("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.
32
<PAGE> 246
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 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 to the Fund, 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% on assets up to $250 million, 0.05% on the
next $750 million and 0.04% on assets of $1 billion and more. These fees are
calculated at an annual rate based upon the Fund's average daily net assets.
The Transfer and Dividend Disbursing Agent, Nationwide Investors Services, Inc.,
("NIS"), Three Nationwide Plaza, Columbus, Ohio 43215, 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.
In addition to paying for the advisory, fund administration and transfer agency
services described above, the Fund pays for its own expenses including services
provided by its custodian, the Trust's independent accountants and legal
counsel, charges and expenses of dividend and capital gain distributions, a
portion of the compensation paid to the Trust's Trustees who are not "interested
persons" of the Adviser and of the expenses of Trustees' meetings, brokerage
commissions and other expenses related to securities transactions, taxes,
insurance and bonding premiums, association membership dues, and expenses
relating to the issuance, registration and qualification of the Fund's
securities. The Fund may also pay for certain expenses relating to shareholders'
meetings and to the printing and distributing of prospectuses to current
shareholders.
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 Contracts and to
affiliated Fund of Funds. Substantially all of the Fund's shares were owned by
separate accounts of Nationwide Life Insurance Company and Nationwide Life and
Annuity Insurance Company as of April 1, 1998. The address for each of these
entities is One Nationwide Plaza, Columbus, Ohio 43215.
33
<PAGE> 247
All investments in the Fund are credited to the Accounts 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 Fund does not compute net
asset value on customary national business holidays, including the following:
Christmas, New Year's Day, Martin Luther King, Jr. Day, 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, or if
there is no sale on that day, the securities are valued at the prior day's
closing prices provided by an independent pricing organization. Securities
traded in the over-the-counter market are valued at the last quoted sale price,
or if there is no sale on that day, the quoted bid price as provided by an
independent pricing organization. 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, or for which an independent pricing organization does not
provide a value or provides a value that does not represent fair value in the
judgement of the Adviser, 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;
34
<PAGE> 248
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 in the form of additional shares of the
Fund. 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 and currently has authorized 15 separate
funds. Shares of each fund participate equally in the earnings, dividends, and
assets of that particular fund. 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. Generally, amendment may be made
to the Declaration of Trust without the affirmative vote of a majority of the
outstanding voting securities 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;
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 when issued are fully
paid and nonassessable. In regard to termination, sale of assets, or changes of
fundamental investment restrictions, the right to vote is limited to the holders
of shares of the particular fund affected by the proposal. However, shares of
all funds vote together, and not by Fund, in the election of Trustees. If an
issue must be approved by a majority as defined by the 1940 Act, a "majority of
the outstanding voting securities" means the lesser of (i) 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
35
<PAGE> 249
by proxy, or (ii) more than 50% of the outstanding shares. For the election of
Trustees only a plurality is required.
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.
TAX STATUS
The Trust's policy is to cause the 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, or substantially all, of
its taxable net income and capital gains to shareholders; therefore, it is
expected that the Fund will not pay any federal income taxes on its investment
income.
Because the Fund 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 from those of other funds of the Trust 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.
36
<PAGE> 250
CONTENTS PAGE
Sale of Fund Shares 2
Summary of Expenses 2
Financial Highlights 3
Investment Objective and Policies 4
Investment Techniques, Considerations and
Risk Factors 9
Performance Information 27
Management of the Trust 30
Investment in Fund Shares 33
Share Redemption 34
Net Income and Distributions 35
Additional Information 35
Tax Status 36
INVESTMENT ADVISER AND ADMINISTRATOR
Nationwide Advisory Services, Inc.
Three Nationwide Plaza
Columbus, Ohio 43215
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Nationwide Investors Services, Inc.
P.O. Box 1492
Three Nationwide Plaza
Columbus, Ohio 43216
AUDITORS
Coopers & Lybrand L.L.P.
100 East Broad Street
Columbus, Ohio 43215
LEGAL COUNSEL
Druen, Dietrich, Reynolds, & Koogler
One Nationwide Plaza
Columbus, Ohio 43215
<PAGE> 251
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1998
NATIONWIDE SEPARATE ACCOUNT TRUST
--TOTAL RETURN FUND
--CAPITAL APPRECIATION FUND
--GOVERNMENT BOND FUND
--MONEY MARKET FUND
--SMALL COMPANY FUND
--INCOME FUND
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 May 1, 1998 for all of such Funds. The Prospectuses may be
obtained from Nationwide Life Insurance Company, One Nationwide Plaza, Columbus,
Ohio 43215, or by calling toll free 1 (800) 848-6331.
TABLE OF CONTENTS PAGE
- ----------------- ----
General Information and History 1
Investment Objectives and Policies 2
Investment Restrictions 25
Major Shareholders 29
Trustees and Officers of the Trust 29
Calculating Yield - The Money Market Fund 31
Calculating Yield and Total Return-Non-Money Market Funds 31
Investment Adviser and Other Services 32
Brokerage Allocations 38
Purchases, Redemptions and Pricing of Shares 40
Additional Information 41
Tax Status 42
Tax Consequences for the Small Company Fund 43
Tax Consequences to Shareholders 45
Financial Statements 45
Appendix A - Bond Ratings 46
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 subsequently amended. The Trust offers shares in fifteen separate
mutual funds, each with its own investment objective. This Statement of
Additional Information describes further six of those funds -- the Total Return
Fund, the Capital Appreciation Fund, the Government Bond Fund, the Money Market
Fund, the Small Company Fund and the Income Fund (collectively, the "Funds" and
individually, a "Fund").
<PAGE> 252
INVESTMENT OBJECTIVES AND POLICIES
The following information supplements the discussion of the Funds'
investment objectives and policies discussed in the Prospectuses. Defined terms
used in this Statement of Additional Information, unless otherwise defined
herein, have the meaning assigned to them in the relevant Prospectus.
The investment policies and types of permitted investments described here
may be changed without prior approval by, or notice to, the shareholders. There
is no guarantee that the objectives will be realized.
- --Total Return Fund
This Fund's investment objective is to obtain a reasonable, long term
total return on invested capital from a flexible combination of dividend return
and capital gains. The Fund seeks to achieve its objective through investments
in common stocks, convertible issues, money market instruments, and bonds, with
a primary emphasis on common stocks.
While it is the intention of the Fund to invest in common stocks or in
issues convertible to common stock, there are no restrictive provisions covering
the proportion of one or another class of securities that may be held, or other
restriction, other than those stated in the investment restrictions.
- --Capital Appreciation Fund
The Fund is designed for investors who are interested in long-term growth.
The Fund seeks to meet its objectives primarily through a diversified portfolio
of the common stock of companies which the investment manager determines have a
better-than-average potential for sustained capital growth over the long term.
While it is the intention of the Fund to invest in common stocks or in
issues convertible to common stock, there are no restrictive provisions covering
the proportion of one or another class of securities that may be held, or other
restriction, other than those stated in the investment restrictions.
The investment manager will focus mainly on a company's or industry's
potential for long term growth, with dividend and interest income being
secondary in importance. The manager's evaluation of a company or industry will
be based more on probable future earnings, relative financial strength and
competitive position. The manager believes this approach will provide a greater
return potential over the long run than simply seeking current dividend or
interest income. The Fund's portfolio will not be limited to any particular type
of company or industry.
- --Government Bond Fund
The investment objective of the Government Bond Fund is to provide as high
a level of income as is consistent with the preservation of capital. It seeks to
achieve its objective by investing in a diversified portfolio of securities
issued or backed by the U.S. Government, and its agencies or instrumentalities.
These securities are of varying types which include but are not limited
to:
Treasury Notes And Bonds - These are direct obligations of the U.S.
Government. New issues of notes mature in one to ten years while bonds generally
have a maturity of ten years or more.
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<PAGE> 253
Treasury Bills - These are direct obligations of the U.S. Government
backed by the full faith and credit of the United States and mature in one year
or less.
Securities Issued By Instrumentalities of the U.S. Government - These
securities are issued by federally-chartered instrumentalities. Some of these
securities are guaranteed by the United States Treasury or are supported by the
issuer's right to borrow from the Treasury and are backed by the credit of the
federal instrumentality itself.
Some of these instrumentalities (listed for example purposes only) are:
Bank for Cooperatives (COOP)
Federal Home Loan Banks (FHLB)
Federal National Mortgage Association (FNMA)
Government National Mortgage Association (GNMA)
Tennessee Valley Authority (TVA)
Farmers Home Administration (FHA)
Federal Home Loan Mortgage Corporation (FHLMC)
The Government Bond Fund will normally invest at least 65% of its assets in
bonds issued by the U.S. Government, and its agencies and instrumentalities.
These bonds pay interest at regular intervals, usually semi-annually, and pay
principal at maturity.
The Government Bond Fund may invest up to 35% of its assets in zero coupon
securities and up to 20% of its assets in securities purchased on a
"when-issued" or on a "delayed-delivery" basis, provided those securities are
issued or backed by the U.S. Government, its agencies or instrumentalities (for
a further description of when-issued or delayed-delivery transactions, see
Income Fund--When-Issued Securities and Delayed-Delivery Transactions below).
The Government Bond Fund may also enter into repurchase agreements in any of the
securities described above (for a description of repurchase agreements, see
Income Fund -Repurchase Agreements below).
The Government Bond Fund may invest up to 35% of its assets in 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. The securities purchased by the Government
Bond Fund are issued or guaranteed by U.S. government agencies or
instrumentalities.
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
previously customary. As new types of mortgage-related securities are developed
and offered to investors, the 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 generally may be prepaid at any time. As a result, if
the Fund purchases these
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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 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 Government Bond Fund will normally invest no more than 20% of its assets in
repurchase agreements or in U.S. Government securities maturing in less than one
year. For temporary defensive purposes, however the Fund may invest up to 100%
of its assets in these securities.
There is a minimal credit risk involved in the purchase of U.S. Government or
U.S. Government guaranteed securities. Securities issued by U.S. Government
agencies or instrumentalities, while perhaps having the implicit backing of the
U.S. Government, may not have an explicit guarantee of the payment of principal
and interest.
The value of shares of the Government Bond Fund will vary inversely with changes
in interest rates. As with any fixed income investment, interest rate risk does
exist; i.e., when interest rates decline, the market value of a portfolio can be
expected to rise; conversely, when interest rates rise, the market value of the
portfolio can be expected to fall. While the Government Bond Fund will engage in
portfolio trading to manage this risk (i.e., shortening the average maturity of
the portfolio in anticipation of a rise in interest rates so as to minimize
depreciation of principal, or lengthening the portfolio in anticipation of a
decline in interest rates so as to maximize appreciation of capital) there is no
assurance that capital will be preserved. Thus, the Government Bond Fund is
designed for those willing to accept market fluctuations to obtain income.
- --Money Market Fund
The investment objective of this Fund is to seek as high a level of current
income as it considered consistent with the preservation of capital and
liquidity through investments in a portfolio of money market instruments with
remaining maturities of 397 days or less. The Fund seeks to achieve its
objective by investing primarily in instruments receiving a rating in one of the
two highest categories by the following six nationally recognized statistical
rating organizations ("NRSROs"): Duff and Phelps, Inc. ("D&P"), Fitch/IBCA
Information Services, Inc. ("Fitch"), Moody's Investors Service Inc.
("Moody's"), Standard & Poor's Ratings Group ("Standard & Poor's"), and Thomson
Bank Watch ("Thomson"). See Appendix A for a further description of the NRSRO
ratings.
The Fund may invest in the following instruments:
-- obligations issued or guaranteed as to interest and principal by
the U.S. government, its agencies, or instrumentalities, or any
federally chartered corporation.
-- repurchase agreements, subject to the restrictions set forth
under "Investment Restrictions." Potential risks associated with
investment in repurchase agreements are twofold: (a) in the event of
default of an issuer and a decrease in the value of the underlying
securities below the repurchase price, the Fund could suffer a loss,
and (b) in the event of an issuer's bankruptcy, the Fund's ability
to dispose of underlying securities could be delayed. (For a further
description, see iIncome Fund--Repurchase Agreementsi below.)
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-- obligations of banks which at the date of investment are rated
TBW1 by Thomson. Obligations of savings and loan associations
(including certificates of deposit and bankers' acceptances) which
at the date of investment have capital, surplus, and undivided
profits (as of the date of their most recently published financial
statements) in excess of $100 million; and obligations of other
banks or savings and loan associations if such obligations are
insured by the Federal Deposit Insurance Corporation, provided that
not more than 10% of the Fund's total assets shall be invested in
such insured obligations.
-- commercial paper which at the date of investment is rated Duff 1
or Duff 2, by D&F, F-1 or F-2 by Fitch, P-1 or P-2 by Moody's, or
A-1 or A-2 by Standard & Poor's, or if not rated, is issued and
guaranteed as to payment of principal and interest by companies
which at the date of investment have an outstanding debt issue rated
AA or better by D&F, AA or better by Fitch, Aa or better by Moody's,
or AA or better by Standard & Poor's.
-- up to 5% of its total assets in commercial paper which at the
date of investment is rated F-2 by Fitch, Duff 2 by D&P, P-2 by
Moody's, or A-2 by Standard and Poor's. However, the Fund is limited
as to the amount it may invest in the commercial paper of a single
issuer to the greater of 1% of the Fund's total assets or $1
million.
-- short-term (maturity in 397 days or less) corporate obligations
which at the date of investment are rated AA or better by D&F, AA or
better by Fitch, Aa or better by Moody's, or AA or better by
Standard & Poor's.
-- bank loan participation agreements representing corporations and
banks having a short-term rating, at the date of investment, of F-1
or F-2 by Fitch, Duff 1 or Duff 2 by D&P, P-1 or P-2 by Moody's or
A-1 or A-2 by Standard & Poor's, 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.
All the assets of the Fund will be invested in obligations with remaining
maturities of 397 days or less and which generally will be held to maturity. The
Fund will, to the extent feasible, make portfolio investments primarily in
anticipation of, or in response to, changing economic and financial conditions.
The Fund will attempt to maximize the return on its investments through careful
analysis of a wide range of investments available and different yield
relationships existing among various sectors of the market. The average dollar
weighted maturity of the Fund's investments may not exceed 90 days. There can be
no assurance that the Fund's investment objective will be achieved.
The Fund may invest in the securities of foreign corporate and governmental
issuers and in the securities of foreign branches of U.S. banks, such as
negotiable certificates of deposit (Eurodollars) in U.S. dollar denominations
which at the date of investment are rated TBW1 by Thomson. Because of this,
investment in the Fund involves risks that are different in some respects from
an investment in a fund which invests only in debt obligations of U.S. domestic
issuers. Such risks may include future political and economic developments, the
possible imposition of foreign withholding taxes on interest income payable on
the securities held in the portfolio, possible seizure or nationalization of
foreign deposits, the possible establishment of exchange controls, or the
adoption of other foreign governmental restrictions which might adversely affect
the payment of principal and interest on securities in the portfolio.
- -- Income Fund
The Income Fund seeks to provide as high a level of income as is
consistent with reasonable concern for safety of principal. The Fund intends to
pursue its investment objective by investing at least 65% of its assets, under
normal market conditions, in investment grade corporate and U.S. Government
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debt obligations. The Fund may invest the remainder of its portfolio in high
quality short-term money market obligations.
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. The Income Fund may invest in high-quality
and medium-quality debt obligations which are characterized as such based on
their ratings by 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 the 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 the Income Fund, an issue of securities may cease
to be rated or its rating may be reduced below the minimum required for purchase
by the Income Fund. In addition, it is possible that an 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 the Income Fund's
Subadviser will consider such events in its determination of whether the Income
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 reorganizations, the Income Fund will attempt to
use comparable ratings as standards for its investments in accordance with its
investment objective and policies.
Money Market Instruments. The Income 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;
-- 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
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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
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- and Asset-Backed Securities - The Income 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 in mortgage loans, including savings
and loan associations, mortgage bankers, commercial banks, investment bankers,
and special purpose entities (collectively, "private lenders"). Mortgage-backed
securities issues 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 previously customary. As new types of
mortgage-related securities are developed and offered to investors, the Fund,
consistent with its investment objective and policies, may consider making
investments in such new types of securities.
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 credit quality of most asset-backed
securities depends primarily on the credit quality of the assets underlying such
securities, how well the entity issuing the security is insulated from the
credit risk of the originator any other affiliated entities, and the amount and
quality of any credit enhancement of the securities.
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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 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 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.
The Fund may invest in stripped mortgage- or asset-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 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 the Fund
failing to recover all or a portion of its investment, even though the
securities are rated investment grade.
Repurchase Agreements. In connection with the purchase of a repurchase agreement
by the Income Fund, the Fund's custodian 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 the resale price.
Repurchase agreements involve certain risks in the event of default or
insolvency by the other party, including possible delays or restrictions upon
the 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 the 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.
Investment Companies. The Income Fund reserves the right to invest up to 5% 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 Income
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. Investing through such vehicles may involve frequent or
layered fees or expenses and may be subject to limitation under the Investment
Company Act of 1940 (the "1940 Act"). The Income Fund will
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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 Income Fund.
When-Issued Securities and Delayed-Delivery Transactions. The Income Fund 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 or delayed-delivery
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 the Fund agrees to purchase when-issued or delayed-delivery securities, its
custodian will set aside cash or liquid securities 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 the
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. The Income 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) the fund must receive at least 100% cash
collateral of the type discussed in the preceding 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) the fund must be
able to terminate the loan at any time; (4) the 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) the 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, the
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
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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.
Borrowing. The Income Fund may borrow money from banks, limited by any
investment restrictions to 33 1/3% of its total assets. However, the Fund
currently intends to borrow money only for temporary or emergency purposes in an
amount of up to 5% of the value of the Fund's total asset (including the amount
borrowed) valued at the time the borrowing is made. 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.
Small Company Fund
The Small Company Fund seeks long-term growth of capital. It seeks to
achieve this objective by investing primarily in equity securities of both
domestic and foreign small market capitalization companies ("small company
stocks"). To attempt to achieve this objective, the Adviser has hired a number
of subadvisers to direct the day-to-day management of the Small Company Fund.
The following information supplements the discussion of the Fund's objectives,
policies and techniques that are described in the Fund's prospectus under
"INVESTMENT OBJECTIVES AND POLICIES" and "INVESTMENT TECHNIQUES, CONSIDERATIONS
AND RISK FACTORS."
Special Situation Companies. The Small Company 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. The Fund believes, however, that if a
Subadviser analyzes "special situation companies" carefully and invests in the
securities of these companies at the appropriate time, the 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.
Foreign Securities. Investors in the Small Company Fund 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 the Fund may hold securities and funds in foreign
currencies, the 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 the Fund
endeavors to achieve the most favorable net results on their 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 the Fund may be subject to foreign government taxes, higher
custodian fees and dividend collection fees which could reduce the yield on such
securities.
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Investments may be made from time to time by the Small Company 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.
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 the 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 of 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
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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 traded on foreign commodity exchanges may be
subject to the same or similar risks as trading in foreign securities.
Depositary Receipts. As indicated in the Fund's prospectus, the Small
Company Fund may invest in foreign securities by purchasing depositary receipts,
including American Depositary Receipts ("ADRs") and European Depositary Receipts
("EDRs") or other securities convertible into securities of issuers based in
foreign 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
Depositary 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 the 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. (For further information on these instruments, see the
descriptions above for the Government Bond Fund and the Money Market Fund.)
The Small Company Fund may invest in depositary receipts through
"sponsored" or "unsponsored" facilities. A sponsored facility is established
jointly by the issuer of the underlying security and a depositary, whereas a
depositary may establish an unsponsored facility without participation by the
issuer of the deposited security. Holders of unsponsored depositary receipts
generally bear all the costs of such facilities and 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 voting rights to the holders of such receipts in respect of the
deposited securities.
Debt Obligations. While the emphasis of the Small Company Fund's
investment is on common stocks and other equity securities (including preferred
stocks and securities convertible into or exchangeable for common stocks), it
may also invest in money market instruments, U.S. Government or Agency
securities, (for further information concerning these securities, see the
descriptions above for the Government Bond and the Money Market Funds) and
corporate bonds and debentures receiving one of the four highest ratings from an
NRSRO, or if not rated by any NRSRO, deemed comparable by a Subadviser to such
rated securities ("Comparable Unrated Securities"). The ratings of an NRSRO
represent its opinion as to the quality of securities it undertakes to rate.
Ratings are not absolute standards of quality; consequently, securities with the
same maturity, coupon, and rating may have different yields. The ratings
assigned by the NRSROS are described in Appendix A to this Statement of
Additional Information.
Fixed income securities are subject to the credit risk and market risk as
described above. 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. Subsequent
to its purchase by the Fund, an issue of securities may cease to be rated or its
rating may be reduced, so that the securities would not be eligible for purchase
by the Fund. In such a case, the Subadviser will evaluate whether the downgraded
security should be disposed of.
High-Yield (High-Risk) Securities -- In General. The Fund has the
authority to invest up to 5% of its net assets 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 B 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
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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 decrease in a rising interest rate market, and accordingly so will
the Fund's net asset value. If the 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),
the Fund may be forced to liquidate these securities at a substantial discount.
Any such liquidation would reduce the Fund's asset base over which expenses
could be allocated and could result in a reduced rate of return for 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, the Fund may have to
replace the securities with a lower yielding security, which would result in a
lower return for the Fund.
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 a Subadviser's credit
analysis than would be the case with investments in investment-grade debt
securities. 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, each Subadviser will continually monitor the
investments in the 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.
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Liquidity And Valuation. The 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 Fund anticipates 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, the Fund's asset value and ability to
dispose of particular securities, when necessary to meet the 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 the Fund to obtain accurate market quotations for purposes of valuing the
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. However, 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.
Convertible Securities. Convertible securities in which the Fund may
invest, including both convertible debt and convertible preferred stock, may be
converted at either a stated price or stated rate into underlying shares of
common stock. Because of this feature, convertible securities enable an investor
to benefit from increases in the market price of the underlying common stock.
Convertible securities provide higher yields than the underlying equity
securities, but generally offer lower yields than non-convertible securities of
similar quality. Like bonds, the value of convertible securities fluctuates in
relation to changes in interest rates and, in addition, also fluctuates in
relation to the underlying common stock.
Warrants. The Small Company 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. The Fund may purchase warrants, valued at the lower
of cost or market value, of up to 5% of the Fund's net assets. Included in that
amount, but not to exceed 2% of the Fund's net assets, may be warrants that are
not listed on any recognized U.S. or foreign stock exchange. Warrants acquired
by the 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.
Repurchase Agreements. The Small Company Fund's custodian or a
sub-custodian 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 to be loans by the Fund. In an attempt to reduce the risk of
incurring a loss on the repurchase agreement, the Fund will enter into
repurchase
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agreements with certain banks and non-bank dealers, all of whose use has been
approved by the Board of Trustees. 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. Each Subadviser will monitor on an
ongoing basis the value of the collateral to assure that it always equals or
exceeds the repurchase price. The Fund will consider on an ongoing basis the
creditworthiness of the institutions with which the Fund enters into repurchase
agreements. Repurchase agreements involve certain risks in the event of default
or insolvency by the other party, including possible delays or restrictions upon
the Fund's ability to dispose of the underlying securities.
Short Sales "Against The Box". In a short sale, the Small Company Fund
sells a borrowed security and has a corresponding obligation to the lender to
replace with such security. The 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."
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. If the Fund engages in a short sale, the collateral for the short
position will be maintained by the Fund's custodian or qualified sub-custodian.
While the short sale against the box is open, the Fund will maintain in a
segregated account an amount of securities equal in kind and amount to the
securities sold short or securities convertible into or exchangeable for such
equivalent securities. These securities constitute the Fund's long position. Not
more than 15% of the Fund's net assets (taken at current value) may be held as
collateral for such short sales at any one time.
The Fund does not intend to engage in short sales against the box for
investment purposes. The 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). 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. The Small Company
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
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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 settlement of unregistered securities of domestic and foreign
issuers, such as the PORTAL System sponsored by the National Association of
Securities Dealers, Inc.
The 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 the
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 the Fund it manages under the supervision of the Board of Trustees
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).
When-Issued Securities And Delayed-Delivery Transactions. The Small
Company Fund 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 Fund
will enter into a when-issued or delayed-delivery transaction for the purpose of
acquiring portfolio securities and not for the purpose of leverage, but may sell
the securities before the settlement date if a Subadviser which purchased such
security deems it advantageous to do so. The payment obligation and the interest
rate that will be received on when-issued or delayed delivery securities are
fixed at the time the buyer enters into the commitment. Due to fluctuations in
the value of securities purchased or sold on such a 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 the Fund agrees to purchase when-issued or delayed-delivery
securities, its custodian will set aside cash, U.S. government securities or
other liquid high-grade debt obligations 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 the 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 the
Fund's commitment. It may be expected that the Fund's net assets will fluctuate
to a
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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 the Fund incurring a loss or
missing an opportunity to obtain a price considered to be advantageous.
Lending Portfolio Securities. The Small Company 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 the Fund,
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) the Fund must receive at least 100% cash collateral of the type
discussed in the preceding 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) the Fund must be able to terminate
the loan at any time; (4) the 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) the 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, the Trust's 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.
Borrowing. The Small Company Fund may borrow money from banks, limited by
the Fund's fundamental investment restriction to 33-1/3% of its total assets,
and may engage in reverse repurchase agreements which may be considered a form
of borrowing. (See "INVESTMENT TECHNIQUES, CONSIDERATIONS AND RISK FACTORS -
Reverse Repurchase Agreements" in the Small Company Fund's Prospectus.) In
addition, the Fund may borrow up to an additional 5% of its total assets from
banks for temporary or emergency purposes. The Fund will not purchase securities
when bank borrowings exceed 5% of the Fund's total assets. The Fund expects that
some of its borrowings may 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.
Derivative Instruments. As discussed in its Prospectus, each of the Small
Company Fund's 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 the 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,
the Commodity Futures Trading Commission ("CFTC") and various state regulatory
authorities. In addition, the 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.
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(1) Successful use of most of these instruments depends upon 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. While each Subadviser is experienced in the use of
these instruments, there can be no assurance that any particular strategy
adopted will succeed.
(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 the Fund entered into a
short hedge because a 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, the 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 the Fund's
derivative instruments, see "Tax Status" below.
Options. The Small Company Fund may purchase or write put and call options
on securities and indices, and may purchase options on foreign currency, 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 the 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
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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.
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, 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 are
only exercisable at expiration. This is in contrast to American-style options
which are exercisable at any time prior to the expiration date of the option.
The Fund may effectively terminate its right or obligation under an option
by entering into a closing transaction. For example, the 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, the 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.
The 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 counter party (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.
The Fund's ability to establish and close out positions in exchange-listed
options depends on the existence of a liquid market. The Fund 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 counter party, or by a
transaction in the secondary market if any such market exists. Although the Fund
will enter into OTC options only with counter parties that are expected to be
capable of entering into closing transactions with the fund, there is no
assurance that the 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, the Fund might be unable to close out an OTC option position at any time
prior to its expiration.
If the Fund were 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 the 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.
The 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.
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To the extent required by SEC guidelines, the 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 securities with
a value sufficient at all times to cover its potential obligations to the extent
not covered as provided in (1) above. The 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.
Transactions using options (other than purchased options) also expose the Fund
to market risk. Market risk is that the price of the option will fluctuate with
the price of the underlying security. Due to the leverage effect of the option
this price fluctuation of the option will be greater than that of the underlying
security.
Spread Transactions. The Small Company 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 the
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 the Fund in purchasing
covered spread options it 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 the 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. The Small Company 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. The 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. The 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. The Fund
will engage in this strategy only when a Subadviser believes it is more
advantageous to the Fund than is purchasing the futures contract.
The 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 the
Fund to trade in futures contracts may be limited by the requirements of the
code applicable to a regulated investment company.
The 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 the Fund's assets that may be at risk with respect to futures activities.
Although techniques other than sales and purchases of futures
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contracts could be used to reduce the Fund's exposure to market, currency, or
interest rate fluctuations, the 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 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, the Fund realizes a gain;
if it is more, the Fund realizes a loss. Conversely, if the offsetting sale
price is more than the original purchase price, the Fund realizes a gain; if it
is less, the Fund realizes a loss. The transaction costs must also be included
in these calculations. There can be no assurance, however, that the Fund will be
able to enter into an offsetting transaction with respect to a particular
futures contract at a particular time. If the Fund is not able to enter into an
offsetting transaction, the Fund will continue to be required to maintain the
margin deposits on the futures contract.
No price is paid by the 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, high grade debt 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
the Fund at the termination of the transaction if all contractual obligations
have been satisfied. Under certain circumstances, such as periods of high
volatility, the 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 the fund purchases an option on a future, the premium paid plus
transaction costs is all that is at risk. In contrast, when the 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 the 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 Fund intends 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
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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 the 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. The Fund 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.
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 Small Company Fund may enter into interest rate,
securities index, commodity, or security and currency exchange rate swap
agreements for any lawful purpose consistent with the 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 Fund 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 the Fund, the obligations
of the parties would be exchanged on a net basis. Consequently, the 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").
The 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 segregate account
consisting of cash, or liquid high grade debt obligations.
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Whether the Fund's use of swap agreements will be successful in furthering
its investment objective will depend, in part, on 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, the 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 the Fund by the
Internal Revenue Code may limit the Fund's ability to use swap agreements. The
swaps market is largely unregulated.
The Fund will enter swap agreements only with counterparties that a
Subadviser reasonably believes are capable of performing under the swap
agreements. If there is a default by the other party to such a transaction, the
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.
The Small Company Fund may use options and futures on foreign currencies and
forward currency contracts to hedge against movements in the values of the
foreign currencies in which the Fund's securities are denominated. The 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. 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.
The 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, the 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, the 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, the 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.
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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, the Fund will normally purchase OTC options on foreign
currency only when a Subadviser believes a liquid secondary market will exist
for a particular option at any specific time.
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 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, the Small Company 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 the Fund retains the
portfolio security and engages in an offsetting transaction, the Fund, at the
time of execution of the offsetting transaction, will incur a gain or a loss to
the extent that movement has occurred in forward 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 the Small Company Fund's investments. A currency hedge, for example,
should protect a Yen-denominated bond against a decline in the Yen, but will not
protect the Fund against price decline if the issuer's creditworthiness
deteriorates. Because the value of the 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 the Fund's investments denominated in that currency over time.
A decline in the dollar value of a foreign currency in which the 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, the 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, the 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.
The Fund's currency hedging will be limited to hedging involving either
specific transactions or portfolio positions. Transaction hedging is the
purchase or sale of forward currency with respect to specific receivables or
payables of the 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
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positions. The 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.
Securities Of Other Non-Affiliated Investment Companies. Some of the
countries in which the Small Company 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. 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.
Commercial Paper. The Small Company 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. The Fund will
purchase such commercial paper 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. The 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 Fund believes 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 U.S. Government securities or other liquid high
quality debt securities having a value equal to the aggregate principal amount
of outstanding commercial paper of this type.
Investment Restrictions
The following are fundamental investment limitations, which cannot be
changed without the approval of the holders of a majority of the shares of the
Fund for which the change is proposed, and apply to all of the Funds of the
Trust (except the Small Company and Income Funds, whose restrictions are listed
separately below), unless otherwise stated.
The Trust may not:
1. Borrow money, except an amount equal to no more than 5% of the value
of each of the Fund's total assets (calculated when the loan is
made) for temporary, emergency purposes or for the clearance of
transactions. This limited borrowing authority will not be used to
leverage the Funds or to borrow for extended periods of time. This
authority is intended to provide the investment manager additional
flexibility in the execution of routine daily transactions, and
allow for more efficient cash management.
2. Purchase securities on margin, but the Trust may obtain such credits
as may be necessary for the clearance of purchases and sales of
securities and except as may be necessary to make margin payments in
connection with derivative securities transactions.
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3. Make loans to other persons, except by the purchase of obligations
in which the Trust is authorized to invest. The Trust may, however,
enter into repurchase agreements, but a Fund will not enter into
repurchase agreements if, as a result thereof, more than 10% of the
Fund's total assets (taken at current value) would be subject to
repurchase agreements maturing in more than 7 days.
4. 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% 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. The Money Market Fund
will be deemed to be in compliance with this restriction as long as
it is in compliance with Rule 2a-7 under the 1940 Act, as such Rule
may be amended from time to time.
5. 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.
6. Purchase or sell commodities or commodities contracts, except to the
extent disclosed in the current Prospectus of such Fund.
7. Issue securities except as permitted by the Investment Company Act
of 1940.
The following are the non-fundamental operating policies of the Capital
Appreciation Fund, Total Return Fund, Government Bond Fund and Money Market Fund
which may be changed by the Board of Trustees of the Trust without shareholder
approval:
No Fund may:
1. Make short sales of securities.
2. Purchase or otherwise acquire any other securities if, as a result,
more than 15% (10% with respect to the Money Market Fund of its net
assets would be invested in securities that are illiquid.
3. Purchase securities of other investment companies, except (a) in
connection with a merger, consolidation, acquisition or
reorganization and (b) to the extent permitted by the 1940 Act, or
any rules or regulations theunder, or pursuant to any exemption
therefrom.
Investment Restrictions for the Small Company Fund and the Income Fund -- The
following are fundamental investment limitations for the Small Company and the
Income Fund which cannot be changed without shareholder approval:
The Small Company Fund and the Income Fund:
1. May (i) borrow money from banks and (ii) make other investments or
engage in other transactions permissible under 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
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(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.
2. May not issue senior securities, except as permitted under the 1940
Act.
3. 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.
4. 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.
5. 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.
6. 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.
7. 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 Small Company
Fund and the Income Fund which may be changed by the Board of Trustees of the
Trust without shareholder approval:
The Small Company and the Income Fund each may not:
1. Sell securities short, 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 sale 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.
2. 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.
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3. 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.
4. 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.
5. 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 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.
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Major Shareholders
As of March 31, 1998, separate accounts of Nationwide Life Insurance
Company and Nationwide Life and Annuity Insurance Company had shared voting and
investment power of 92.8% and 7.2% of the shares of the Total Return Fund, 93.7%
and 6.3% of the shares of Government Bond Fund, 97.7% and 2.3% of the shares of
Money Market Fund, and 97.2% and 2.5% of the shares of Capital Appreciation
Fund, respectively. As of March 31, 1998, Nationwide Life Insurance Company
owned beneficially 2.3% and had shared voting and investment power for 97.5% of
the shares of the Small Company Fund.
As of March 31, 1998, the Trustees and Officers of the Trust as a group
owned less than 1% of the shares of the Funds.
Trustees And Executive Officers Of The Trust
Trustees and Executive Officers
The principal occupations of the Trustees and Officers during the last
five years and their affiliations are:
Dr. John C. Bryant, Trustee, Age 62
411 Oak Street, Suite 306, Cincinnati, Ohio.
Dr. Bryant is Executive Director of the Cincinnati Youth Collaborative a
partnership of business, government, schools and social service agencies
to address the educational needs of students. He was formerly Professor of
Education, Wilmington College.
Sue A. Doody, Trustee, Age 63
169 East Beck Street, Columbus, Ohio.
Ms. Doody is owner of Lindey's Restaurant, Columbus, Ohio.
Robert M. Duncan, Trustee, Age 70.
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.
Joseph J. Gasper*, Trustee, Chairman, Age 54
One Nationwide Plaza, Columbus, Ohio
Mr. Gasper is President and Chief Operating Officer of Nationwide Life
Insurance Company and Nationwide Life and Annuity Insurance Company. Prior
to that, he was Executive Vice President and Senior Vice President for
Nationwide Insurance Enterprise.
Dr. Thomas J. Kerr, IV, Trustee, Age 64
4890 Smoketalk Lane, Westerville, Ohio.
Dr. Kerr is President Emeritus of Kendall College. He was formerly
President of Kendall College.
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Douglas F. Kridler, Trustee, Age 42
55 E. State Street, Columbus, Ohio.
Mr. Kridler is President and Executive Director of the Columbus
Association for the Performing Arts.
Robert J. Woodward, Jr.*, Trustee, Age 56
One Nationwide Plaza, Columbus, Ohio.
Mr. Woodward is Executive Vice President - Chief Investment Officer of
Nationwide Insurance Enterprise and of Nationwide Advisory Services, Inc.
James F. Laird, Jr., Treasurer, Age 41.
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.
Elizabeth A. Davin, Secretary, Age 34
One Nationwide Plaza, Columbus, Ohio.
Ms. Davin is a member of the Office of General Counsel of the Nationwide
Insurance Enterprise and partner in Druen, Dietrich, Reynolds & Koogler.
*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, 1997, and the aggregate compensation paid to
each disinterested Trustee during the year by all 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.
Fiscal Year Ended December 31, 1997
<TABLE>
<CAPTION>
Total
Compensation
from the
Nationwide
Fund
Aggregate Complex
Compensation including
from the Trust the Trust
-------------- ---------
<S> <C> <C>
Dr. John C. Bryant $2,500 $18,500
Sue A. Doody $ 750 $10,750
Robert M. Duncan $2,500 $18,500
Dr. Thomas J. Kerr IV $2,500 $18,500
Douglas F. Kridler $ 750 $10,750
</TABLE>
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<PAGE> 281
Calculating Yield - The Money Market Fund
Any current Fund yield quotations, subject to Rule 482 under the
Securities Act, shall consist of a seven calendar day historical yield, carried
at least to the nearest hundredth of a percent. The yield shall be calculated by
determining the net change, excluding realized and unrealized gains and losses,
in the value of a hypothetical pre-existing account having a balance of one
share at the beginning of the period, dividing the net change in account value
by the value of the account at the beginning of the base period to obtain the
base period return, and multiplying the base period return by 365/7 (or 366/7
during a leap year). For purposes of this calculation, the net change in account
value reflects the value of additional shares purchased with dividends from the
original share, and dividends declared on both the original share and any such
additional shares. As of December 31, 1997, the Fund's seven-day current yield
was 5.36%. The Fund's effective yield represents an annualization of the current
seven day return with all dividends reinvested, and for the period ended
December 31, 1997, was 5.51%.
The Fund's yield will fluctuate daily. Actual yields will depend on
factors such as the type of instruments in the Fund's portfolio, portfolio
quality and average maturity, changes in interest rates, and the Fund's
expenses. There is no assurance that the yield quoted on any given occasion will
remain in effect for any period of time and there is no guarantee that the net
asset value will remain constant. It should be noted that a shareholder's
investment in the Fund is not guaranteed or insured. Yields of other money
market funds may not be comparable if a different base period or another method
of calculation is used.
Calculating Yield And Total Return - Non-Money Market Funds
The Funds may from time to time advertise historical performance, subject
to Rule 482 under the Securities Act. 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.
The uniformly calculated average annual total returns for the one year,
five year, and ten year periods for the Total Return and Government Bond Funds,
ended December 31, 1997 are shown below.
<TABLE>
<CAPTION>
Total Government
Return Bond
------ ----
<S> <C> <C>
1 Year 29.4% 9.7%
5 Years 17.9% 7.4%
10 Years 15.6% 9.3%
</TABLE>
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<PAGE> 282
The Capital Appreciation Fund began operations on May 1, 1992. Its average
annual total return for one year ended December 31, 1997, the five years ended
December 31, 1997 and for the period from May 1, 1992 through December 31, 1997
was 34.5%, 19.0% and 17.6%, respectively. The Small Company Fund began
operations on October 23, 1995. Its average total return for the year ended
December 31, 1997 and period from October 23, 1995 through December 31, 1997 was
17.4% and 25.6%, respectively.
The Government Bond Fund may also from time to time advertise a uniformly
calculated yield quotation. This yield is calculated by dividing the net
investment income per share earned during a 30-day base period by the maximum
offering price per share on the last day of the period, assuming reinvestment of
all dividends and distributions. This yield formula uses the average number of
shares entitled to receive dividends, provides for semi-annual compounding of
interest, and includes a modified market value method for determining
amortization. The yield will fluctuate, and there is no assurance that the yield
quoted on any given occasion will remain in effect for any period of time. The
Government Bond Fund yield for the 30-day period ended December 31, 1997 was
5.94%.
Investment Adviser And Other Services
The Adviser provides the Trust with overall investment advisory services
and, subject to such policies as the Trustees may determine, makes investment
decisions for the Trust.
The Trust pays the compensation of the five 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.
NAS pays the compensation of the Trustees affiliated with the Adviser. The
officers of the Trust receive no compensation from the Trust. NAS also furnishes
all necessary administrative services, office space, equipment, and clerical
personnel for servicing the investments of the 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 Agreement also specifically provides 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 only if
its 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 less than 60 days
written notice. The Agreement further provides that the Adviser may render
services to others.
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<PAGE> 283
The Adviser, Nationwide Advisory Services, Inc. ("NAS"), manages the Funds
(except the Small Company Fund and the Income Fund) pursuant to an Investment
Advisory Agreement (the "Agreement") dated as of November 1, 1997. Prior to
November 1, 1997, the Adviser received a fee computed and paid monthly at the
annual rate equal to .5% of the average daily net assets of each Fund of the
Trust (except for the Small Company and Income Funds).
The following are the advisory fees (except for Small Company and Income
Fund), expressed as an annual percentage of average daily net assets:
<TABLE>
<CAPTION>
Fund Advisory Fees
---- -------------
<S> <C>
Total Return Fund and 0.60% on assets up to $1 billion
Capital Appreciation Fund 0.575% on assets of $1 billion and more but
less than $2 billion
0.55% on assets of $2 billion and more but less
than $5 billion
0.50% for assets of $5 billion and more
Government Bond Fund 0.50% on assets up to $1 billion
0.475% on assets of $1 billion and more but less
than $2 billion
0.45% on assets of $2 billion and more but less
than $5 billion
0.40% for assets of $5 billion and more
Money Market Fund 0.40% on assets up to $1 billion
0.38% on assets of $1 billion and more but less
than $2 billion
0.36% on assets of $2 billion and more but less
than $5 billion
0.34% for assets of $5 billion and more
</TABLE>
For the years ended December 31, 1997, 1996, and 1995, the Adviser
received fees in the following amounts: Total Return Fund $7,903,818,
$4,851,676, and $3,406,571, respectively; Government Bond Fund $2,231,930,
$2,225,962, and $2,088,523, respectively; Money Market Fund $4,969,345,
$4,518,925, and $3,574,486, respectively; and Capital Appreciation Fund
$1,759,412, $684,932, and $326,158,
respectively.
Effective November 1, 1997, NAS also provides fund accounting and
administrative services to the Trust (except Small Company and Income Fund)
pursuant to a separate Fund Administration Agreement dated November 1, 1997. For
these services, NAS receives a fee, calculated daily and paid monthly at an
annual rate of 0.05% for each Fund's average net assets on the first $1 billion
of assets and 0.04% on the assets of $1 billion and more. During the year ended
December 31, 1997, NAS received administration fees in the following amounts:
Total Return Fund $135,272, Capital Appreciation Fund $37,284, Government Bond
Fund $39,441 and Money Market Fund $89,708.
Advisory Services for the Small Company Fund
The Adviser oversees the management of the Small Company Fund pursuant to
an Investment Advisory Agreement dated October 20, 1995. Subject to the
supervision and direction of the Trustees, the Adviser determines the allocation
of assets among the Subadvisers and evaluates and monitors the
33
<PAGE> 284
performance of the Subadvisers. The Adviser is also authorized to select and
place portfolio investments on behalf of the Fund; however, the Adviser
generally intends to limit its direct portfolio management to the investment of
a portion of the Fund's assets in cash or money market instruments. 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. The
Advisory Agreement of the Small Company Fund contains termination and
indemnification provisions similar to those in the Agreement as described above.
The Fund pays to the Adviser a fee at the annual rate of 1.00% of the
Fund's average daily net assets. The Adviser has voluntarily agreed to waive all
or part of its fees in order to limit the Fund's total operating expenses to not
more than 1.25% of the Fund's average daily net assets on an annual basis. These
fee waivers are voluntary and may be terminated at any time. During the year
ended December 31, 1997, December 31, 1996 and the period from October 23, 1995
(date of commencement of operations) through December 31, 1995, the Adviser
received advisory fees in the amount of $2,520,540, $851,352, and $11,003,
respectively, and waived fees and reimbursed expenses in the amount of $0, $0,
and $10,495, respectively.
The Subadvisers - Pursuant to Subadvisory Agreements between each of the
Subadvisers and the Adviser, each of which are dated October 20, 1995, the
Subadvisers each manage a portion 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 decisions place purchase and sell
orders for the securities in the Fund. For the investment management services
they provide to the Fund, each Subadviser, or PIML and VEAC together, receives a
fee from the Adviser at the annual rate of .60% of the average daily net assets
of the portion of the Fund managed by that Subadviser or group of Subadvisers.
During the year ended December 31, 1997, December 31, 1996 and the period
from October 23 (date of commencement of operations) through December 31, 1995,
the Adviser paid $1,402,367, $483,572 and $11,394 in fees to the Subadvisers.
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 Small Company 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 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 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 out standing voting securities, or by either party, on
not more than 60 days nor less than 30 days written notice.
Below is a brief description of each of the Subadvisers.
The Dreyfus Corporation. Dreyfus, located at 200 Park Avenue, New York,
New York 10166, was formed in 1947 and serves as one of the Small Company Fund's
Subadvisers. Dreyfus is a wholly-owned subsidiary of Mellon Bank, N.A., which is
a wholly-owned subsidiary of Mellon Bank
34
<PAGE> 285
Corporation ("Mellon"). As of March 31, 1998, Dreyfus managed or administered
approximately $100 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 $305 billion in assets as of December 31, 1997,
including approximately $104 billion in mutual fund assets. As of December 31,
1997, various subsidiaries of Mellon provided non-investment services, such as
custodial or administration services, for approximately $1.5 billion in assets
including approximately $60 billion in mutual fund assets.
Neuberger & Berman L.L.C. Neuberger & Berman, also serves as a sub-adviser
to the Fund. Neuberger & Berman and its predecessor firms have specialized in
the management of no-load mutual funds since 1950. Neuberger & Berman and its
affiliates manage securities accounts that had approximately $52 billion of
assets as of December 31, 1997. Neuberger & Berman is a member firm of the NYSE
and other principal exchanges and acts as the Fund's principal broker in the
purchase and sale of their securities for that portion of the Fund's portfolio
managed by Neuberger & Berman.
Strong Capital Management, Inc. Strong, which also serves as one of the
Subadvisers for the Fund, 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 February 28, 1998, Strong had over $29
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.
Pictet International Management Limited and Van Eck Associates
Corporation. PIML and VEAC will together manage a portion of the Fund. VEAC is
located at 99 Park Avenue, New York, New York 10016. PIML is located at Cutlers
Gardens, 5 Devonshire Square, London, United Kingdom EC2M 4LD. PIML is primarily
responsible for managing the portion of the Fund's assets allocated to the PIML
and VEAC. PIML determines which securities are to be bought and sold. VEAC,
however, makes recommendations to PIML regarding Hard Asset securities. VEAC
will also make recommendations regarding the allocation among each of the Hard
Asset sectors. PIML is not obligated to act on VEAC'S recommendation's and the
amount, if any, allocated to Hard Assets will be determined by PIML. VEAC will
also assist PIML on issues regarding determining the liquidity of securities,
portfolio diversification and matters involving United States federal securities
and tax law as they apply to management of the Fund.
PIML is an operating company of Pictet (London) Limited, an affiliate of
Pictet & Cie ("Pictet"). Pictet was founded in 1805 and is the largest private
Swiss Bank, as well as the leading specialist investment bank domiciled in
Europe. Pictet has a worldwide network of offices employing over 200 investment
professionals in Geneva, London, Zurich, Luxembourg, Hong Kong, Tokyo, Montreal
and Nassau. PIML has access to all of Pictet's investment infrastructure. As of
December 31, 1997, total assets under management by Pictet and its affiliates,
including PIML, on behalf of all clients, was in excess of $52 billion.
Warburg, Pincus Asset Management, Inc. The Fund also employs Warburg as a
Subadviser to the Fund. Warburg is a professional investment counselling firm
which provides investment services to
35
<PAGE> 286
investment companies, employee benefit plans, endowment funds, foundations and
other institutions and individuals. As of March 31, 1998, Warburg managed
approximately $22 billion in assets including approximately $10.9 billion of
investment company assets. Incorporated in 1970, Warburg is a wholly owned
subsidiary of Warburg, Pincus Counsellors G.P. (Warburg G.P."), a New York
general partnership which itself is controlled by Warburg, Pincus & Co. ("W P &
Co."), also a New York general partnership. Lionel I. Pincus, the managing
partner of W P & Co., may be deemed to control, both W P & Co. and Warburg.
Warburg G.P. has no business other than being a holding company of Warburg and
its subsidiaries. Warburg's address is 466 Lexington Avenue, New York, New York
10017-3147.
Advisory Services for the Income Fund
The Adviser oversees the management of the Income Fund pursuant to an
Investment Advisory Agreement. Subject to the supervision and direction of the
Trustees, the Adviser will determine the allocation of assets among the
Subadvisers and evaluate and monitor the performance of Subadvisers. The Adviser
also is authorized to select and place portfolio investments on behalf of the
Fund; however, the Adviser currently does not intend to do so. The Adviser is
responsible 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 Advisory
Agreement of the Income Fund contains termination and indemnification provisions
similar to those in the Agreement as described above for the Small Company Fund.
The Fund pays to the Adviser a fee at the annual rate of 0.45% of the
Fund's average daily net assets. The Adviser has voluntarily agreed to waive all
or part of its fees in order to limit the Fund's total operating expenses to not
more than 0.75% of the Fund's average daily net assets on an annual basis. These
fee waivers are voluntary and may be terminated at any time. The Fund commenced
operations on January 20, 1998.
The Subadvisers - Pursuant to Subadvisory Agreements between each of the
Subadvisers and the Adviser, the Subadvisers each manage a portion 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
makes investment decisions for the Fund and in connection with such decisions
place purchase and sell orders for the securities in the Fund. For the
investment management services they provide to the Fund, each Subadviser
receives an annual fee from the Adviser based on the average daily net assets of
the portion of the Fund managed by that Subadviser as specified below:
<TABLE>
<CAPTION>
Subadvisory Fees Average Daily Net Assets
---------------- ------------------------
<S> <C>
0.25% on the first $100 million
0.15% on assets in excess of $100
million
</TABLE>
The fees for each of the Subadvisers are subject to the following annual
minimum fees: $15,000 for NCM Capital and $25,000 for Smith Graham.
Below is a brief description of each of the Subadvisers.
36
<PAGE> 287
NCM Capital Management Group, Inc. NCM Capital was founded in 1986 and serves as
one of the Fund's Subadvisers. As of December 31, 1997, NCM Capital had
approximately $4.2 billion in assets under management.
NCM Capital's Chairman of the Board, President and Chief Executive Officer is
Maceo K. Sloan. Other directors are Justin F. Beckett, Executive Vice President;
Peter J. Anderson, Chairman and Chief Investment Officer of American Express
Asset Management Group, Inc.; and Morris Goodwin, Jr., Vice President, Corporate
Treasurer, American Express Financial Advisers Inc.
NCM Capital is a wholly-owned subsidiary of Sloan Financial Group, Inc. Both NCM
Capital and Sloan Financial Group, Inc. are located at 103 West Main Street, 4th
Floor, Durham, North Carolina 27701. Sloan Financial Group, Inc. is a
corporation of which Maceo K. Sloan, CFA, Chairman, President and Chief
Executive Officer of NCM Capital, owns 43%; Justin F. Beckett, Executive Vice
President and director of NCM Capital, owns 17%; and IDS Financial Services
Inc., a wholly-owned subsidiary of American Express Company owns 40% as of
December 31, 1997.
Smith Graham & Co. Asset Managers, L.P. Smith Graham also serves as a
sub-adviser to the Fund. Its corporate offices are located at 6900 Texas
Commerce Tower, 600 Travis Street, Houston, Texas 77002-3007. Smith Graham
serves as an investment adviser to a variety of corporate, foundation, public,
Taft Hartley and mutual fund clients. The firm provides global and international
money management through its affiliate Smith Graham Robeco Global Advisers. As
of December 31, 1997, Smith Graham managed approximately $2 billion of assets.
Smith Graham is 60% owned by its Managing General Partner, Smith Graham & Co.,
Inc., while 40% of the firm is owned by the Dutch based Robeco Group. Smith
Graham & Co., Inc. is wholly owned by Gerald B. Smith, Ladell Graham and Jamie
G. House.
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 Income 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 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 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
60 days written notice.
Other Services Provided By The Adviser for the Income Fund
Under the terms of an Administrative Services Agreement, the Adviser
provides various administrative and accounting services, including daily
valuation of the Income Fund's shares, preparation of financial statements,
taxes, and regulatory reports. For these services the Fund pays to the Adviser a
fee at the annual rate of 0.07% of the Fund's average net assets up to $250
million in assets, 0.05% on the next $750 million and 0.04% on assets of $1
billion and more.
Custodian
37
<PAGE> 288
The Fifth Third Bank, 38 Fountain Square Plaza, Cincinnati, OH 45263, is
the Custodian for the Funds and makes all receipts and disbursements under a
Custodian Agreement. 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. NISI receives a fee, calculated daily and
paid monthly at a rate of 0.01% of average daily net assets of each Fund.
Management believes the charges for the services performed are comparable to
fees charged by other companies performing similar services.
Brokerage Allocations
In General. During the fiscal years ended December 31, 1997, 1996, and
1995,, the Total Return Fund, paid brokerage commissions of $924,959, $519,949,
and $377,463, respectively, and the Capital Appreciation Fund paid brokerage
commissions of $327,691, $196,526, and $36,471, all to firms rendering
statistical services. The Money Market Fund and Government Bond Fund paid no
brokerage commissions during the periods covered by the financial statements.
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
execution," i.e., execution at the most favorable prices and in the most
effective manner possible. The Adviser or Subadvisers always attempts to achieve
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 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.
Trust portfolio transactions may be effected with broker-dealers who have
assisted investors in the purchase of Policies. 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 the Trust 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
38
<PAGE> 289
could be either advantageous or disadvantageous to the Trust, they are effected
only when the Adviser or a Subadviser believes that to do so is in the interest
of the Trust. 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 Fund and review the commissions paid by
the Fund over representative periods of time to determine if they are reasonable
in relation to the benefits to the Fund.
Special Brokerage Allocation Considerations Relating to the Small Company
Fund and the Income Fund. In purchasing and selling investments for these 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. During the year
ended December 31, 1997, December 31, 1996 and the period ended December 31,
1995, the Small Company Fund paid brokerage commissions of $887,672, $ 424,176
and $27,100, respectively.
Each Subadviser may cause the Small Company or the Income 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,
sub-adviser or administrator.
Considerations Relating to the Small Company Fund. Neuberger & Berman will act
as the principal broker in the purchase and sale of portfolio securities for the
portion of the Fund advised by Neuberger & Berman and in connection with the
writing of covered call options on their securities. Transactions in portfolio
securities for which Neuberger & Berman serves as broker will be affected in
accordance with Rule 17e-1 under the 1940 Act.
The Fund will continue to use Neuberger & Berman as its principal broker
for the portion of the Fund advised by Neuberger & Berman where, in the judgment
of Neuberger & Berman, the firm is able to obtain a price and execution at least
as favorable as that provided by other qualified brokers. To the Fund's
knowledge, however, no affiliate of Neuberger & Berman receives give-ups or
reciprocal business in connection with their securities transactions.
Under the 1940 Act, commissions paid by the Fund to Neuberger & Berman 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 Fund's policy that the commissions to be paid to
Neuberger & Berman must, in its judgment, be (1) at least as favorable as those
that would be charged by other
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brokers having comparable execution capability and (2) at least as favorable as
commissions contemporaneously charged by Neuberger & Berman on comparable
transactions for its most favored unaffiliated customers, except for accounts
for which Neuberger & Berman acts as a clearing broker for another brokerage
firm and customers of Neuberger & Berman 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. The 1940 Act
generally prohibits Neuberger & Berman from acting as principal in the purchase
or sale of securities for the Fund's account, unless an appropriate exemption is
available.
During the year ended December 31, 1997, December 31, 1996 and the period
ended December 31, 1995, the Small Company Fund paid brokerage commissions to
Neuberger & Berman in the amount of $35,069, $24,069 and $4,434, respectively,
representing 4.0%, 5.7% and 16.4%, respectively, of the total commissions paid
by the Fund. The aggregate dollar amount of transactions involving the payment
of commissions to Neuberger & Berman represented 6.1%, 5.5% and 20.2%,
respectively, of total transactions on which commissions were paid by the Fund
during the periods ended December 31, 1997, 1996 and 1995.
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 Trust. For certain of the Funds, shares may
also be sold to affiliated Fund 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 the New York Stock Exchange (currently 4 P.M. eastern time) on each
business day the New York Stock Exchange is open and on such 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, New Year's Day, Martin
Luther King, Jr. Day, 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 the Exchange. For
orders placed after the close of 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. The
net asset value of each Fund is determined by subtracting the liabilities of the
Fund from the value of its assets (chiefly composed of investment securities).
Securities of the Funds listed on national exchanges are valued at the last
quoted sales price on the principal exchange, or if there is no sale on that
day, the securities are valued at the prior day's closing price as provided by
an independent pricing organization. Securities traded in the over-the-counter
market are valued at the quoted sales price or if there is no sale
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that day, the last quoted bid price as provided by an independent pricing
organization. Securities and other assets, for which such market prices are
unavailable, or for which an independent pricing organization does not provide a
value or provides a value that does not represent fair market value in the
judgement of the Adviser, are valued at fair value as determined by the
Trustees. For the Money Market Fund, all securities are valued at amortized
cost, which approximates market value, in accordance with Rule 2a-7 of the 1940
Act.
The net income of the Money Market Fund is determined once daily, as of
the close of the New York Stock Exchange (currently 4:00 P.M., New York time) on
each business day on which such Exchange is open. All the net income of the
Fund, so determined, is declared in shares as a dividend to shareholders of
record at the time of such determination. (Shares purchased become entitled to
dividends declared as of the first day following the date of investment.)
Dividends are distributed in the form of additional shares of the Fund on the
last business day of each month at the rate of one share (and fraction thereof)
of the Fund for each one dollar (and fraction thereof) of dividend income.
For this purpose, the net income of the Money Market Fund (from the time
of the immediately preceding determination thereof) shall consist of: (a) all
interest income accrued on the portfolio assets of the Fund, (b) less all actual
and accrued expenses and (c) plus or minus net realized gains and losses on the
assets of the Fund determined in accordance with generally accepted accounting
principles. Interest income shall include discount earned (including both
original issue and market discount) on discount paper accrued ratably to the
date of maturity. Securities are valued at market or amortized cost which
approximates market, which the Trustees have determined in good faith
constitutes fair value for the purposes of complying with the Investment Company
Act of 1940.
Because the net income of the Money Market Fund is declared as a dividend
each time the net income is determined, the net asset value per share (i.e., the
value of the net assets of the Fund divided by the number of shares outstanding)
remains at one dollar per share immediately after each such determination and
dividend declaration. Any increase in the value of a shareholder's investment in
the Fund, representing the reinvestment of dividend income, is reflected by an
increase in the number of shares of the Fund in its account.
Pursuant to its objective of maintaining a fixed one dollar share price,
the Fund will not purchase securities with a remaining maturity of more than 397
days and will maintain a dollar weighted average portfolio maturity of 90 days
or less.
The Accounts redeem shares to make benefit or surrender payments under the
terms of its Contracts. 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 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 SEC 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
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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 and currently has authorized 15
separate funds. Shares of each series would participate equally in the earnings,
dividends, and assets of that fund. Upon liquidation of a Fund, shareholders are
entitled to share pro rata 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. Generally, 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:
o designate series of the Trust; or
o change the name of the Trust; or
o 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, when issued, are
fully paid and nonassessable, except as set forth below. In regard to
termination, sale of assets, or change of fundamental investment restrictions,
the right to vote is limited to the holders of shares of the particular Fund
affected by the proposal. However, shares of all funds would vote together, and
not by fund, in the election of Trustees. If an issue must be approved by a
majority as defined by the 1940 Act, a "majority of the outstanding voting
securities" means the lesser of (i) 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 (ii) more than 50% of the outstanding shares. For
the election of Trustees only a plurality is required.
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 of the Trust is treated as a separate entity for purpose of the
regulated investment company provisions of the Internal Revenue 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.
Each Fund of the Trust 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) 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 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%
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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 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.
Tax Consequences for the Small Company Fund
Foreign Transactions. Dividends and interest received by the Small Company
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.
The 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
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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 the 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. The 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.
As described in the Prospectus, because shares of the Fund may only be
purchased through Policies, it is anticipated that dividends and distributions
will be exempt from current taxation if left to accumulate within the Policies.
Investment in Passive Foreign Investment Companies. If the Fund purchases
shares in certain foreign entities classified under the Code as "passive foreign
investment companies" ("PFICs"), the 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 Policies. 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.
Regulations of the Internal Revenue Service (the "IRS") provide a
mark-to-market election for shares in certain PFICs held by regulated investment
companies. If the Fund makes the election, 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 the
Small Company Fund realizes in connection therewith. Gains from the disposition
of foreign currencies (except certain gains therefrom that may be excluded by
future regulations), and income from transactions in options, futures, and
forward currency contracts derived by the 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
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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.
Financial Statements
The Report of Independent Auditors and Financial Statements of the Funds for the
period ended December 31, 1997 are incorporated by reference to the Trust's
Annual Report. Copies of the Annual Report are available without charge upon
request by writing the Trust or calling toll free 1 (800) 848-6331.
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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:
o 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.
o 2. Nature of and provisions of the obligation.
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
'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.
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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.
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
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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/IBCA INVESTORS SERVICE, INC. BOND RATINGS
Fitch/IBCA 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.
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.
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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 capacity for continued
payment is contingent upon a sustained, favorable business and economic
environment.
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.
DDD, Bonds are in default on interest and/or principal payments. Such bonds are
extremely speculative, and should be valued on the basis of their ultimate
DD recovery value in liquidation or reorganization of the obligor. `DDD'
&D represents the highest potential for recovery of these bonds, and 'D'
represents the lowest potential for recovery.
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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.
Rating
Scale Definition
- ----- ----------
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 strong. Risk is modest,
AA but may vary slightly from time to time because of economic
AA- conditions.
A+ Protection factors are average but adequate. However, risk factors
A are more variable and greater in periods of economic stress.
A-
BBB+ Below average protection factors but still considered sufficient for
BBB prudent investment. Considerable variability in risk during economic
BBB- cycles.
BB+ Below investment grade but deemed likely to meet obligations when
BB due. Present or prospective financial protection factors fluctuate
BB- 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 obligations will not
B be met when due. Financial protection factors will fluctuate widely
B- according to economic cycles, industry conditions and/or company
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.
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DD Defaulted debt obligations. Issuer failed to meet scheduled
principal and/or interest payments.
DP Preferred stock with dividend arrearages.
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:
- Amortization schedule - the larger the final maturity relative to
other maturities, the more likely the issue is to be treated as a
note.
- Source of payment - the more the issue depends on the market for
its refinancing, the more likely it is to be considered a note.
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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 flows, superior liquidity
support or demonstrated broad based access to the market for
refinancing.
MIG 2/VMIG 2 This designation denotes high quality. Margins of
protection are ample although not so large as in the preceding
group.
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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/IBCA SHORT-TERM RATINGS
Fitch/IBCA 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.
B Speculative. 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.
C High default risk. Default is a real possibility, Capacity for meeting
financial commitments is solely reliant upon a sustained, favorable
business and economic environment.
D Default. Issues assigned this rating are in actual or imminent payment
default.
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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.
Rating Scale Definition
- ------------ ----------
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.
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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.
TBW-4 the lowest rating category; this rating is regarded as
non-investment grade and therefore speculative.
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STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1998
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 May 1, 1998, 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 toll free 1 (800) 848-6331.
Table Of Contents Page
- ----------------- ----
General Information and History .......................................... 02
Additional Information on Portfolio Instruments and Investment Policies .. 02
Investment Restrictions .................................................. 23
Major Shareholders ....................................................... 26
Trustees and Officers of the Trust ....................................... 26
Calculating Yield and Total Return ....................................... 28
Investment Adviser and Other Services .................................... 29
Brokerage Allocations .................................................... 36
Purchases, Redemptions and Pricing of Shares ............................. 38
Additional Information ................................................... 39
Tax Status ............................................................... 40
Other Tax Consequences ................................................... 41
Tax Consequences to Shareholders ......................................... 42
Financial Statements ..................................................... 42
Appendix A - Bond Ratings ................................................ 43
<PAGE> 307
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 subsequently amended. 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 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
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<PAGE> 308
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.
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
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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 investors. 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;
-- 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;
Mortgage- and Asset-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
4
<PAGE> 310
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.
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 credit quality of most asset-backed
securities depends primarily on the credit quality of the assets underlying such
securities, how well the entity issuing the security is insulated from the
credit risk of the originator or any other affiliated entities, and the amount
and quality of any credit enhancement of the 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
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
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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 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.
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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.
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.
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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
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
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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 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
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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 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.
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The Mid Cap Fund, the Strategic Growth Fund, and the Strategic 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 settlement of unregistered securities of domestic and foreign
issuers, such as the PORTAL System sponsored by the National Association of
Securities Dealers, Inc.
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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.
(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
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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, as well as, how
similar the index is to the portion of the Fund's assets being hedged in terms
of securities composition.
(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.
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
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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 OTC 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 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
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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 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
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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
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be any fixed number of days from the date of the contract agreed upon by the
parties, at a price set at the time of the contract. 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
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between two currencies while the obligation is outstanding. A Fund will purchase
such commercial paper 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 Adviser 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 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
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and enter into an agreement to repurchase the security at a specified future
date and price. A Fund generally 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 for each of the
Funds which cannot be changed without shareholder approval:
Each of the Funds (except the Strategic Growth Fund whose restrictions are
listed separately below):
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 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
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<PAGE> 330
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 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
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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 March 31, 1998, separate accounts of Nationwide Life Insurance
Company had shared voting and investment power over 87.6% of the Balanced Fund
shares, 88.3% of the Multi Sector Bond Fund shares, 86.2% of the Small Cap Value
Fund shares, 41.3% of the Global Equity Fund shares, 41.1% of the Select
Advisors Mid Cap Fund shares, 65.5% of the Strategic Growth Fund shares, 77.2%
of the Strategic Value Fund shares, 77.2% of the Equity Income Fund shares, and
52.4% of the High Income Fund shares, respectively. As of March 31, 1998,
Nationwide Life Insurance Company owned beneficially 12.4% of the Balanced Fund
shares, 11.7% of the Multi Sector Bond Fund shares, 13.8% of the Small Cap Value
Fund shares, 58.7% of the Global Equity Fund shares, 58.9% of the Select
Advisors Mid Cap Fund shares, 34.5% of the Strategic Growth Fund shares, 22.8%
of the Strategic Value Fund shares, 22.8% of the Equity Income Fund shares and
47.6% of the High Income Fund shares.
As of March 31, 1998, 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 62
411 Oak Street - Suite 306
Cincinnati, Ohio
Dr. Bryant is Executive Director of the Cincinnati Youth Collaborative, a
partnership of business, government, schools and social service agencies
to address the educational needs of students. He was formerly Professor of
Education, Wilmington College.
Sue Doody, Trustee, Age 63
169 East Beck Street
Columbus, Ohio
Ms. Doody is President of Lindey's Restaurant, Columbus, Ohio.
Robert M. Duncan, Trustee, Age 70
1397 Haddon Road
Columbus, Ohio.
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<PAGE> 332
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.
Joseph J. Gasper, Trustee*, Chairman, Age 54
One Nationwide Plaza
Columbus, Ohio
Mr. Gasper is Director, President and Chief Operating Officer for
Nationwide Life and Annuity Insurance Company and Nationwide Life
Insurance Company. Prior to that, he was Executive Vice President and
Senior Vice President for the Nationwide Insurance Enterprise.
Dr. Thomas J. Kerr, IV, Trustee, Age 64
4890 Smoketalk Lane
Westerville, Ohio
Dr. Kerr is President Emeritus of Kendall College. He was formerly
President of Kendall College.
Douglas F. Kridler, Trustee, Age 42
55 East State Street
Columbus, Ohio
Mr. Kridler is President and Executive Director of Columbus Association
for the Performing Arts.
Robert J. Woodward, Jr., Trustee*, Vice-Chairman, Age 56
One Nationwide Plaza
Columbus, Ohio
Mr. Woodward is Executive Vice President - Chief Investment Officer for
Nationwide Life and Annuity Insurance Company and Nationwide Life
Insurance Company.
James F. Laird, Jr., Treasurer, Age 41
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.
Elizabeth A. Davin, Secretary, Age 34
One Nationwide Plaza
Columbus, Ohio
Ms. Davin is a member of the Office of General Counsel of the Nationwide
Insurance Enterprise and a partner in Druen, Dietrich, Reynolds & Koogler.
*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
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<PAGE> 333
Trustee during the fiscal year ended December 31, 1997, and the aggregate
compensation paid to each disinterested Trustee during the year by all twenty
nine 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.
Compensation Table
Fiscal Year Ended December 31, 1997
<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 $ 2,500 $18,500
Robert M. Duncan $ 2,500 $18,500
Dr. Thomas J. Kerr, IV $ 2,500 $18,500
Douglas F. Kridler $ 750 $10,750
Sue Doody $ 750 $10,750
</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.
The uniformly calculated average annual total returns for the two month period
ended December 31, 1997 are shown below.
<TABLE>
<CAPTION>
Fund Total Return*
---- -------------
<S> <C>
Strategic Growth Fund 2.2%
Strategic Value Fund 1.6%
Equity Income Fund 1.8%
High Income Bond Fund 2.3%
Balanced Fund 1.5%
</TABLE>
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<PAGE> 334
<TABLE>
<CAPTION>
Fund Total Return*
---- -------------
<S> <C>
Multi Sector Bond Fund 1.0%
Small Cap Value Fund (1.6)%
Global Equity Fund 1.2%
Select Advisers Mid Cap Growth Fund (0.4)%
</TABLE>
* Period from October 31, 1997 ( commencement of operations) through December
31, 1997.
Certain Funds may also from time to time advertise a uniformly
calculated yield quotation. This yield is calculated by dividing the net
investment income per share earned during a 30-day base period by the maximum
offering price per share on the lats day of the period, assuming reinvestment of
all dividends and distributions. This yield formula uses the average number of
share entitled to receive dividends, provides for semi-annual compounding of
interest, and includes a modified market value method for determining
amortization. The yield will fluctuate, and there is no assurance that the yield
quoted on any given occasion will remain in effect for any period of time. The
uniformly calculated yields for the 30 day period ended December 31, 1997 were
as follows:
<TABLE>
<CAPTION>
Fund 30-day yield
---- ------------
<S> <C>
High Income Bond Fund 9.72%
Balanced Fund 3.50%
Multi Sector Bond Fund 4.88%
</TABLE>
Investment Advisory And Other Services
The Adviser oversees the management of each of the Funds pursuant to
an Investment Advisory Agreement dated October 31, 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 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.
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 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.
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<PAGE> 335
The Investment Advisory Agreement also specifically provides 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 less than 60 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 provides 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 less than 60 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. For the period October 31, 1997 (commencement of
operations) through December 31, 1997, the Adviser waived all advisory fees in
the amount of $1,685.
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<PAGE> 336
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% on
assets up to $50 million, 0.25% on assets of $50 million and more but less than
$250 million, 0.20% on assets of $250 million and more but less than $500
million, and 0.15% on assets of $500 million and more. These fees are calculated
at an annual rate based upon the Fund's average daily net assets. For the period
October 31, 1997 (commencement of operations) through December 31, 1997, the
Adviser paid $842 in fees to the Subadviser.
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 an open number of investment companies and private accounts. Certain
other subsidiaries also provide administrative services to a number of
investment companies. With over $139 billion invested across more than 370 funds
under management and/or administration by its subsidiaries, as of December 31,
1997, 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. For the period October 31, 1997 (commencement
of operations) through December 31, 1997, the Adviser waived all advisory fees
in the amount of $7,374.
Federated Investment Counseling 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% on assets up to $50
million, 0.25% on assets of $50 million and more but less than $250 million,
0.20% on assets of $250 million and more but less than $500 million, and 0.15%
on assets of $500 million and more. These fees are calculated at an annual rate
based upon the Fund's average daily net assets. Additional information about
Federated is included above. For the period October 31, 1997 (commencement of
operations) through December 31, 1997, the Adviser paid $3,687 in fees to the
Subadviser.
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. For the period October 31, 1997 (commencement of
operations) through December 31, 1997, the Adviser waived all advisory fees in
the amount of $8,799.
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% on assets up to $50 million and 0.55% on assets of $50 million and
over. These fees are calculated at an annual rate based on the Fund's average
daily net assets. For the period October 31, 1997 (commencement of operations)
through December 31, 1997, the Adviser paid $5,279 in fees to the Subadviser.
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<PAGE> 337
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 $255 billion, including approximately $25 billion in
global equity portfolios.
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. For the period October 31, 1997 (commencement of operations) through
December 31, 1997, the Adviser waived all advisory fees in the amount of $5,371.
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% on assets up to $50 million managed by
such Subadviser and 0.50% on assets of $50 million and more managed by a
Subadviser. For the period October 31, 1997 (commencement of operations) through
December 31, 1997, the Adviser paid $3,325 in fees to the Subadvisers.
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. For the period October 31, 1997 (commencement of operations)
through December 31, 1997, the Adviser waived all advisory fees in the amount of
$1,605.
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% on assets up
to $150 million, 0.30% on assets of $150 million and more but less than $500
million, and 0.25% on assets of $500 million and more. These fees are calculated
as an annual rate based upon the Fund's average daily net assets. For the period
October 31, 1997
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<PAGE> 338
(commencement of operations) through December 31, 1997, the Adviser paid $749 in
fees to the Subadviser.
SBAM is a wholly owned subsidiary of Salomon Brothers Holding
Company Inc, which is in turn wholly owned by Salomon Smith Barney Holdings,
Inc. which is, in turn, wholly owned by Travelers Group, 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
March 31, 1998, SBAM and its worldwide investment advisory affiliates managed
approximately $27 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. For the period October 31, 1997 (commencement
of operations) through December 31, 1997, the Adviser waived all advisory fees
in the amount of $1,724.
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% on assets up to $50 million, 0.30% on assets of $50
million and more but less than $200 million, 0.25% on assets of $200 million and
more but less than $500 million, and 0.20% on assets of $500 million and more.
These fees are calculated at an annual rate based upon the Fund's average daily
net assets. For the period October 31, 1997 (commencement of operations) through
December 31, 1997, the Adviser paid $805 in fees to the Subadviser.
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. For the period October 31, 1997 (commencement of
operations) through December 31, 1997, the Adviser waived all advisory fees in
the amount of $2,029.
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% on assets up to $200 million and 0.45% on
assets of $200 million and more. These fees are calculated at an annual rate
based on each Fund's average daily net assets. 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. For the period October 31, 1997 (commencement of
operations) through December 31, 1997, the Adviser paid $1,127 in fees to the
Subadviser.
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<PAGE> 339
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 $305 billion in assets as of March 31,
1997, including approximately $104 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 $1.532 trillion in
assets including approximately $60 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. For the period
October 31, 1997 (commencement of operations) through December 31, 1997, the
Adviser waived all advisory fees for the Strategic Value and Strategic Growth
Fund in the amount of $1,715 and $1,645, respectively.
The Adviser has selected Strong Capital Management, Inc. ("Strong")
to be the Subadviser to the Strategic Value Fund and the Strategic Growth Fund.
Strong has subcontracted with Schafer Capital Management, Inc. ("Schafer
Capital") to subadviser 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% on assets of each Fund up to $500 million and 0.45%
on assets of each Fund of $500 million and more. These fees are calculated at an
annual rate based on each Fund's average daily net assets. Pursuant to its
subcontract with Schafer Capital, Strong pays Schafer's subadvisory fees. For
the period October 31, 1997 (commencement of operations) through December 31,
1997, the Adviser paid $953 and $914, respectively for the Strategic Value and
Strategic Growth Funds, in fees to the Subadviser.
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 February 28, 1998, Strong had over $29 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.
For the period October 31, 1997 (commencement of operations) through December
31, 1997, the Advisor waived all administration fees as follows:
34
<PAGE> 340
<TABLE>
<CAPTION>
Fund Administration Fees Waived
---- --------------------------
<S> <C>
Strategic Growth Fund $128
Strategic Value Fund 134
Equity Income Fund 147
High Income Bond Fund 645
Balanced Fund 150
Multi Sector Bond Fund 161
Small Cap Value Fund 158
Global Equity Fund 616
Select Advisers Mid Cap Growth Fund 358
</TABLE>
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 policy making functions for the Funds.
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.
For the period October 31, 1997 (commencement of operations) through December
31, 1997, Nationwide Investor Services waived all transfer agent fees as
follows:
<TABLE>
<CAPTION>
Fund Transfer Agent Fees Waived
---- --------------------------
<S> <C>
Strategic Growth Fund $18
Strategic Value Fund 19
Equity Income Fund 21
High Income Bond Fund 92
Balanced Fund 21
</TABLE>
35
<PAGE> 341
<TABLE>
<CAPTION>
Fund Transfer Agent Fees Waived
---- --------------------------
<S> <C>
Multi Sector Bond Fund $23
Small Cap Value Fund 22
Global Equity Fund 88
Select Advisers Mid Cap Growth Fund 51
</TABLE>
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 and other
debt 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.
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
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<PAGE> 342
the commissions paid by the Fund 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.
The following table lists the amount of brokerage commissions (excluding
directed brokerage) and the amount of transactions and related commissions paid
to brokers providing research and other services to the subadvisers for the
period October 31, 1997 (commencement of operations) through December 31, 1997:
<TABLE>
<CAPTION>
Transactions Related to
-----------------------
Brokerage Services
------------------
Fund Commission $ Amount Commission
---- ---------- -------- ----------
<S> <C> <C> <C>
Strategic Growth Fund $2,117 $ 0 - $ 0 -
Strategic Value Fund 2,664 - 0 - - 0 -
Equity Income Fund 1,319 1,018,166 910
High Income Bond Fund - 0 - - 0 - - 0 -
Balanced Fund 1,038 315,101 420
Multi Sector Bond Fund - 0 - - 0 - - 0 -
Small Cap Value Fund 2,317 3,045 30
Global Equity Fund 8,058 - 0 - - 0 -
Select Advisers Mid Cap Fund 3,479 509,403 828
</TABLE>
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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 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, Jr. Day,
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 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. The net asset value
of each Fund is determined by subtracting the liabilities of the Fund from the
value of its assets (chiefly composed of investment securities). Securities of
the Funds listed on national
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<PAGE> 344
exchanges are valued at the last sales price on the principal exchange, or if
there is no sale on that day, the securities are valued at the prior day's
closing prices as provided by an independent pricing organization. Securities
traded in the over-the-counter market are valued at the last quoted sale price,
or if there is no sale on that day, the quoted bid price as provided by an
independent pricing organization. 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 and other assets, for which such
market prices are unavailable or for which an independent pricing organization
does not provide a value or provides a value that does not represent fair value
in the judgement of the Adviser, are valued at fair value in accordance with
procedures authorized by the Trustees.
The Accounts redeem shares to make benefit or surrender payments
under the terms of its Contracts. 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 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 SEC 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 different funds and currently has
authorized 15 separate funds. Shares of each fund would participate equally in
the earnings, dividends, and assets of that particular fund. 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. Generally, amendment may be made to the
Declaration of Trust without the affirmative vote of a majority of the
outstanding voting securities 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, when
issued, are fully paid and nonassessable. In regard to termination, sale of
assets, or change of investment restrictions, the right to vote
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<PAGE> 345
is limited to the holders of shares of the particular Fund affected by the
proposal. However, shares of all funds vote together, and not by fund, in the
election of Trustees. If an issue must be approved by a majority as defined in
the 1940 Act., a "majority of the outstanding voting securities" means the
lesser of (i) 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
(ii) more than 50% of the outstanding shares. For the election of Trustees only
a plurality is required.
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.
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, and (iii) 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
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<PAGE> 346
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.
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 hyper inflationary 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.
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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 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.
Financial Statements
The Report of Independent Auditors and Financial Statements of the
Funds for the period ended December 31, 1997 are incorporated by reference to
the Trust's Annual Report. Copies of the Annual Report are available without
charge upon request by writing the Trust or by calling toll free 1 (800)
848-6331.
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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:
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.
Nature of and provisions of the obligation.
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
'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.
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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.
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
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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/IBCA INVESTORS SERVICE, INC. BOND RATINGS
Fitch/IBCA 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.
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.
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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 capacity for continued
payment is contingent upon a sustained, favorable business and economic
environment.
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.
DDD, Bonds are in default on interest and/or principal payments. Such bonds are
DD extremely speculative, and should be valued on the basis of their ultimate
&D 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.
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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.
Rating
Scale Definition
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 strong. Risk is modest,
AA but may vary slightly from time to time because of economic
AA- conditions.
A+ Protection factors are average but adequate. However, risk factors
A are more variable and greater in periods of economic stress.
A-
BBB+ Below average protection factors but still considered sufficient for
BBB prudent investment. Considerable variability in risk during economic
BBB- cycles.
BB+ Below investment grade but deemed likely to meet obligations when
BB due. Present or prospective financial protection factors fluctuate
BB- 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 obligations will not
B be met when due. Financial protection factors will fluctuate widely
B- according to economic cycles, industry conditions and/or company
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
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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.
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:
- Amortization schedule - the larger the final maturity relative to
other maturities, the more likely the issue is to be treated as a
note.
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- 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 flows, superior liquidity
support or demonstrated broad based access to the market for
refinancing.
MIG 2/VMIG 2 This designation denotes high quality. Margins of protection
are ample although not
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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/IBCA SHORT-TERM RATINGS
Fitch/IBCA 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.
B Speculative. 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.
C High default risk. Default is a real possibility, Capacity for meeting
financial commitments is solely reliant upon a sustained, favorable business and
economic environment.
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D Default. Issues assigned this rating are in actual or imminent payment
default.
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.
Rating Scale Definition
- ------------ ----------
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
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D-5 Issuer failed to meet scheduled principal and/or interest payments.
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.
TBW-4 the lowest rating category; this rating is regarded as
non-investment grade and therefore speculative.
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PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENT AND EXHIBITS
(a) Financial Statements:
(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: Audited financial statements for the Funds
(except the Income Fund) are hereby incorporated by reference to
Form N-30D filed by Nationwide Separate Account Trust on March 6,
1998.
(b) Exhibits
(1) Amended Declaration of Trust - previously filed with Post-Effective
Amendment and hereby incorporated by reference.
(2) Bylaws as proposed to be amended
(3) Not applicable.
(4) Not applicable.
(5) (a) Investment Advisory Agreement for the Total Return Fund,
Capital Appreciation Fund, Government Bond Fund and Money
Market Fund - previously filed with Post-Effective Amendment
to the Registration Statement, 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.
(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
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herein incorporated by reference.
(f) Proposed 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") - previously filed with
Post-Effective Amendment to the Registration Statement, and
herein incorporated by reference
(g) Subadvisory Agreements for the Subadvised Funds.
(1) Subadvisory Agreement with Salomon Brothers Asset
Management, Inc. for the Balanced Fund and Multi Sector
Bond Fund
(2) Subadvisory Agreement with Strong Capital Management,
Inc. for the Strategic Growth Fund and Strategic Value
Fund
(3) Subadvisory Agreement with Federated Investment
Counseling for the Equity Income Fund and High Income
Bond Fund
(4) Subadvisory Agreement with The Dreyfus Corporation for
the Small Cap Value Fund
(5) Subadvisory Agreement with J.P. Morgan Investment
Management Inc. for the Global Equity Fund
(6) Subadvisory Agreement with First Pacific Advisors, Inc.
for the Select Advisers Mid Cap Fund
(7) Subadvisory Agreement with Pilgrim Baxter & Associates
for the Select Advisers Mid Cap Fund
(8) Subadvisory Agreement with Rice, Hall, James &
Associates for the Select Advisers Mid Cap Fund
(6) Not Applicable
(7) Not applicable.
(8) Custody Agreement - previously filed with Registration Statement and
Post-Effective Amendment, and herein incorporated by reference.
(9) (a) Fund Administration Agreement for the Total Return Fund,
Capital Appreciation Fund, Government Bond Fund and Money
Market Fund - previously filed with Post-Effective Amendment
to the Registration Statement and herein incorporated by
reference.
(b) Fund Administration Agreement for the Income Fund- previously
filed with Post-Effective Amendment to the Registration
Statement and herein incorporated by reference.
(c) Proposed Fund Administration Agreement for the Subadvised
Funds - previously filed with Post-Effective Amendment to the
Registration Statement and herein incorporated by reference.
(10) Opinion and consent of counsel. Previously filed with Post-Effective
Amendment to the Registration Statement, and herein incorporated by
reference.
(11) Auditor's Consent
(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) Financial Data Schedules
(18) 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.
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Item 26. Number of Holders of Securities
<TABLE>
<CAPTION>
Number of Record Holders
Title of Class as of March 31, 1998
------------------------------------------------------
<S> <C>
Total Return Fund 2
Government Bond Fund 2
Money Market Fund 2
Capital Appreciation Fund 2
Small Company Fund 2
Income Fund 2
Strategic Growth Fund 2
Strategic Value Fund 2
Equity Income Fund 2
High Income Bond Fund 2
Balanced Fund 2
Multi Sector Bond Fund 2
Small Cap Value Fund 2
Global Equity Fund 2
Select Advisors Mid Cap Equity Fund 2
</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
Investing Foundation III, 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.
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.
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Dennis W. Click Vice President 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 Insurance Enterprise Services, Ltd.
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
California Cash Management Company
Colonial Insurance Company of Wisconsin
Gates, McDonald & Company
GatesMcDonald Health Plus Inc.
Nationwide Global Holdings, Inc.
Nationwide Cash Management Company
Nationwide Indemnity Company
Nationwide Community Urban Redevelopment
Corporation
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
Employers Insurance of Wausau A Mutual Company
Nationwide Advisory Services, Inc.
Nationwide Investor Services, Inc.
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
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.
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NEA Valuebuilder Investor Services of
Oklahoma, Inc.
NEA Valuebuilder Investor Services of
Wyoming, Inc.
Nationwide Agency, Inc.
Nationwide Health Plans, Inc.
Nationwide Management Systems, Inc.
MRM Investments, Inc.
NWE, Inc.
TIG Countrywide Insurance Company
Assistant Secretary
Pension Associations of Wausau, Inc.
Companies Agency, Inc.
Companies Agency of Alabama, Inc.
Companies Agency Insurance Services of California
Companies Agency of Georgia Inc.
Companies Agency of Idaho, Inc.
Companies Agency of Kentucky, Inc.
Companies Agency of New York, Inc.
Companies Agency of Pennsylvania, Inc.
Companies Agency of Phoenix, Inc.
Countrywide Services Corporation
Key Health Plan, Inc.
Wausau (Bermuda) Ltd.
Wausau International Underwriters
Vice President and Assistant Secretary
National Casualty Company
Secretary
The Beak and Wire Corporation
Clerk
NEA Valuebuilder Services Insurance Agency, Inc.
Assistant Clerk
Companies Agency of Massachusetts, Inc.
Dimon R. McFerson Chairman and Chief Executive Officer-Nationwide
Insurance Enterprise and Director
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 Insurance Company of Wisconsin
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
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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 Georgia, Inc.
Companies Agency of Idaho, 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.
Nationwide Insurance Enterprise Services, Ltd.
TIG Countrywide Insurance Company
Wausau International Underwriters
Wausau Preferred Health Insurance Company
Trustee and Chairman
Financial Horizons Investment Trust
Nationwide Investing Foundation
Nationwide Investing Foundation II
Nationwide Separate Account Trust
Nationwide Investing Foundation III
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.
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NEA Valuebuilder Investor Services of
Arizona, 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 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 Georgia, Inc.
Companies Agency of Idaho, 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
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 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.
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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.
Nationwide Insurance Enterprise Services, Ltd.
MRM Investments, Inc.
Nationwide Advisory Services, Inc.
Nationwide Indemnity Company
TIG Countrywide Insurance 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
NWE, Inc..
Gates, McDonald & Company
GatesMcDonald Health Plus Inc.
Susan A. Wolken Senior Vice President-Life Company Operations
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
Director
Affiliate Agency, Inc.
Affiliate Agency of Ohio, Inc.
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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 Investment Services Corporation
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.
PEBSCO of Massachusetts Insurance Agency, Inc.
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
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 Insurance Enterprise Services, Ltd.
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
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Director
Nationwide Global Holdings, Inc.
Nationwide Investors Services, 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.
Director, Executive Vice President-Chief
Investment Officer
Nationwide Indemnity Company
Nationwide Advisory Services, Inc.
TIG Countrywide Insurance Company
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
Nationwide Investing Foundation III
Christopher A.
Cray Treasurer
Nationwide Advisory Services, Inc.
Nationwide Investors Services, Inc.
Assistant Treasurer
Nationwide Investing Foundation
Nationwide Separate Account Trust
Nationwide Investing Foundation II
Nationwide Investing Foundation III
Financial Horizons Investment Trust
Nationwide Asset Allocation Trust
David E. Simaitis Secretary
Nationwide Horizons Investment Trust
Nationwide Investing Foundation
Nationwide Investing Foundation II
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Nationwide Investing Foundation III
Assistant Secretary
Nationwide Advisory Services, Inc.
Nationwide Investors Services, Inc.
Nationwide Separate Account Trust
Elizabeth A.
Davin Secretary
Nationwide Asset Allocation Trust
Nationwide Separate Account Trust
Assistant Secretary
Nationwide Advisory Services, Inc.
Nationwide Horizons Investment Trust
Nationwide Investing Foundation
Nationwide Investing Foundation II
Nationwide Investing Foundation III
Nationwide Investors Services, Inc.
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 Global Holdings, 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
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
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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 Corporation
Nationwide Insurance Enterprise Services, Ltd.
Nationwide Investment Services Corporation
Companies Agency, Inc.
Companies Agency Insurance Services of California
Companies Agency of Alabama, Inc.
Companies of Georgia, Inc.
Companies Agency of Idaho, 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 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.
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
Scottsdale Insurance Company
Scottsdale Surplus Lines insurance Company
Wausau International Underwriters
Senior Vice President and General Counsel and
Director
Nationwide Community Urban Redevelopment
Corporation
Nationwide Indemnity Company
MRM Investments, Inc.
NEW, Inc.
TIG Countrywide Insurance Company
Assistant Secretary
Key Health Plan, Inc.
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General Counsel
Nationwide Insurance Golf Charities, Inc.
Patricia J. Smith Assistant Secretary
Nationwide Advisory Services, Inc.
Nationwide Horizons Investment Trust
Nationwide Investing Foundation
Nationwide Investing Foundation II
Nationwide Investing Foundation III
Nationwide Investors Services, Inc.
Nationwide Separate Account 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 Investing Foundation III
Nationwide Separate Account Trust
Nationwide Asset Allocation Trust
Edwin P.
McCausland, Jr. Senior 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
Nationwide Life and Annuity Insurance Company
Nationwide Advisory Services, Inc.
California Cash Management Company
Colonial Insurance Company of Wisconsin
Nationwide Cash Management Company
Nationwide Indemnity Company
Nationwide Insurance Enterprise Foundation
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Vice President-Fixed Income Securities
Employers Insurance of Wausau A Mutual Company
Employers Life Insurance Company of Wausau
Farmland Mutual Insurance Company
Gates, McDonald & Company
GatesMcDonald Health Plus, Inc.
National Casualty Company
Nationwide Agribusiness Insurance Company
Scottsdale Indemnity Company
Scottsdale Insurance Company
` Scottsdale Surplus Lines Insurance Company
TIG Countrywide Insurance Company
Wausau Business Insurance Company
Wausau General Insurance Company
Wausau Preferred Health Insurance Company
Wausau Service Corporation
Wausau Underwriters Insurance Company
Assistant Treasurer
Financial Horizons Investment Trust
Nationwide Asset Allocation Trust
Nationwide Investing Foundation
Nationwide Investing Foundation II
Nationwide Investing Foundation III
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. Vice President
Goslee Nationwide Advisory Services, Inc.
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
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Des Moines, Iowa 50315-1000
Colonial Insurance Company of Wisconsin
5525 Park Center Circle
Dublin, Ohio 43017
Employers Insurance of Wausau A Mutual Company
2000 Westwood Drive
Wausau, Wisconsin 54401-7881
Scottsdale Insurance Company
P.O. Box 4110
Scottsdale, Arizona 85261-4110
National Casualty Company
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
(b) Information for the Subadvisers of the Small Company Fund
(1) The Dreyfus Corporation
The Dreyfus Corporation ("Dreyfus") acts as subadvisor to the Smaal
Comapny 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).
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(2) Neuberger & Berman L.L.C.
Neuberger & Berman, L.L.C. ("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. ("SCM"), acts as subadviser to the
Small Company Fund, the Strategic Growth Fund and the Strategic
Value Fund. SCM began conducting business in 1974, provides
continuous investment supervision for individuals and institutional
accounts, such as pension funds and profit-sharing plans. SCM 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.
Officers and Directors of SCM Other Business
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
Fussville Development L.L.C.
Fussville Real Estate Holding
L.L.C.
Sherwood Development L.L.C.
Strong Service Corporation
President, Treasurer and
Director:
Heritage Reserve Holding L.L.C.
Thomas P. Lemke Chief Operating Officer, Vice
Senior Vice President, Chief President and Chief Compliance
Operating Officer, Secretary, Officer:
General Counseland Chief StrongFunds Distributors Inc.
Compliance Officer
Vice President:
Strong Holdings, Inc.
Fussville Development L.L.C.
Fussville Real Estate Holding
L.L.C.
Heritage Reserve Development
Corporation
Sherwood Development L.L.C.
Strong Service Corporation
Thomas M. Zoeller Treasurer:
Senior Vice President, Strong Holdings, Inc.
Chief Financial Officer, Fussville Development L.L.C.
Treasurer and Controller Fussville Real Estate Holding
L.L.C.
Heritage Reserve Development
Corporation
Strong Service Corporation
Richard T. Weiss Director:
Director and Portfolio Manager Strong Funds Distributors, Inc.
Strong Holdings, Inc.
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Heritage Reserve Development
Corporation
Strong Service Corporation
Stephen J. Shenkenberg Vice President, Deputy Chief
Vice President, Assistant Compliance Officer and
Secretary, Acting General Secretary:
Counsel and Deputy Chief Strong Funds Distributors, Inc.
Compliance Officer
Vice President and Assistant
Secretary:
Heritage Reserve Holding L.L.C.
Secretary:
Strong Holdings Inc.
Fussville Development L.L.C.
Fussville Real Estate Holdings
L.L.C.
Heritage Reserve Development
Corporation
Sherwood Development L.L.C.
Strong Service Corporation
Joseph R. Demartine Vice President:
Senior Vice President and Chief Strong Funds Distributors, Inc.
Marketing Officer; Managing
Director - Strong Retail Services
Michael E. Fisher N/A
Senior Vice President; Managing
Director - Institutional Business
Group
Kenneth M. Landis Until December 1996, was Partner
Senior Vice President and Chief at Coopers & Lybrand, Boston,
Information Officer MA
John A. Flanagan Until May 1997, was a Partner
Senior Vice President and CPA at Coopers & Lybrand,
L.L.P., New York, NY
Jeffrey L. Kubik Until June 1997, was Director of
Senior Vice President Human Resources at
Allen-Bradley, Milwaukee, WI
(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.
Name Position with Van Eck
---- ---------------------
Associates Corporation
----------------------
John C. Van Eck Chairman of the Board
Philip DeFeo President, Chief Executive
Officer and Director
Fred M. Van Eck Director
C-18
<PAGE> 376
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
Kevin Reid Director, Real Estate Research
Charles Cameron Director, Trading; Co Portfolio
Manager Of Worldwide Bond Fund
Bruce J. Smith Sr. Vice President, Treasurer,
Controller and Chief Financial
Officer
Thomas Elwood Vice President, General and
Secretary
(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 Asset Management, Inc.
Warburg, Pincus Asset Management, 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
C-19
<PAGE> 377
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
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
C-20
<PAGE> 378
Peter Jon Anderson**
Director
American Express Financial Corporation
Director and Senior Vice President
American Express Asset Management 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
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:
C-21
<PAGE> 379
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
(d) Information for the Subadviser of the Strategic Growth Fund
(1) Strong Capital Management, Inc. - See Item 28 (b) (3)
(e) Information for the Subadviser of the Strategic Value Fund
(1) 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 Federated Global Federated Global Federated
Research Corp. Research Corp. Research Corp. Management
Federated Management Federated Management Federated Management Federated Research
John F. Donahue J. Christopher Donahue John W. McGonigle Mark D. Olson
- --------------- ---------------------- ----------------- -------------
Board Member: Board Member: Board Member: Board Member:
</TABLE>
C-22
<PAGE> 380
<TABLE>
<S> <C> <C> <C>
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. 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 Federated Investors
Services, Inc. Insurance, Inc.
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
J. Christopher Donahue John W. McGonigle
---------------------- -----------------
President, CEO & COO: Chairman, President &
</TABLE>
C-23
<PAGE> 381
<TABLE>
<S> <C>
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; Joseph M. Balestrino, Drew J.
Collins, Jonathan C. Conley, Deborah A. Cunningham, Mark E.
Durbiano, Saundra L. McInerney, J. Alan Minteer, Susan M. Nason,
Mary Jo Ochson, Robert J. Ostrowski and Charles A. Ritter, Senior
Vice Presidents; Todd A. Abraham, J. Scott Albrecht, Randall S.
Bauer, David A. Briggs, Micheal W. Casey, 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. Kowit, Jeff A.
Kozenemchak, Steven Lehman, Marian R. Marinack, 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 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"), 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
C-24
<PAGE> 382
other institutional investors, including foundations, endowments,
sovereign governements, 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
Paul J. Hondros PBHG Fund Services
President and Chief Operating Officer
Eric C. Schneider Newbold's Asset Management, Inc.
Chief Financial Officer and Treasurer
Amy S. Yuter
Chief Compliance Officer
John M. Zerr,
General Counsel and Secretary
</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
Chairman
Name and Position with Subadvisor: Other Affiliations
Samuel R. Trozzo none
</TABLE>
C-25
<PAGE> 383
<TABLE>
<S> <C>
Chairman
Director of RHJ
Walter H. Beck none
Partner
Director of RHJ
Michelle P. Connell none
Partner
Douglas Sheres 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. ("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 Affliations(1)
--------------------------------- --------------------
<S> <C>
Julio J. de Puzo, Jr., Director and/or Officer of
Director, Principal & Chief Executive Officer Source, Capital, New Income,.
Paramount, and Perennial.
<CAPTION>
Name and Position with Subadviser Other Affliations(1)
--------------------------------- --------------------
<S> <C>
Robert L. Rodriguez, Director and/or Officer of
Director, Principal & Chief Investment Officer Source, Capital, New Income,.
Paramount, and Perennial.
</TABLE>
C-26
<PAGE> 384
<TABLE>
<S> <C>
William M. Samms, Officer of Paramount
Director & Principal
J. Richard Atwood, Officer of Source, Capital, New
Senior Vice President, Chief Financial Income, Paramount, and
Officer & Treasurer Perennial.
Eric S. Ende, Officer of Source, Capital, New
Senior Vice President Income, Paramount, 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
Vice President & Controller Income, Paramount, and
Perennial.
Thomas H. Aneberry, --
Vice President
Dennis M. Bryan, Officer of Capital.
Vice President
Steven R. Geist, Officer of Source and
Vice President Perennial.
Janet M. Pitman Officer of Source, Capital, New
Vice President Income, Paramount, and
Perennial.
Mary S. Thomas, --
Vice President
Sherry Sasaki, Officer of Source, Capital, New
Assistant Vice President & Secretary Income, Paramount,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.
C-27
<PAGE> 385
Three Nationwide Plaza
Columbus, OH 43215
Item 31. Management Services
Not applicable.
Item 32. Undertakings
(a) Not applicable.
C-28
<PAGE> 386
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that they meet all the
requirements for effectiveness of this Registration Statement pursuant to Rule
485(b) under the Securities Act of 1933 and has duly caused this Post-Effective
Amendment No. 26 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 30th day of April 1998.
NATIONWIDE SEPARATE ACCOUNT TRUST
By: JAMES F. LAIRD, JR.
-------------------
James F. Laird, Jr., Treasurer
PURSUANT TO THE REQUIREMENT OF THE SECURITIES ACT OF 1933, THIS POST-EFFECTIVE
AMENDMENT NO. 26 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE
FOLLOWING PERSONS IN THE CAPACITIES INDICATED ON THE 30TH DAY OF APRIL 1998.
Signature & Title
- -----------------
Principal Executive Officer
JOSEPH J. GASPER*
- --------------------------------------------
Joseph J. Gasper, 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
DOUGLAS F. KRIDLER*
- --------------------------------------------
Douglas F. Kridler, Trustee
SUE DOODY*
- --------------------------------------------
Sue Doody, Trustee
*By: JAMES F. LAIRD, JR.
--------------------------------------
James F. Laird, Jr., Attorney-In-Fact
C-29
<PAGE> 387
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned as Trustees and/or
as Officer of NATIONWIDE SEPARATE ACCOUNT TRUST, an open-end investment company
created pursuant to the laws of the Commonwealth of Massachusetts, which has
filed with the Securities and Exchange Commission under the provisions of the
Securities Act of 1933, as amended, and of the Investment Company Act of 1940,
as amended, a Registration Statement on Form N-1A for the registration under
said Acts of the sale of shares of Nationwide Separate Account Trust, hereby
constitute and appoint Dimon Richard McFerson, Joseph J. Gasper, James F. Laird,
Jr., W. Sidney Druen, and Joseph P. Rath his/her attorneys, and each of them,
with power to act without the others, his/her attorneys, with full power of
substitution and resubstitution, for and in his/her name, place and stead, in
any and all capacities, to approve and sign any and all amendments to such
Registration Statement, for Nationwide Separate Account Trust, and to file the
same, with all exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, hereby granting unto said
attorneys, and each of them, full power and authority to do and perform all and
every act and thing requisite to all intents and purposes as he or she might or
could do in person, hereby ratifying and confirming that said attorneys, or any
one of them, may lawfully do or cause to be done by virtue hereof. This
instrument may be executed in one or more counterparts.
IN WITNESS WHEREOF, the undersigned have herewith set their names and seals
as of this 9th day of September 1997.
/s/ Sue A. Doody /s/ Douglas F. Kridler
- ------------------------------------ ------------------------------------
Sue A. Doody, Trustee Douglas F. Kridler, Trustee
Nationwide Separate Account Trust Nationwide Separate Account Trust
/s/ Robert M. Duncan /s/ Robert J. Woodward, Jr.
- ------------------------------------ ------------------------------------
Robert M. Duncan, Trustee Robert J. Woodward, Jr., Trustee
Nationwide Separate Account Trust Nationwide Separate Account Trust
/s/ Joseph J. Gasper /s/ John C. Bryant
- ------------------------------------ ------------------------------------
Joseph J. Gasper, Trustee & Chairman Dr. John C. Bryant, Trustee
Nationwide Separate Account Trust Nationwide Separate Account Trust
/s/ Thomas J. Kerr, IV
- ------------------------------------
Dr. Thomas J. Kerr, IV, Trustee
Nationwide Separate Account Trust
<PAGE> 1
EXHIBIT (5)(g)(i)
SUBADVISORY AGREEMENT
THIS AGREEMENT is made and entered into on this 31st day of October, 1997,
among NATIONWIDE SEPARATE ACCOUNT TRUST, a Massachusetts business trust (the
"Trust"), NATIONWIDE ADVISORY SERVICES, INC. (the "Adviser"), an Ohio
corporation registered under the Investment Advisers Act of 1940, as amended
(the "Advisers Act"), and Salomon Brothers Asset Management, Inc., a Delaware
corporation (the "Subadviser"), also registered under the Advisers Act.
W I T N E S S E T H :
WHEREAS, the Trust is registered with the Securities and Exchange
Commission (the "SEC") as an open-end management investment company under the
Investment Company Act of 1940 (the "1940 Act");
WHEREAS, the Adviser has, pursuant to an Advisory Agreement with the Trust
dated as of October 31, 1997 (the "Advisory Agreement"), been retained to act as
investment adviser for certain of the series of the Trust which are listed on
Exhibit A to this Agreement (each a "Fund");
WHEREAS, the Advisory Agreement permits the Adviser to delegate certain of
its duties under the Advisory Agreement to other investment advisers, subject to
the requirements of the 1940 Act; and
WHEREAS, the Adviser desires to retain Subadviser to assist it in the
provision of a continuous investment program for that portion of the Trust's
assets which the Adviser will assign to the Subadviser (the "Subadviser
Assets"), and Subadviser is willing to render such services subject to the terms
and conditions set forth in this Agreement.
NOW, THEREFORE, the parties do mutually agree and promise as follows:
1. Appointment as Subadviser. The Adviser hereby retains the Subadviser to
act as investment adviser for and to manage the Subadviser Assets subject to the
supervision of the Adviser and the Board of Trustees of the Trust and subject to
the terms of this Agreement; and the Subadviser hereby accepts such employment.
In such capacity, the Subadviser shall be responsible for the investment
management of the Subadviser Assets. It is recognized that the Subadviser and
certain of its affiliates now act, and that from time to time hereafter may act,
as investment adviser to one or more other investment companies and to fiduciary
or other managed accounts and that the Adviser and the Trust have no objection
to such activities.
1
<PAGE> 2
2. Duties of Subadviser.
(a) Investments. The Subadviser is hereby authorized and directed
and hereby agrees, subject to the stated investment policies and
restrictions of the Funds as set forth in the Funds' prospectus and
statement of additional information as currently in effect and as
supplemented or amended from time to time (collectively referred to
hereinafter as the "Prospectus") and subject to the directions of the
Adviser and the Trust's Board of Trustees, to purchase, hold and sell
investments for the Subadviser Assets ("Fund Investments") and to monitor
on a continuous basis the performance of such Fund Investments. In
providing these services, the Subadviser will conduct a continual program
of investment, evaluation and, if appropriate, sale and reinvestment of
the Subadviser Assets. The Adviser agrees to provide the Subadviser with
such assistance as may be reasonably requested by the Subadviser in
connection with its activities under this Agreement, including, without
limitation, information concerning the Funds, their funds available, or to
become available, for investment and generally as to the conditions of the
Funds' or Trust's affairs.
(b) Compliance with Applicable Laws and Governing Documents. In the
performance of its duties and obligations under this Agreement, the
Subadviser shall act in conformity with the Trust's Declaration of Trust
and By-Laws and the Prospectus and with the instructions and directions
received in writing from the Adviser or the Trustees of the Trust and will
conform to and comply with the requirements of the 1940 Act, the Internal
Revenue Code of 1986, as amended (the "Code"), and all other applicable
federal and state laws and regulations. Notwithstanding the foregoing, the
Adviser shall remain responsible for ensuring each Fund's overall
compliance with the 1940 Act and the Code and the Subadviser is only
obligated to comply with this subsection (b) with respect to the
Subadviser Assets. The Adviser will provide the Subadviser with a copy of
the minutes of the meetings of the Board of Trustees of the Trust to the
extent they may affect the Funds or the duties of the Subadviser, and with
copies of any financial statements or reports made by the Funds to their
shareholders, and any further materials or information which the
Subadviser may reasonably request to enable it to perform its functions
under this Agreement.
The Adviser will also provide the Subadviser with reasonable advance
notice of any change in a Fund's investment objectives, policies and
restrictions as stated in the Prospectus, and the Subadviser shall, in the
performance of its duties and obligations under this Agreement, manage the
Fund Investments consistent with such changes, provided the Subadviser has
received prompt notice of the effectiveness of such changes from the Trust
or the Adviser. In addition to such notice, the Adviser shall provide to
the Subadviser a copy of a modified Prospectus reflecting such changes.
The Adviser acknowledges and agrees that the Prospectus will at all times
be in compliance with all disclosure requirements under all applicable
federal and state laws and regulations relating to the Trust or the Funds,
including, without limitation, the 1940 Act, and the rules and regulations
thereunder, and that the Subadviser shall have no liability in connection
therewith, except as to the accuracy of
2
<PAGE> 3
material information furnished by the Subadviser to the Trust or to the
Adviser specifically for inclusion in the Prospectus. The Subadviser
hereby agrees to provide to the Adviser in a timely manner such
information relating to the Subadviser and its relationship to, and
actions for, the Trust as may be required to be contained in the
Prospectus.
(c) Voting of Proxies. The Subadviser shall have the power to vote,
either in person or by proxy, all securities in which the Subadviser
Assets may be invested from time to time, and shall not be required to
seek or take instructions from, the Adviser or the Trust or take any
action with respect thereto. If both the Subadviser and another entity
managing assets of a Fund have invested in the same security, the
Subadviser and such other entity will each have the power to vote its pro
rata share of the security.
(d) Agent. Subject to any other written instructions of the Adviser
or the Trust, the Subadviser is hereby appointed the Adviser's and the
Trust's agent and attorney-in-fact for the limited purposes of executing
account documentation, agreements, contracts and other documents as the
Subadviser shall be requested by brokers, dealers, counterparties and
other persons in connection with its management of the Subadviser Assets.
The Subadviser agrees to provide the Adviser and the Trust with copies of
any such agreements executed on behalf of the Adviser or the Trust.
(e) Brokerage. The Subadviser is authorized, subject to the
supervision of the Adviser and the Trust's Board of Trustees, to establish
and maintain accounts on behalf of the Fund with, and place orders for the
purchase and sale of the Subadviser Assets with or through, such persons,
brokers (including, to the extent permitted by applicable law, any broker
affiliated with the Subadviser) or dealers ("brokers") as the Subadviser
may elect and negotiate commissions to be paid on such transactions. The
Subadviser, however, is not required to obtain the consent of the Adviser
or the Trust's Board of Trustees prior to establishing any such brokerage
account. The Subadviser shall place all orders for the purchase and sale
of portfolio investments for the Funds' account with brokers selected by
the Subadviser. In the selection of such brokers and the placing of such
orders, the Subadviser shall seek to obtain for the Funds the most
favorable price and execution available, except to the extent it may be
permitted to pay higher brokerage commissions for brokerage and research
services, as provided below. In using its reasonable efforts to obtain for
the Funds the most favorable price and execution available, the
Subadviser, bearing in mind the best interests of each Fund at all times,
shall consider all factors it deems relevant, including price, the size of
the transaction, the breadth and nature of the market for the security,
the difficulty of the execution, the amount of the commission, if any, the
timing of the transaction, market prices and trends, the reputation,
experience and financial stability of the broker involved, and the quality
of service rendered by the broker in other transactions. Subject to such
policies as the Trustees may determine, or as may be mutually agreed to by
the Adviser and the Subadviser, the Subadviser shall not be deemed to have
acted unlawfully or to have breached any duty created by this Agreement or
otherwise solely by reason of its having caused a Fund to pay a broker
that provides brokerage and research services (within
3
<PAGE> 4
the meaning of Section 29(e) of the Securities Exchange Act of 1934) to
the Subadviser an amount of commission for effecting a Fund investment
transaction that is in excess of the amount of commission that another
broker would have charged for effecting that transaction if, but only if,
the Subadviser determines in good faith that such commission was
reasonable in relation to the value of the brokerage and research services
provided by such broker or dealer viewed in terms of either that
particular transaction or the overall responsibility of the Subadviser
with respect to the accounts as to which it exercises investment
discretion.
It is recognized that the services provided by such brokers may be
useful to the Subadviser in connection with the Subadviser's services to
other clients. On occasions when the Subadviser deems the purchase or sale
of a security to be in the best interests of a Fund as well as other
clients of the Subadviser, the Subadviser, to the extent permitted by
applicable laws and regulations, may, but shall be under no obligation to,
aggregate the securities to be sold or purchased. In such event,
allocation of securities so sold or purchased, as well as the expenses
incurred in the transaction, will be made by the Subadviser in the manner
the Subadviser considers to be the most equitable and consistent with its
fiduciary obligations to the Funds and to such other clients. It is
recognized that in some cases, this procedure may adversely affect the
price paid or received by the Funds or the size of the position obtainable
for, or disposed of by, the Funds.
(f) Securities Transactions. The Subadviser and any affiliated
person of the Subadviser will not purchase securities or other instruments
from or sell securities or other instruments to a Fund; provided, however,
the Subadviser and any affiliated person of the Subadviser may purchase
securities or other instruments from or sell securities or other
instruments to a Fund if such transaction is permissible under applicable
laws and regulations, including, without limitation, the 1940 Act and the
Advisers Act and the rules and regulations promulgated thereunder.
The Subadviser, including its Access Persons (as defined in
subsection (e) of Rule 17j-1 under the 1940 Act), agrees to observe and
comply with Rule 17j-1 and its Code of Ethics (which shall comply in all
material respects with Rule 17j-1), as the same may be amended from time
to time. On a quarterly basis, the Subadviser will either (i) certify to
the Adviser that the Subadviser and its Access Persons have complied with
the Subadviser's Code of Ethics with respect to the Subadviser Assets or
(ii) identify any violations which have occurred with respect to the
Subadviser Assets.
(g) Books and Records. The Subadviser shall maintain separate
detailed records of all matters pertaining to the Subadviser Assets (the
"Funds' Records"), including, without limitation, brokerage and other
records of all securities transactions. The Subadviser acknowledges that
the Funds' Records are property of the Trust. The Funds' Records (relating
to the Subadviser Assets) shall be available to the Adviser at any time
upon reasonable request during normal business hours and shall be
available for telecopying without delay to the Adviser during any day that
the Fund is open for business.
4
<PAGE> 5
(h) Information Concerning Fund Investments and Subadviser. From
time to time as the Adviser or the Trust may request, the Subadviser will
furnish the requesting party reports on portfolio transactions and reports
on Fund Investments held in the portfolio, all in such detail as the
Adviser or the Trust may reasonably request. The Subadviser will also
inform the Adviser in a timely manner of material changes in portfolio
managers responsible for Subadviser Assets, any changes in the ownership
or management of the Subadviser, or of material changes in the control of
the Subadviser. Upon reasonable request, the Subadviser will make
available its officers and employees to meet with the Trust's Board of
Trustees to review the Fund Investments.
The Subadviser will also provide such information or perform such
additional acts as are customarily performed by a subadviser and may be
required for the Trust or the Adviser to comply with their respective
obligation, the Code, the 1940 Act, the Advisers Act, and the Securities
Act of 1933, as amended (the "Securities Act"), and any rule or regulation
thereunder.
(i) Custody Arrangements. The Subadviser shall on each business day
provide the Adviser and the Trust's custodian such information as the
Adviser and the Trust's custodian may reasonably request relating to all
transactions concerning the Fund Investments.
(j) Historical Performance Information. To the extent agreed upon by
the parties, the Subadviser will provide the Trust with historical
performance information on similarly managed investment companies or for
other accounts to be included in the Prospectus or for any other uses
permitted by applicable law.
3. Independent Contractor. In the performance of its duties hereunder, the
Subadviser is and shall be an independent contractor and unless otherwise
expressly provided herein or otherwise authorized in writing, shall have no
authority to act for or represent the Trust or the Adviser in any way or
otherwise be deemed an agent of the Trust or the Adviser.
4. Expenses. During the term of this Agreement, Subadviser will pay all
expenses incurred by it in connection with its activities under this Agreement
other than the cost of securities, commodities and other investments (including
brokerage commissions and other transaction charges, if any) purchased for the
Funds. The Subadviser shall, at its sole expense, employ or associate itself
with such persons as it believes to be particularly fitted to assist it in the
execution of its duties under this Agreement. The Subadviser shall not be
responsible for the Trust's, the Fund's or Adviser's expenses, which shall
include, but not be limited to, organizational and offering expenses (which
include out-of-pocket expenses, but not overhead or employee costs of the
Subadviser); expenses for legal, accounting and auditing services; taxes and
governmental fees; dues and expenses incurred in connection with membership in
investment company organizations; costs of printing and distributing shareholder
reports, proxy materials, prospectuses, stock certificates and distribution of
dividends; charges of the Funds' custodians and sub-custodians, administrators
and sub-
5
<PAGE> 6
administrators, registrars, transfer agents, dividend disbursing agents and
dividend reinvestment plan agents; payment for portfolio pricing services to a
pricing agent, if any; registration and filing fees of the Securities and
Exchange Commission (the "SEC"); expenses of registering or qualifying
securities of the Funds for sale in the various states; freight and other
charges in connection with the shipment of the Funds' portfolio securities; fees
and expenses of non-interested Trustees; salaries of shareholder relations
personnel; costs of shareholders meetings; insurance; interest; brokerage costs;
and litigation and other extraordinary or non-recurring expenses. The Trust or
the Adviser, as the case may be, shall reimburse the Subadviser for any expenses
of the Funds or the Adviser as may be reasonably incurred by such Subadviser on
behalf of the Funds or the Adviser. The Subadviser shall keep and supply to the
Trust and the Adviser reasonable records of all such expenses.
5. Compensation. For the services provided and the expenses assumed with
respect to the Funds and the Subadviser Assets pursuant to this Agreement, the
Subadviser will be entitled to the fee listed for each Fund on Exhibit A. Such
fees will be computed daily and payable no later than the seventh (7th) business
day following the end of each month, from the Adviser or the Trust, calculated
at an annual rate based on the Subadviser Assets' average daily net assets.
The method of determining net assets of a Fund for purposes hereof shall
be the same as the method of determining net assets for purposes of establishing
the offering and redemption price of the shares of that Fund as described in the
Funds' Prospectus. If this Agreement shall be effective for only a portion of a
month, the aforesaid fee shall be prorated for the portion of such month during
which this Agreement is in effect.
6. Representations and Warranties of Subadviser. The Subadviser represents
and warrants to the Adviser and the Trust as follows:
(a) The Subadviser is registered as an investment adviser under the
Advisers Act;
(b) The Subadviser has filed a notice of exemption pursuant to Rule
4.14 under the Commodity Exchange Act (the "CEA") with the Commodity
Futures Trading Commission (the "CFTC") and the National Futures
Association ("NFA"), or is not required to file such exemption;
(c) The Subadviser is a corporation duly organized and validly
existing under the laws of the State of Delaware with the power to own and
possess its assets and carry on its business as it is now being conducted;
(d) The execution, delivery and performance by the Subadviser of
this Agreement are within the Subadviser's powers and have been duly
authorized by all necessary action on the part of its board of directors,
and no action by or in respect of, or filing with, any governmental body,
agency or official is required on the part of the Subadviser for the
execution, delivery and performance by the Subadviser of this Agreement,
and the execution,
6
<PAGE> 7
delivery and performance by the Subadviser of this Agreement do not
contravene or constitute a default under (i) any provision of applicable
law, rule or regulation, (ii) the Subadviser's governing instruments, or
(iii) any agreement, judgment, injunction, order, decree or other
instrument binding upon the Subadviser;
(e) The Form ADV of the Subadviser previously provided to the
Adviser is a true and complete copy of the form as currently filed with
the SEC and the information contained therein is accurate and complete in
all material respects and does not omit to state any material fact
necessary in order to make the statements made, in light of the
circumstances under which they were made, not misleading.
7. Representations and Warranties of Adviser. The Adviser represents and
warrants to the Subadviser as follows:
(a) The Adviser is registered as an investment adviser under the
Advisers Act;
(b) The Adviser has filed a notice of exemption pursuant to Rule
4.14 under the CEA with the CFTC and the NFA or is not required to file
such exemption;
(c) The Adviser is a corporation duly organized and validly existing
under the laws of the State of Ohio with the power to own and possess its
assets and carry on its business as it is now being conducted;
(d) The execution, delivery and performance by the Adviser of this
Agreement are within the Adviser's powers and have been duly authorized by
all necessary action on the part of its shareholders or directors, and no
action by or in respect of, or filing with, any governmental body, agency
or official is required on the part of the Adviser for the execution,
delivery and performance by the Adviser of this Agreement, and the
execution, delivery and performance by the Adviser of this Agreement do
not contravene or constitute a default under (i) any provision of
applicable law, rule or regulation, (ii) the Adviser's governing
instruments, or (iii) any agreement, judgment, injunction, order, decree
or other instrument binding upon the Adviser;
(e) The Form ADV of the Adviser previously provided to the
Subadviser is a true and complete copy of the form filed with the SEC and
the information contained therein is accurate and complete in all material
respects and does not omit to state any material fact necessary in order
to make the statements made, in light of the circumstances under which
they were made, not misleading;
(f) The Adviser acknowledges that it received a copy of the
Subadviser's Form ADV prior to the execution of this Agreement; and
7
<PAGE> 8
(g) The Adviser and the Trust have duly entered into the Advisory
Agreement pursuant to which the Trust authorized the Adviser to enter into
this Agreement.
8. Representations and Warranties of the Trust. The Trust represents and
warrants to the Adviser and the Subadviser as follows:
(a) The Trust is a business trust duly organized and validly
existing under the laws of the Commonwealth of Massachusetts with the
power to own and possess its assets and carry on its business as it is now
being conducted;
(b) The Trust is registered as an investment company under the 1940
Act and the Fund's shares are registered under the Securities Act; and
(c) The execution, delivery and performance by the Trust of this
Agreement are within the Trust's powers and have been duly authorized by
all necessary action on the part of the Trust and its Board of Trustees,
and no action by or in respect of, or filing with, any governmental body,
agency or official is required on the part of the Trust for the execution,
delivery and performance by the Adviser of this Agreement, and the
execution, delivery and performance by the Trust of this Agreement do not
contravene or constitute a default under (i) any provision of applicable
law, rule or regulation, (ii) the Trust's governing instruments, or (iii)
any agreement, judgment, injunction, order, decree or other instrument
binding upon the Trust.
9. Survival of Representations and Warranties; Duty to Update Information.
All representations and warranties made by the Subadviser, the Adviser and the
Trust pursuant to Sections 6, 7 and 8, respectively, shall survive for the
duration of this Agreement and the parties hereto shall promptly notify each
other in writing upon becoming aware that any of the foregoing representations
and warranties are no longer true.
10. Liability and Indemnification.
(a) Liability. The Subadviser shall exercise its best judgment in
rendering the services in accordance with the terms of this Agreement. In
the absence of wilful misfeasance, bad faith or gross negligence on the
part of the Subadviser or a reckless disregard of its duties hereunder,
the Subadviser, each of its affiliates and all respective partners,
officers, directors and employees ("Affiliates") and each person, if any,
who within the meaning of the Securities Act controls the Subadviser
("Controlling Persons") shall not be liable for any error of judgment or
mistake of law and shall not be subject to any expenses or liability to
the Adviser, the Trust or the Funds or any of the Funds' shareholders, in
connection with the matters to which this Agreement relates. In the
absence of wilful misfeasance, bad faith or gross negligence on the part
of the Adviser or a reckless disregard of its duties hereunder, the
Adviser, any of its Affiliates and each of the Adviser's Controlling
Persons, if any, shall not be subject to any liability to the Subadviser,
for any act
8
<PAGE> 9
or omission in the case of, or connected with, rendering services
hereunder or for any losses that may be sustained in the purchase, holding
or sale of Fund Investments; provided, however, that nothing herein shall
relieve the Adviser and the Subadviser from any of their obligations under
applicable law, including, without limitation, the federal and state
securities laws and the CEA.
(b) Indemnification. The Subadviser shall indemnify the Adviser and
the Trust, and their respective Affiliates and Controlling Persons for any
liability and expenses, including reasonable attorneys' fees, which the
Adviser and the Trust and their respective Affiliates and Controlling
Persons may sustain as a result of the Subadviser's wilful misfeasance,
bad faith, gross negligence, reckless disregard of its duties hereunder or
violation of applicable law, including, without limitation, the federal
and state securities laws or the CEA. Notwithstanding any other provision
in this Agreement, the Subadviser will indemnify the Adviser and the
Trust, and their respective Affiliates and Controlling Persons for any
liability and expenses, including reasonable attorneys' fees, to which
they may be subjected as a result of their reliance upon and use of the
historical performance calculations provided by the Subadviser concerning
the Subadviser's composite account data or historical performance
information on similarly managed investment companies or accounts, except
that the Adviser and the Trust and their respective Affiliates and
Controlling Persons shall not be indemnified for a loss or expense
resulting from their negligence or willful misconduct in using such
numbers, or for their failure to conduct reasonable due diligence with
respect to such information.
The Adviser shall indemnify the Subadviser, its Affiliates and its
Controlling Persons, for any liability and expenses, including reasonable
attorneys' fees, which may be sustained as a result of the Adviser's
wilful misfeasance, bad faith, gross negligence, reckless disregard of its
duties hereunder or violation of applicable law, including, without
limitation, the federal and state securities laws or the CEA, or as a
result of any negligence or willful misconduct on the part of the Adviser
in the reliance upon and/or use of any historical performance calculations
provided by the Subadviser concerning the Subadviser's composite account
data or historical performance information or similarly managed investment
companies.
11. Duration and Termination.
(a) Duration. Unless sooner terminated, this Agreement shall
continue until October 31, 1999, and thereafter shall continue
automatically for successive annual periods, provided such continuance is
specifically approved at least annually by the Trust's Board of Trustees
or vote of the lesser of (a) 67% of the shares of the Funds represented at
a meeting if holders of more than 50% of the outstanding shares of the
Funds are present in person or by proxy or (b) more than 50% of the
outstanding shares of the Funds; provided that in either event its
continuance also is approved by a majority of the Trust's Trustees who are
not
9
<PAGE> 10
"interested persons" (as defined in the 1940 Act) of any party to this
Agreement, by vote cast in person at a meeting called for the purpose of
voting on such approval.
(b) Termination. Notwithstanding whatever may be provided herein to
the contrary, this Agreement may be terminated at any time, without
payment of any penalty:
(i) By vote of a majority of the Trust's Board of Trustees, or
by vote of a majority of the outstanding voting securities of the
Fund, or by the Adviser, in each case, upon at least 60 days'
written notice to the Subadviser;
(ii) By any party hereto immediately upon written notice to
the other parties in the event of a breach of any provision of this
Agreement by either of the other parties; or
(iii) By the Subadviser upon at least 60 days' written notice
to the Adviser and the Trust.
This Agreement shall not be assigned (as such term is defined in the 1940
Act) and shall terminate automatically in the event of its assignment or
upon the termination of the Advisory Agreement.
12. Duties of the Adviser. The Adviser shall continue to have
responsibility for all services to be provided to the Trust pursuant to the
Advisory Agreement and shall oversee and review the Subadviser's performance of
its duties under this Agreement. Nothing contained in this Agreement shall
obligate the Adviser to provide any funding or other support for the purpose of
directly or indirectly promoting investments in the Trust.
13. Reference to Subadviser. Neither the Adviser nor any Affiliate or
agent of it shall make reference to or use the name of Subadviser or any of its
Affiliates, or any of their clients, except references concerning the identity
of and services provided by the Subadviser to the Fund, which references shall
not differ in substance from those included in the Prospectus and this
Agreement, in any advertising or promotional materials without the prior
approval of Subadviser, which approval shall not be unreasonably withheld or
delayed. The Adviser hereby agrees to make all reasonable efforts to cause the
Fund and any Affiliate thereof to satisfy the foregoing obligation.
14. Amendment. This Agreement may be amended by mutual consent of the
parties, provided that the terms of any material amendment shall be approved by:
a) the Trust's Board of Trustees or by a vote of a majority of the outstanding
voting securities of the Funds (as required by the 1940 Act) and b) the vote of
a majority of those Trustees of the Trust who are not "interested persons" of
any party to this Agreement cast in person at a meeting called for the purpose
of voting on such approval, if such approval is required by applicable law.
10
<PAGE> 11
15. Confidentiality. Subject to the duties of the Adviser, the Trust and
the Subadviser to comply with applicable law, including any demand of any
regulatory or taxing authority having jurisdiction, the parties hereto shall
treat as confidential all information pertaining to the Fund and the actions of
the Subadviser, the Adviser and the Fund in respect thereof.
16. Notice. Any notice that is required to be given by the parties to each
other under the terms of this Agreement shall be in writing, delivered, or
mailed postpaid to the other parties, or transmitted by facsimile with
acknowledgment of receipt, to the parties at the following addresses or
facsimile numbers, which may from time to time be changed by the parties by
notice to the other party:
(a) If to the Subadviser:
Salomon Brothers Asset Management, Inc.
7 World Trade Center
New York, NY 10048
Attention: ______________
Facsimile: ______________
(b) If to the Adviser:
Nationwide Advisory Services, Inc.
Three Nationwide Plaza, 26th Floor
Columbus, OH 43215
Attention: James F. Laird, Jr.
Facsimile: (614) 249-7424
(c) If to the Trust:
Nationwide Separate Account Trust
Three Nationwide Plaza, 26th Floor
Columbus, OH 43215
Attention: James F. Laird, Jr.
Facsimile: (614) 249-7424
16. Jurisdiction. This Agreement shall be governed by and construed to be
consistent with the Advisory Agreement and in accordance with substantive laws
of the Commonwealth of Massachusetts without reference to choice of law
principles thereof and in accordance with the 1940 Act. In the case of any
conflict, the 1940 Act shall control.
17. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, all of which shall
together constitute one and the same instrument.
11
<PAGE> 12
18. Certain Definitions. For the purposes of this Agreement and except as
otherwise provided herein, "interested person," "affiliated person," and
"assignment" shall have their respective meanings as set forth in the 1940 Act,
subject, however, to such exemptions as may be granted by the SEC.
19. Captions. The captions herein are included for convenience of
reference only and shall be ignored in the construction or interpretation
hereof.
20. Severability. If any provision of this Agreement shall be held or made
invalid by a court decision or applicable law, the remainder of the Agreement
shall not be affected adversely and shall remain in full force and effect.
21. Nationwide Separate Account Trust and its Trustees. The terms
"Nationwide Separate Account Trust" and the "Trustees of Nationwide Separate
Account Trust" refer respectively to the Trust created and the Trustees, as
trustees but not individually or personally, acting from time to time under a
Declaration of Trust dated as of June 30, 1981, as has been or may be amended
from time to time, and to which reference is hereby made and a copy of which is
on file at the office of the Secretary of State of The Commonwealth of
Massachusetts and elsewhere as required by law, and to any and all amendments
thereto so filed or hereafter filed. The obligations of the Trust entered into
in the name or on behalf thereof by any of Nationwide Separate Account Trust's
Trustees, representatives, or agents are not made individually, but only in
their capacities with respect to Nationwide Separate Account Trust. Such
obligations are not binding upon any of the Trustees, shareholders, or
representatives of the Trust personally, but bind only the assets of the Trust.
All persons dealing with any series of Shares of the Trust must look solely to
the assets of the Trust belonging to such series for the enforcement of any
claims against the Trust.
12
<PAGE> 13
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
day and year first written above.
TRUST
NATIONWIDE SEPARATE ACCOUNT TRUST
By:__________________________________
Name:
Title:
ADVISER
NATIONWIDE ADVISORY SERVICES, INC.
By:__________________________________
Name:
Title:
SUBADVISER
SALOMON BROTHERS ASSET MANAGEMENT
INC.
By:__________________________________
Name:
Title:
13
<PAGE> 14
EXHIBIT A
SUBADVISORY AGREEMENT
BETWEEN NATIONWIDE SEPARATE
ACCOUNT TRUST, NATIONWIDE ADVISORY
SERVICES, INC. and SALOMON BROTHERS ASSET MANAGEMENT, INC.
Effective October 31, 1997
<TABLE>
<CAPTION>
Funds of the Trust Advisory Fees
- ------------------ -------------
<S> <C>
Nationwide Balanced Fund 0.35% on Subadviser Assets up to
$150 million
0.30% on Subadviser Assets of $150
million and more but less than $500
million
0.25% for Subadviser Assets of $500 million
and more
Nationwide Multi Sector 0.35% on Subadviser Assets of up to
Bond Fund $50 million
0.30% on Subadviser Assets of $50
million and more but less than $200
million
0.25% on Subadviser Assets of $200
million and more but less than $500
million
0.20% on Subadviser Assets of $500 million
and more
</TABLE>
14
<PAGE> 1
EXHIBIT (5)(g)(ii)
SUBADVISORY AGREEMENT
THIS AGREEMENT is made and entered into on this 31st day of October, 1997
among NATIONWIDE SEPARATE ACCOUNT TRUST, a Massachusetts business trust (the
"Trust"), NATIONWIDE ADVISORY SERVICES, INC. (the "Adviser"), an Ohio
corporation registered under the Investment Advisers Act of 1940 (the "Advisers
Act"), and Strong Capital Management, Inc., a Wisconsin corporation (the
"Subadviser"), also registered under the Advisers Act.
W I T N E S S E T H :
WHEREAS, the Trust is registered with the Securities and Exchange
Commission (the "SEC") as an open-end management investment company under the
Investment Company Act of 1940 (the "1940 Act");
WHEREAS, the Adviser has, pursuant to an Advisory Agreement with the Trust
dated as of October 31, 1997 (the "Advisory Agreement"), been retained to act as
investment adviser for certain of the series of the Trust which are listed on
Exhibit A to this Agreement (each a "Fund");
WHEREAS, the Advisory Agreement permits the Adviser to delegate certain of
its duties under the Advisory Agreement to other investment advisers, subject to
the requirements of the 1940 Act; and
WHEREAS, the Adviser desires to retain Subadviser to assist it in the
provision of a continuous investment program for that portion of each Fund's
assets which the Adviser will assign to the Subadviser (the "Subadviser
Assets"), and Subadviser is willing to render such services subject to the terms
and conditions set forth in this Agreement.
NOW, THEREFORE, the parties do mutually agree and promise as follows:
1. Appointment as Subadviser. The Adviser hereby retains the Subadviser to
act as investment adviser for and to manage the Subadviser Assets subject to the
supervision of the Adviser and the Board of Trustees of the Trust and subject to
the terms of this Agreement; and the Subadviser hereby accepts such employment.
In such capacity, the Subadviser shall be responsible for the investment
management of the Subadviser Assets. It is recognized that the Subadviser now
acts, and that from time to time hereafter may act, as investment adviser to one
or more other investment companies and to fiduciary or other managed accounts
and that the Adviser and the Trust have no objection to such activities.
2. Duties of Subadviser.
(a) Investments. The Subadviser is hereby authorized and directed
and hereby agrees, subject to the stated investment policies and
restrictions of each Fund as set forth in
1
<PAGE> 2
that Fund's prospectus and statement of additional information as
currently in effect and as supplemented or amended from time to time
(collectively referred to hereinafter as the "Prospectus") and subject to
the directions of the Adviser and the Trust's Board of Trustees, to
purchase, hold and sell investments for the Subadviser Assets ("Fund
Investments") and to monitor on a continuous basis the performance of such
Fund Investments. In providing these services, the Subadviser will conduct
a continual program of investment, evaluation and, if appropriate, sale
and reinvestment of the Fund's Subadviser Assets. The Adviser agrees to
provide the Subadviser with such assistance as may be reasonably requested
by the Subadviser in connection with its activities under this Agreement,
including, without limitation, information concerning each Fund, its funds
available, or to become available, for investment and generally as to the
conditions of the Fund's affairs.
(b) Compliance with Applicable Laws and Governing Documents. In the
performance of its duties and obligations under this Agreement, the
Subadviser shall act in conformity with the Trust's Declaration of Trust
and By-Laws and the Prospectus and with the instructions and directions
received in writing from the Adviser or the Trustees of the Trust and will
conform to and comply with the requirements of the 1940 Act, the Internal
Revenue Code of 1986, as amended (the "Code"), and all other applicable
federal and state laws and regulations. Notwithstanding the foregoing, the
Adviser shall remain responsible for ensuring the each Fund's overall
compliance with the 1940 Act, the Code and all other applicable federal
and state laws and regulations and the Subadviser is only obligated to
comply with this subsection (b) with respect to the Subadviser Assets.
The Adviser will provide the Subadviser with reasonable advance
notice of any change in the a Fund's investment objectives, policies and
restrictions as stated in the Prospectus, and the Subadviser shall, in the
performance of its duties and obligations under this Agreement, manage the
Fund Investments consistent with such changes, provided the Subadviser has
received prompt notice of the effectiveness of such changes from the Trust
or the Adviser. In addition to such notice, the Adviser shall provide to
the Subadviser a copy of a modified Prospectus reflecting such changes.
The Adviser acknowledges and agrees that the Prospectus will at all times
be in compliance with all disclosure requirements under all applicable
federal and state laws and regulations relating to the Trust or a Fund,
including, without limitation, the 1940 Act, and the rules and regulations
thereunder, and that the Subadviser shall have no liability in connection
therewith, except as to the accuracy of material information furnished by
the Subadviser to a Fund or to the Adviser specifically for inclusion in
the Prospectus. The Subadviser hereby agrees to provide to the Adviser in
a timely manner such information relating to the Subadviser and its
relationship to, and actions for, a Fund as may be required to be
contained in the Prospectus.
(c) Voting of Proxies. The Subadviser shall have the power to vote,
either in person or by proxy, all securities in which the Subadviser
Assets may be invested from time to time, and shall not be required to
seek or take instructions from, the Adviser or the Fund or take any action
with respect thereto. If both the Subadviser and another entity managing
2
<PAGE> 3
assets of a Fund have invested in the same security, the Subadviser and
such other entity will each have the power to vote its pro rata share of
the security.
(d) Agent. Subject to any other written instructions of the Adviser
or the Trust, the Subadviser is hereby appointed the Adviser's and the
Trust's agent and attorney-in-fact for the limited purposes of executing
account documentation, agreements, contracts and other documents as the
Subadviser shall be requested by brokers, dealers, counterparties and
other persons in connection with its management of the Subadviser Assets.
The Subadviser agrees to provide the Adviser and the Trust with copies of
any such agreements executed on behalf of the Adviser or the Trust.
(e) Brokerage. The Subadviser is authorized, subject to the
supervision of the Adviser and the Trust's Board of Trustees, to establish
and maintain accounts on behalf of the Fund with, and place orders for the
purchase and sale of the Subadviser Assets with or through, such persons,
brokers or dealers ("brokers") as Subadviser may elect and negotiate
commissions to be paid on such transactions. The Subadviser, however, is
not required to obtain the consent of the Adviser or the Trust's Board of
Trustees prior to establishing any such brokerage account. The Subadviser
shall place all orders for the purchase and sale of portfolio investments
for a Fund's account with brokers selected by the Subadviser. In the
selection of such brokers and the placing of such orders, the Subadviser
shall seek to obtain for the Fund the most favorable price and execution
available, except to the extent it may be permitted to pay higher
brokerage commissions for brokerage and research services, as provided
below. In using its reasonable efforts to obtain for a Fund the most
favorable price and execution available, the Subadviser, bearing in mind
such Fund's best interests at all times, shall consider all factors it
deems relevant, including price, the size of the transaction, the breadth
and nature of the market for the security, the difficulty of the
execution, the amount of the commission, if any, the timing of the
transaction, market prices and trends, the reputation, experience and
financial stability of the broker involved, and the quality of service
rendered by the broker in other transactions. Subject to such policies as
the Trustees may determine, or as may be mutually agreed to by the Adviser
and the Subadviser, the Subadviser shall not be deemed to have acted
unlawfully or to have breached any duty created by this Agreement or
otherwise solely by reason of its having caused a Fund to pay a broker
that provides brokerage and research services (within the meaning of
Section 29(e) of the Securities Exchange Act of 1934) to the Subadviser an
amount of commission for effecting a Fund investment transaction that is
in excess of the amount of commission that another broker would have
charged for effecting that transaction if, but only if, the Subadviser
determines in good faith that such commission was reasonable in relation
to the value of the brokerage and research services provided by such
broker or dealer viewed in terms of either that particular transaction or
the overall responsibility of the Subadviser with respect to the accounts
as to which it exercises investment discretion.
It is recognized that the services provided by such brokers may be
useful to the Subadviser in connection with the Subadviser's services to
other clients. On occasions when
3
<PAGE> 4
the Subadviser deems the purchase or sale of a security to be in the best
interests of a Fund as well as other clients of the Subadviser, the
Subadviser, to the extent permitted by applicable laws and regulations,
may, but shall be under no obligation to, aggregate the securities to be
sold or purchased in order to obtain the most favorable price or lower
brokerage commissions and efficient execution. In such event, allocation
of securities so sold or purchased, as well as the expenses incurred in
the transaction, will be made by the Subadviser in the manner the
Subadviser considers to be the most equitable and consistent with its
fiduciary obligations to the Fund and to such other clients. It is
recognized that in some cases, this procedure may adversely affect the
price paid or received by the Fund or the size of the position obtainable
for, or disposed of by, the Fund.
(f) Securities Transactions. The Subadviser and any affiliated
person of the Subadviser will not purchase securities or other instruments
from or sell securities or other instruments to a Fund; provided, however,
the Subadviser may purchase securities or other instruments from or sell
securities or other instruments a Fund if such transaction is permissible
under applicable laws and regulations, including, without limitation, the
1940 Act and the Advisers Act and the rules and regulations promulgated
thereunder.
The Subadviser, including its Access Persons (as defined in
subsection (e) of Rule 17j-1 under the 1940 Act), agrees to observe and
comply with Rule 17j-1 and its Code of Ethics (which shall comply in all
material respects with Rule 17j-1), as the same may be amended from time
to time. On a quarterly basis, the Subadviser will either (i) certify to
the Adviser that the Subadviser and its Access Persons have complied with
the Subadviser's Code of Ethics with respect to the Subadviser Assets or
(ii) identify any violations which have occurred with respect to the
Subadviser Assets.
(g) Books and Records. The Subadviser shall maintain separate
detailed records of all matters pertaining to the Subadviser Assets (the
"Fund's Records"), including, without limitation, brokerage and other
records of all securities transactions. The Subadviser acknowledges that
the Fund's Records are property of the Trust. The Fund's Records (relating
to the Subadviser Assets) shall be available to the Adviser at any time
upon reasonable request during normal business hours and shall be
available for telecopying without unreasonable delay to the Adviser during
any day that a Fund is open for business.
(h) Information Concerning Fund Investments and Subadviser. From
time to time as the Adviser or a Fund may request, the Subadviser will
furnish the requesting party reports on portfolio transactions and reports
on Fund Investments held in the portfolio, all in such detail as the
Adviser or each Fund may reasonably request. The Subadviser will also
inform the Adviser in a timely manner of material changes in portfolio
managers responsible for Subadviser Assets, any changes in the executive
officers of the Subadviser, or of material changes in the control of the
Subadviser. Upon reasonable request, the Subadviser will make available
its officers and employees to meet with the Trust's Board of Trustees to
review the Fund Investments.
4
<PAGE> 5
The Subadviser will also provide such information or perform such
additional acts as are customarily performed by a subadviser and may be
required for a Fund or the Adviser to comply with their respective
obligations under applicable laws, including, without limitation, the
Code, the 1940 Act, the Advisers Act, the Securities Act of 1933, as
amended (the "Securities Act") and any state securities laws, and any rule
or regulation thereunder.
(i) Custody Arrangements. The Subadviser shall on each business day
provide the Adviser and the Trust's custodian such information as the
Adviser and the Trust's custodian may reasonably request relating to all
transactions concerning the Fund Investments.
(j) Historical Performance Information. To the extent agreed upon by
the parties, the Subadviser will provide the Trust with historical
performance information on similarly managed investment companies or for
other accounts to be included in the Prospectus or for any other uses
permitted by applicable law.
3. Independent Contractor. In the performance of its duties hereunder, the
Subadviser is and shall be an independent contractor and unless otherwise
expressly provided herein or otherwise authorized in writing, shall have no
authority to act for or represent a Fund, the Trust or the Adviser in any way or
otherwise be deemed an agent of a Fund, the Trust or the Adviser.
4. Expenses. During the term of this Agreement, Subadviser will pay all
expenses incurred by it in connection with its activities under this Agreement
other than the cost of securities, commodities and other investments (including
brokerage commissions and other transaction charges, if any) purchased for a
Fund. The Subadviser shall, at its sole expense, employ or associate itself with
such persons as it believes to be particularly fitted to assist it in the
execution of its duties under this Agreement. The Subadviser shall not be
responsible for the Trust's, a Fund's or Adviser's expenses. The Trust or the
Adviser, as the case may be, shall reimburse the Subadviser for any expenses of
a Fund or the Adviser as may be reasonably incurred by such Subadviser on behalf
of such Fund or the Adviser. The Subadviser shall keep and supply to the Trust
and the Adviser reasonable records of all such expenses.
5. Compensation. For the services provided and the expenses assumed with
respect to the Fund pursuant to this Agreement, the Subadviser will be entitled
to the fee listed for each Fund on Exhibit A. Such fees will be computed daily
and payable no later than the seventh (7th) business day following the end of
each month, from the Adviser or the Trust, calculated at an annual rate based on
the Subadviser Assets' average daily net assets.
The method of determining net assets of a Fund for purposes hereof shall
be the same as the method of determining net assets for purposes of establishing
the offering and redemption price of the Shares as described in the Fund's
Prospectus. If this Agreement shall be effective for only a portion of a month,
the aforesaid fee shall be prorated for the portion of such month during which
this Agreement is in effect.
5
<PAGE> 6
6. Representations and Warranties of Subadviser. The Subadviser represents
and warrants to the Adviser and the Fund as follows:
(a) The Subadviser is registered as an investment adviser under the
Advisers Act;
(b) The Subadviser has filed a notice of exemption pursuant to Rule
4.14 under the Commodity Exchange Act (the "CEA") with the Commodity
Futures Trading Commission (the "CFTC") and the National Futures
Association ("NFA"), or is not required to file such exemption;
(c) The Subadviser is a corporation duly organized and validly
existing under the laws of the State of Wisconsin with the power to own
and possess its assets and carry on its business as it is now being
conducted;
(d) The execution, delivery and performance by the Subadviser of
this Agreement are within the Subadviser's powers and have been duly
authorized by all necessary corporate action, and no action by or in
respect of, or filing with, any governmental body, agency or official is
required on the part of the Subadviser for the execution, delivery and
performance by the Subadviser of this Agreement, and the execution,
delivery and performance by the Subadviser of this Agreement do not
contravene or constitute a default under (i) any provision of applicable
law, rule or regulation, (ii) the Subadviser's governing instruments, or
(iii) any agreement, judgment, injunction, order, decree or other
instrument binding upon the Subadviser;
(e) The Form ADV of the Subadviser previously provided to the
Adviser is a true and complete copy of the form as currently filed with
the SEC and the information contained therein is accurate and complete in
all material respects and does not omit to state any material fact
necessary in order to make the statements made, in light of the
circumstances under which they were made, not misleading.
7. Representations and Warranties of Adviser. The Adviser represents and
warrants to the Subadviser as follows:
(a) The Adviser is registered as an investment adviser under the
Advisers Act;
(b) The Adviser has filed a notice of exemption pursuant to Rule
4.14 under the CEA with the CFTC and the NFA or is not required to file
such exemption;
(c) The Adviser is a corporation duly organized and validly existing
under the laws of the State of Ohio with the power to own and possess its
assets and carry on its business as it is now being conducted;
6
<PAGE> 7
(d) The execution, delivery and performance by the Adviser of this
Agreement are within the Adviser's powers and have been duly authorized by
all necessary action on the part of its shareholders or directors, and no
action by or in respect of, or filing with, any governmental body, agency
or official is required on the part of the Adviser for the execution,
delivery and performance by the Adviser of this Agreement, and the
execution, delivery and performance by the Adviser of this Agreement do
not contravene or constitute a default under (i) any provision of
applicable law, rule or regulation, (ii) the Adviser's governing
instruments, or (iii) any agreement, judgment, injunction, order, decree
or other instrument binding upon the Adviser;
(e) The Form ADV of the Adviser previously provided to the
Subadviser is a true and complete copy of the form filed with the SEC and
the information contained therein is accurate and complete in all material
respects and does not omit to state any material fact necessary in order
to make the statements made, in light of the circumstances under which
they were made, not misleading;
(f) The Adviser acknowledges that it received a copy of the
Subadviser's Form ADV prior to the execution of this Agreement; and
(g) The Adviser and the Trust have duly entered into the Advisory
Agreement pursuant to which the Trust authorized the Adviser to enter into
this Agreement.
8. Representations and Warranties of the Trust. The Trust represents and
warrants to the Adviser and the Subadviser as follows:
(a) The Trust is a business trust duly organized and validly
existing under the laws of the Commonwealth of Massachusetts with the
power to own and possess its assets and carry on its business as it is now
being conducted;
(b) The Trust is registered as an investment company under the 1940
Act and each Fund's shares are registered under the Securities Act; and
(c) The execution, delivery and performance by the Trust of this
Agreement are within the Trust's powers and have been duly authorized by
all necessary action on the part of the Trust and its Board of Trustees,
and no action by or in respect of, or filing with, any governmental body,
agency or official is required on the part of the Trust for the execution,
delivery and performance by the Adviser of this Agreement, and the
execution, delivery and performance by the Trust of this Agreement do not
contravene or constitute a default under (i) any provision of applicable
law, rule or regulation, (ii) the Trust's governing instruments, or (iii)
any agreement, judgment, injunction, order, decree or other instrument
binding upon the Trust.
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<PAGE> 8
9. Survival of Representations and Warranties; Duty to Update Information.
All representations and warranties made by the Subadviser, the Adviser and the
Trust pursuant to Sections 6, 7 and 8, respectively, shall survive for the
duration of this Agreement and the parties hereto shall promptly notify each
other in writing upon becoming aware that any of the foregoing representations
and warranties are no longer true.
10. Liability and Indemnification.
(a) Liability. In the absence of wilful misfeasance, bad faith or
gross negligence on the part of the Subadviser or any investment adviser
to which the Subadviser delegates certain of its responsibilities
hereunder (each a "Sub-Subadviser"), or a reckless disregard of its duties
hereunder, the Subadviser, each of its affiliates, including any
Sub-Subadviser and all respective partners, officers, directors and
employees ("Affiliates") and each person, if any, who within the meaning
of the Securities Act controls the Subadviser ("Controlling Persons")
shall not be subject to any expenses or liability to the Adviser, the
Trust or the Fund or any of the Fund's shareholders. In the absence of
wilful misfeasance, bad faith or gross negligence on the part of the
Adviser or a reckless disregard of its duties hereunder, the Adviser, any
of its Affiliates and each of the Adviser's Controlling Persons, if any,
shall not be subject to any liability to the Subadviser, for any act or
omission in the case of, or connected with, rendering services hereunder
or for any losses that may be sustained in the purchase, holding or sale
of Fund Investments; provided, however, that nothing herein shall relieve
the Adviser and the Subadviser from any of their obligations under
applicable law, including, without limitation, the federal and state
securities laws and the CEA.
(b) Indemnification. The Subadviser shall indemnify the Adviser and
the Trust, and their respective Affiliates and Controlling Persons for any
liability and expenses, including reasonable attorneys' fees, which the
Adviser and the Trust and their respective Affiliates and Controlling
Persons may sustain as a result of the Subadviser's wilful misfeasance,
bad faith, gross negligence, reckless disregard of its duties hereunder or
violation of applicable law, including, without limitation, the federal
and state securities laws or the CEA. Notwithstanding any other provision
in this Agreement, the Subadviser will indemnify the Adviser and the
Trust, and their respective Affiliates and Controlling Persons for any
liability and expenses, including reasonable attorneys' fees, to which
they may be subjected as a result of their reliance upon and use of the
historical performance calculations provided by the Subadviser concerning
the Subadviser's composite account data or historical performance
information on similarly managed investment companies or accounts, except
that the Adviser and the Trust and their respective Affiliates and
Controlling Persons shall not be indemnified for a loss or expense
resulting from their negligence or willful misconduct in using such
information.
The Adviser shall indemnify the Subadviser, its Affiliates and its
Controlling Persons, for any liability and expenses, including reasonable
attorneys' fees, which may be sustained as a result of the Adviser's
wilful misfeasance, bad faith, gross negligence, reckless
8
<PAGE> 9
disregard of its duties hereunder or violation of applicable law,
including, without limitation, the federal and state securities laws or
the CEA.
11. Duration and Termination.
(a) Duration. Unless sooner terminated, this Agreement shall
continue until October 31, 1999, and thereafter shall continue
automatically for successive annual periods, provided such continuance is
specifically approved at least annually by the Trust's Board of Trustees
or vote of the lesser of (a) 67% of the shares of the Fund represented at
a meeting if holders of more than 50% of the outstanding shares of the
Fund are present in person or by proxy or (b) more than 50% of the
outstanding shares of the Fund; provided that in either event its
continuance also is approved by a majority of the Trust's Trustees who are
not "interested persons" (as defined in the 1940 Act) of any party to this
Agreement, by vote cast in person at a meeting called for the purpose of
voting on such approval.
(b) Termination. Notwithstanding whatever may be provided herein to
the contrary, this Agreement may be terminated at any time, without
payment of any penalty:
(i) By vote of a majority of the Trust's Board of Trustees, or
by vote of a majority of the outstanding voting securities of the
Fund, or by the Adviser, in each case, upon at least 60 days'
written notice to the Subadviser;
(ii) By any party hereto immediately upon written notice to
the other parties in the event of a breach of any provision of this
Agreement by either of the other parties; or
(iii) By the Subadviser upon at least 60 days' written notice
to the Adviser and the Trust.
This Agreement shall not be assigned (as such term is defined in the 1940
Act) and shall terminate automatically in the event of its assignment or
upon the termination of the Advisory Agreement.
12. Duties of the Adviser. The Adviser shall continue to have
responsibility for all services to be provided to the Fund pursuant to the
Advisory Agreement and shall oversee and review the Subadviser's performance of
its duties under this Agreement. Nothing contained in this Agreement shall
obligate the Adviser to provide any funding or other support for the purpose of
directly or indirectly promoting investments in the Fund.
13. Reference to Subadviser. Neither the Adviser nor any Affiliate or
agent of it shall make reference to or use the name of Subadviser or any of its
Affiliates, or any of their clients, except references concerning the identity
of and services provided by Subadviser and any Affiliates to the Fund, which
references shall not differ in substance from those included in the Fund's
9
<PAGE> 10
Prospectus and this Agreement, in any advertising or promotional materials
without the prior approval of Subadviser, which approval shall not be
unreasonably withheld or delayed. The Adviser hereby agrees to make all
reasonable efforts to cause the Fund and any Affiliate thereof to satisfy the
foregoing obligation.
14. Amendment. This Agreement may be amended by mutual consent of the
parties, provided that the terms of any material amendment shall be approved by:
a) the Trust's Board of Trustees or by a vote of a majority of the outstanding
voting securities of the Fund (as required by the 1940 Act) and b) the vote of a
majority of those Trustees of the Trust who are not "interested persons" of any
party to this Agreement cast in person at a meeting called for the purpose of
voting on such approval, if such approval is required by applicable law.
15. Confidentiality. Subject to the duties of the Adviser, the Fund and
the Subadviser to comply with applicable law, including any demand of any
regulatory or taxing authority having jurisdiction, the parties hereto shall
treat as confidential all information pertaining to the Fund and the actions of
the Subadviser, the Adviser and the Fund in respect thereof.
16. Notice. Any notice that is required to be given by the parties to each
other under the terms of this Agreement shall be in writing, delivered, or
mailed postpaid to the other parties, or transmitted by facsimile with
acknowledgment of receipt, to the parties at the following addresses or
facsimile numbers, which may from time to time be changed by the parties by
notice to the other party:
(a) If to the Subadviser:
Strong Capital Management, Inc.
100 Heritage Reserve
Menomonee Falls, WI 53051
Attention: Michael Reardon
Facsimile: 414-502-5616
With a copy to:
Attention: Thomas Lemke
Facsimile: 414-359-3948
(b) If to the Adviser:
Nationwide Advisory Services, Inc.
Three Nationwide Plaza, 26th Floor
Columbus, OH 43215
Attention: James F. Laird, Jr.
Facsimile: (614) 249-7424
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<PAGE> 11
(c) If to the Trust:
Nationwide Separate Account Trust
Three Nationwide Plaza, 26th Floor
Columbus, OH 43215
Attention: James F. Laird, Jr.
Facsimile: (614) 249-7424
16. Jurisdiction. This Agreement shall be governed by and construed to be
consistent with the Advisory Agreement and in accordance with substantive laws
of the Commonwealth of Massachusetts without reference to choice of law
principles thereof and in accordance with the 1940 Act. In the case of any
conflict, the 1940 Act shall control.
17. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, all of which shall
together constitute one and the same instrument.
18. Certain Definitions. For the purposes of this Agreement and except as
otherwise provided herein, "interested person," "affiliated person," and
"assignment" shall have their respective meanings as set forth in the 1940 Act,
subject, however, to such exemptions as may be granted by the SEC.
19. Captions. The captions herein are included for convenience of
reference only and shall be ignored in the construction or interpretation
hereof.
20. Severability. If any provision of this Agreement shall be held or made
invalid by a court decision or applicable law, the remainder of the Agreement
shall not be affected adversely and shall remain in full force and effect.
21. Nationwide Separate Account Trust and its Trustees. The terms
"Nationwide Separate Account Trust" and the "Trustees of Nationwide Separate
Account Trust" refer respectively to the Trust created and the Trustees, as
trustees but not individually or personally, acting from time to time under a
Declaration of Trust dated as of June 30, 1981, as has been or may be amended
from time to time, and to which reference is hereby made and a copy of which is
on file at the office of the Secretary of State of The Commonwealth of
Massachusetts and elsewhere as required by law, and to any and all amendments
thereto so filed or hereafter filed. The obligations of the Trust entered into
in the name or on behalf thereof by any of Nationwide Separate Account Trust's
Trustees, representatives, or agents are not made individually, but only in
their capacities with respect to Nationwide Separate Account Trust. Such
obligations are not binding upon any of the Trustees, shareholders, or
representatives of the Trust personally, but bind only the assets of the Trust.
All persons dealing with any series of Shares of the Trust must look solely to
the assets of the Trust belonging to such series for the enforcement of any
claims against the Trust.
11
<PAGE> 12
22. Clone Fund. Except for the restrictions necessary to comply with
Section 817(h) of the Internal Revenue Code of 1986, as amended, and Treasury
Regulations Section 1.817-5 (including any successor thereto, the "Tax
Restrictions"), the Adviser and Subadviser agree that the investment objectives
of the Nationwide Strategic Value Fund are identical to, and that investment
policies, restrictions and limitations of the Fund are no more restrictive or
limiting than, those contained in the current prospectus and statement of
additional information of the Strong Schafer Value Fund, Inc. (the "Value
Fund"), and that the investment objective of the Nationwide Strategic Growth
Fund is identical to, and that investments policies, restrictions and
limitations of the Fund are no more restrictive or limiting than, those
contained in the current prospectus and statement of additional information of
the Strong Growth Fund, a series of the Strong Equity Funds, Inc. (the "Growth
Fund")(the Value Fund and the Growth Fund hereinafter each referred to as a
"Strong Fund"). Except to the extent of the Tax Restrictions, to the extent
necessary to comply with any federal securities law requirements and to the
extent that the parties hereto may otherwise agree in writing, Adviser shall
take all steps reasonably necessary to cause each Fund to file such amendment,
supplements and stickers to its Prospectus, Statement of Additional Information
and other governing instruments and regulatory filings as are necessary to
ensure that the investment policies, restrictions and limitations applicable to
each Fund are at all times no more restrictive than those contained in the
prospectus and statement of additional information , as the same may be amended
or supplemented from time to time, of the applicable Strong Fund, provided that
the Subadviser shall have afforded the Adviser sufficient notice of such changes
to the Strong Fund so as to enable corresponding changes to be timely made with
regard to the Fund's investment objectives, policies, restrictions and
limitations. Adviser shall not permit the investment objective of a Fund to
change without the prior written consent of the Subadviser unless such change is
in response to a change made to the applicable Strong Fund and then, only to the
extent necessary to make the investment objective of a Fund substantially
identical to that of the applicable Strong Fund.
23. Appointment of Sub-Subadviser. To the extent permitted by the 1940
Act, Subadviser may appoint such Sub-Subadvisers to advise the Subadviser Assets
and to carry out Subadviser's obligations hereunder as Subadviser may deem
appropriate, provided that Subadviser shall remain liable pursuant to this
Agreement for the actions of said Sub-Subadvisers. Each Sub-Subadviser shall
have such investment discretion and shall make all determinations with respect
to the investment of the Subadviser Assets as shall be assigned to a
Sub-Subadviser. A Sub-Subadviser shall also make all determinations with respect
to the purchase and sale of portfolio securities for the Fund and shall take
such steps as may be necessary to implement its decisions. A Sub-Subadviser
shall have all rights, powers and obligations granted to or imposed on the
Subadviser to the extent that the Sub-Subadviser agrees to take on investment
management services for a Fund.
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<PAGE> 13
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
day and year first written above.
TRUST
NATIONWIDE SEPARATE ACCOUNT TRUST
By:__________________________________
Name:
Title:
ADVISER
NATIONWIDE ADVISORY SERVICES, INC.
By:__________________________________
Name:
Title:
SUBADVISER
STRONG CAPITAL MANAGEMENT, INC.
By:__________________________________
Name:
Title:
13
<PAGE> 14
EXHIBIT A
SUBADVISORY AGREEMENT
BETWEEN NATIONWIDE SEPARATE
ACCOUNT TRUST, NATIONWIDE ADVISORY
SERVICES, INC. and STRONG CAPITAL MANAGEMENT, INC.
Effective October 31, 1997
<TABLE>
<CAPTION>
Funds of the Trust Advisory Fees (applicable for each Fund)
- ------------------ ----------------------------------------
<S> <C>
Nationwide Strategic Growth Fund and 0.50% on Subadviser Assets
Nationwide Strategic Value Fund up to $500 million
0.45% for Subadviser Assets
of $500 million and more
</TABLE>
14
<PAGE> 1
EXHIBIT (5)(g)(iii)
SUBADVISORY AGREEMENT
THIS AGREEMENT is made and entered into on this 31st day of October, 1997,
among NATIONWIDE SEPARATE ACCOUNT TRUST, a Massachusetts business trust (the
"Trust"), NATIONWIDE ADVISORY SERVICES, INC. (the "Adviser"), an Ohio
corporation registered under the Investment Advisers Act of 1940 (the "Advisers
Act"), and Federated Investment Counseling, a Delaware business trust (the
"Subadviser"), also registered under the Advisers Act.
W I T N E S S E T H :
WHEREAS, the Trust is registered with the Securities and Exchange
Commission (the "SEC") as an open-end management investment company under the
Investment Company Act of 1940 (the "1940 Act");
WHEREAS, the Adviser has, pursuant to an Advisory Agreement with the Trust
dated as of October 31, 1997 (the "Advisory Agreement"), been retained to act as
investment adviser for certain of the series of the Trust which are listed on
Exhibit A to this Agreement (each a "Fund");
WHEREAS, the Advisory Agreement permits the Adviser to delegate certain of
its duties under the Advisory Agreement to other investment advisers, subject to
the requirements of the 1940 Act; and
WHEREAS, the Adviser desires to retain Subadviser to assist it in the
provision of a continuous investment program for that portion of each Fund's
assets which the Adviser will assign to the Subadviser (the "Subadviser
Assets"), and Subadviser is willing to render such services subject to the terms
and conditions set forth in this Agreement.
NOW, THEREFORE, the parties do mutually agree and promise as follows:
1. Appointment as Subadviser. The Adviser hereby retains the Subadviser to
act as investment adviser for and to manage the Subadviser Assets subject to the
supervision of the Adviser and the Board of Trustees of the Trust and subject to
the terms of this Agreement; and the Subadviser hereby accepts such employment.
In such capacity, the Subadviser shall be responsible for the investment
management of the Subadviser Assets. It is recognized that the Subadviser now
acts, and that from time to time hereafter may act, as investment adviser to one
or more other investment companies and to fiduciary or other managed accounts
and that the Adviser and the Trust have no objection to such activities.
2. Duties of Subadviser.
(a) Investments. The Subadviser is hereby authorized and directed
and hereby agrees, subject to the stated investment policies and
restrictions of each Fund as set forth in
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the Fund's prospectus and statement of additional information as currently
in effect and as supplemented or amended from time to time (collectively
referred to hereinafter as the "Prospectus") and subject to the directions
of the Adviser and the Trust's Board of Trustees, to purchase, hold and
sell investments for the Subadviser Assets ("Fund Investments") and to
monitor on a continuous basis the performance of such Fund Investments. In
providing these services, the Subadviser will conduct a continual program
of investment, evaluation and, if appropriate, sale and reinvestment of
the Subadviser Assets. The Adviser agrees to provide the Subadviser with
such assistance as may be reasonably requested by the Subadviser in
connection with its activities under this Agreement, including, without
limitation, information concerningeach Fund, its funds available, or to
become available, for investment and generally as to the conditions of the
Fund's affairs.
(b) Compliance with Applicable Laws and Governing Documents. In the
performance of its duties and obligations under this Agreement, the
Subadviser shall act in conformity with the Trust's Declaration of Trust
and By-Laws and the Prospectus and with the instructions and directions
received in writing from the Adviser or the Trustees of the Trust and will
conform to and comply with the requirements of the 1940 Act, the Internal
Revenue Code of 1986, as amended (the "Code"), and all other applicable
federal and state laws and regulations. Notwithstanding the foregoing, the
Adviser shall remain responsible for ensuring each Fund's overall
compliance with the 1940 Act, the Code and all other applicable federal
and state laws and regulations and the Subadviser is only obligated to
comply with this subsection (b) with respect to the Subadviser Assets.
The Adviser will provide the Subadviser with reasonable advance
notice of any change in a Fund's investment objectives, policies and
restrictions as stated in the Prospectus, and the Subadviser shall, in the
performance of its duties and obligations under this Agreement, manage the
Fund Investments consistent with such changes, provided the Subadviser has
received prompt notice of the effectiveness of such changes from the Trust
or the Adviser. In addition to such notice, the Adviser shall provide to
the Subadviser a copy of a modified Prospectus reflecting such changes.
The Adviser acknowledges and agrees that the Prospectus will at all times
be in compliance with all disclosure requirements under all applicable
federal and state laws and regulations relating to the Trust or a Fund,
including, without limitation, the 1940 Act, and the rules and regulations
thereunder, and that the Subadviser shall have no liability in connection
therewith, except as to the accuracy of material information furnished by
the Subadviser to a Fund or to the Adviser specifically for inclusion in
the Prospectus. The Subadviser hereby agrees to provide to the Adviser in
a timely manner such information relating to the Subadviser and its
relationship to, and actions for, a Fund as may be required to be
contained in the Prospectus.
(c) Voting of Proxies. The Subadviser shall have the power to vote,
either in person or by proxy, all securities in which the Subadviser
Assets may be invested from time to time, and shall not be required to
seek or take instructions from the Adviser or the Fund or take any action
with respect thereto. If both the Subadviser and another entity managing
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<PAGE> 3
assets of a Fund have invested in the same security, the Subadviser and
such other entity will each have the power to vote its pro rata share of
the security.
(d) Agent. Subject to any other written instructions of the Adviser
or the Trust, the Subadviser is hereby appointed the Adviser's and the
Trust's agent and attorney-in-fact for the limited purposes of executing
account documentation, agreements, contracts and other documents as the
Subadviser shall be requested by brokers, dealers, counterparties and
other persons in connection with its management of the Subadviser Assets.
The Subadviser agrees to provide the Adviser and the Trust with copies of
any such agreements executed on behalf of the Adviser or the Trust.
(e) Brokerage. The Subadviser is authorized, subject to the
supervision of the Adviser and the Trust's Board of Trustees, to establish
and maintain accounts on behalf of the Fund with, and place orders for the
purchase and sale of the Subadviser Assets with or through, such persons,
brokers or dealers ("brokers") as Subadviser may elect and negotiate
commissions to be paid on such transactions. The Subadviser, however, is
not required to obtain the consent of the Adviser or the Trust's Board of
Trustees prior to establishing any such brokerage account. The Subadviser
shall place all orders for the purchase and sale of portfolio investments
for a Fund's account with brokers selected by the Subadviser. In the
selection of such brokers and the placing of such orders, the Subadviser
shall seek to obtain for the Fund the most favorable price and execution
available, except to the extent it may be permitted to pay higher
brokerage commissions for brokerage and research services, as provided
below. In using its reasonable efforts to obtain for a Fund the most
favorable price and execution available, the Subadviser, bearing in mind
such Fund's best interests at all times, shall consider all factors it
deems relevant, including price, the size of the transaction, the breadth
and nature of the market for the security, the difficulty of the
execution, the amount of the commission, if any, the timing of the
transaction, market prices and trends, the reputation, experience and
financial stability of the broker involved, and the quality of service
rendered by the broker in other transactions. Subject to such policies as
the Trustees may determine, or as may be mutually agreed to by the Adviser
and the Subadviser, the Subadviser shall not be deemed to have acted
unlawfully or to have breached any duty created by this Agreement or
otherwise solely by reason of its having caused a Fund to pay a broker
that provides brokerage and research services (within the meaning of
Section 29(e) of the Securities Exchange Act of 1934) to the Subadviser an
amount of commission for effecting a Fund investment transaction that is
in excess of the amount of commission that another broker would have
charged for effecting that transaction if, but only if, the Subadviser
determines in good faith that such commission was reasonable in relation
to the value of the brokerage and research services provided by such
broker or dealer viewed in terms of either that particular transaction or
the overall responsibility of the Subadviser with respect to the accounts
as to which it exercises investment discretion.
It is recognized that the services provided by such brokers may be
useful to the Subadviser in connection with the Subadviser's services to
other clients. On occasions when
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<PAGE> 4
the Subadviser deems the purchase or sale of a security to be in the best
interests of a Fund as well as other clients of the Subadviser, the
Subadviser, to the extent permitted by applicable laws and regulations,
may, but shall be under no obligation to, aggregate the securities to be
sold or purchased in order to obtain the most favorable price or lower
brokerage commissions and efficient execution. In such event, allocation
of securities so sold or purchased, as well as the expenses incurred in
the transaction, will be made by the Subadviser in the manner the
Subadviser considers to be the most equitable and consistent with its
fiduciary obligations to the Fund and to such other clients. It is
recognized that in some cases, this procedure may adversely affect the
price paid or received by the Fund or the size of the position obtainable
for, or disposed of by, the Fund.
(f) Securities Transactions. The Subadviser and any affiliated
person of the Subadviser will not purchase securities or other instruments
from or sell securities or other instruments to a Fund; provided, however,
the Subadviser may purchase securities or other instruments from or sell
securities or other instruments to a Fund if such transaction is
permissible under applicable laws and regulations, including, without
limitation, the 1940 Act and the Advisers Act and the rules and
regulations promulgated thereunder.
The Subadviser, including its Access Persons (as defined in
subsection (e) of Rule 17j-1 under the 1940 Act), agrees to observe and
comply with Rule 17j-1 and its Code of Ethics (which shall comply in all
material respects with Rule 17j-1), as the same may be amended from time
to time. On a quarterly basis, the Subadviser will either (i) certify to
the Adviser that the Subadviser and its Access Persons have complied with
the Subadviser's Code of Ethics with respect to the Subadviser Assets or
(ii) identify any violations which have occurred with respect to the
Subadviser Assets.
(g) Books and Records. The Subadviser shall maintain separate
detailed records of all matters pertaining to management of the Trust (the
"Subadviser's Records") including, without limitation, brokerage and other
records of all securities transactions. The Subadviser acknowledges that
the Subadviser's Records are property of the Trust. The Subadviser's
Records shall be available to the Adviser at any time upon reasonable
request during normal business hours and shall be available for
telecopying without delay to the Adviser during any day that the Fund is
open for business. The Subadviser shall not be responsible for the
provision of administrative, bookkeeping or accounting services to the
Trust. The Adviser hereby acknowledges that the Subadviser is not
responsible for pricing portfolio securities, and that the Adviser, the
Trust and the Subadviser will generally rely on the pricing agent chosen
by the Board of Trustees for the prices of securities; provided, however,
that to the extent that such pricing agents are unable to provide prices
for certain securities, the Subadviser will assist the Adviser in
obtaining a price for such securities.
(h) Information Concerning Fund Investments and Subadviser. From
time to time as the Adviser or a Fund may request, the Subadviser will
furnish the requesting party reports on portfolio transactions and reports
on Fund Investments held in the portfolio, all in such
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<PAGE> 5
detail as the Adviser or a Fund may reasonably request. The Subadviser
will also inform the Adviser in a timely manner of material changes in
portfolio managers responsible for Subadviser Assets, any changes in the
ownership or management of the Subadviser, or of material changes in the
control of the Subadviser. Upon reasonable request, the Subadviser will
make available its officers and employees to meet with the Trust's Board
of Trustees to review the Fund Investments.
The Subadviser will maintain compliance procedures for each Fund
that it believes is adequate to ensure each Fund's compliance, and will
provide such information as may be required for a Fund or the Adviser to
comply with their respective obligations, under applicable laws,
including, without limitation, the Code, the 1940 Act, the Advisers Act,
the Securities Act of 1933, as amended (the "Securities Act") and any
state securities laws, and any rule or regulation thereunder.
(i) Custody Arrangements. The Subadviser shall on each business day
provide the Adviser and the Trust's custodian such information as the
Adviser and the Trust's custodian may reasonably request in such form as
may be mutually agreed upon relating to all transactions concerning the
Fund Investments.
(j) Historical Performance Information. To the extent agreed upon by
the parties, the Subadviser will provide the Trust with historical
performance information on similarly managed investment companies or for
other accounts to be included in the Prospectus or for any other uses
permitted by applicable law.
3. Independent Contractor. In the performance of its duties hereunder, the
Subadviser is and shall be an independent contractor and unless otherwise
expressly provided herein or otherwise authorized in writing, shall have no
authority to act for or represent a Fund, the Trust or the Adviser in any way or
otherwise be deemed an agent of a Fund, the Trust or the Adviser.
4. Expenses. During the term of this Agreement, Subadviser will pay all
expenses incurred by it in connection with its activities under this Agreement
other than the cost of securities, commodities and other investments (including
brokerage commissions and other transaction charges, if any) purchased for a
Fund. The Subadviser shall, at its sole expense, employ or associate itself with
such persons as it believes to be particularly fitted to assist it in the
execution of its duties under this Agreement. The Subadviser shall not be
responsible for the Trust's, a Fund's or Adviser's expenses, including any
extraordinary and non-recurring expenses. The Trust or the Adviser, as the case
may be, shall reimburse the Subadviser for any expenses of a Fund or the Adviser
as may be reasonably incurred by such Subadviser on behalf of such Fund or the
Adviser, including any extraordinary and non-recurring expenses. The Subadviser
shall keep and supply to the Trust and the Adviser reasonable records of all
such expenses.
5. Compensation. For the services provided and the expenses assumed with
respect to the Fund pursuant to this Agreement, the Subadviser will be entitled
to the fee listed for each Fund
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<PAGE> 6
on Exhibit A. Such fees will be computed daily and payable no later than the
seventh (7th) business day following the end of each month, from the Adviser or
the Trust, calculated at an annual rate based on the Subadviser Assets' average
daily net assets.
The method of determining net assets of the Fund for purposes hereof shall
be the same as the method of determining net assets for purposes of establishing
the offering and redemption price of the Shares as described in the Fund's
Prospectus. If this Agreement shall be effective for only a portion of a month,
the aforesaid fee shall be prorated for the portion of such month during which
this Agreement is in effect.
6. Representations and Warranties of Subadviser. The Subadviser represents
and warrants to the Adviser and the Fund as follows:
(a) The Subadviser is registered as an investment adviser under the
Advisers Act;
(b) The Subadviser has filed a notice of exemption pursuant to Rule
4.14 under the Commodity Exchange Act (the "CEA") with the Commodity
Futures Trading Commission (the "CFTC") and the National Futures
Association ("NFA"), or is not required to file such exemption;
(c) The Subadviser is a Delaware business trust, duly organized and
validly existing under the laws of the State of Delaware with the power to
own and possess its assets and carry on its business as it is now being
conducted;
(d) The execution, delivery and performance by the Subadviser of
this Agreement are within the Subadviser's powers and have been duly
authorized by all necessary action on the part of its Board of Trustees,
and no action by or in respect of, or filing with, any governmental body,
agency or official is required on the part of the Subadviser for the
execution, delivery and performance by the Subadviser of this Agreement,
and the execution, delivery and performance by the Subadviser of this
Agreement do not contravene or constitute a default under (i) any
provision of applicable law, rule or regulation, (ii) the Subadviser's
governing instruments, or (iii) any agreement, judgment, injunction,
order, decree or other instrument binding upon the Subadviser;
(e) The Form ADV of the Subadviser previously provided to the
Adviser is a true and complete copy of the form as currently filed with
the SEC and the information contained therein is accurate and complete in
all material respects and does not omit to state any material fact
necessary in order to make the statements made, in light of the
circumstances under which they were made, not misleading.
7. Representations and Warranties of Adviser. The Adviser represents and
warrants to the Subadviser as follows:
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<PAGE> 7
(a) The Adviser is registered as an investment adviser under the
Advisers Act;
(b) The Adviser has filed a notice of exemption pursuant to Rule
4.14 under the CEA with the CFTC and the NFA or is not required to file
such exemption;
(c) The Adviser is a corporation duly organized and validly existing
under the laws of the State of Ohio with the power to own and possess its
assets and carry on its business as it is now being conducted;
(d) The execution, delivery and performance by the Adviser of this
Agreement are within the Adviser's powers and have been duly authorized by
all necessary action on the part of its shareholders or directors, and no
action by or in respect of, or filing with, any governmental body, agency
or official is required on the part of the Adviser for the execution,
delivery and performance by the Adviser of this Agreement, and the
execution, delivery and performance by the Adviser of this Agreement do
not contravene or constitute a default under (i) any provision of
applicable law, rule or regulation, (ii) the Adviser's governing
instruments, or (iii) any agreement, judgment, injunction, order, decree
or other instrument binding upon the Adviser;
(e) The Form ADV of the Adviser previously provided to the
Subadviser is a true and complete copy of the form filed with the SEC and
the information contained therein is accurate and complete in all material
respects and does not omit to state any material fact necessary in order
to make the statements made, in light of the circumstances under which
they were made, not misleading;
(f) The Adviser acknowledges that it received a copy of the
Subadviser's Form ADV prior to the execution of this Agreement; and
(g) The Adviser and the Trust have duly entered into the Advisory
Agreement pursuant to which the Trust authorized the Adviser to enter into
this Agreement.
8. Representations and Warranties of the Trust. The Trust represents and
warrants to the Adviser and the Subadviser as follows:
(a) The Trust is a business trust duly organized and validly
existing under the laws of the Commonwealth of Massachusetts with the
power to own and possess its assets and carry on its business as it is now
being conducted;
(b) The Trust is registered as an investment company under the 1940
Act and the Fund's shares are registered under the Securities Act; and
(c) The execution, delivery and performance by the Trust of this
Agreement are within the Trust's powers and have been duly authorized by
all necessary action on the part
7
<PAGE> 8
of the Trust and its Board of Trustees, and no action by or in respect of,
or filing with, any governmental body, agency or official is required on
the part of the Trust for the execution, delivery and performance by the
Adviser of this Agreement, and the execution, delivery and performance by
the Trust of this Agreement do not contravene or constitute a default
under (i) any provision of applicable law, rule or regulation, (ii) the
Trust's governing instruments, or (iii) any agreement, judgment,
injunction, order, decree or other instrument binding upon the Trust.
9. Survival of Representations and Warranties; Duty to Update Information.
All representations and warranties made by the Subadviser, the Adviser and the
Trust pursuant to Sections 6, 7 and 8, respectively, shall survive for the
duration of this Agreement and the parties hereto shall promptly notify each
other in writing upon becoming aware that any of the foregoing representations
and warranties are no longer true.
10. Liability and Indemnification.
(a) Liability. In the absence of wilful misfeasance, bad faith or
gross negligence on the part of the Subadviser or a reckless disregard of
its duties hereunder, the Subadviser, each of its affiliates and all
respective partners, officers, directors and employees ("Affiliates") and
each person, if any, who within the meaning of the Securities Act controls
the Subadviser ("Controlling Persons") shall not be subject to any
expenses or liability to the Adviser, the Trust or a Fund or any of a
Fund's shareholders. In the absence of wilful misfeasance, bad faith or
gross negligence on the part of the Adviser or a reckless disregard of its
duties hereunder, the Adviser, any of its Affiliates and each of the
Adviser's Controlling Persons, if any, shall not be subject to any
liability to the Subadviser, for any act or omission in the case of, or
connected with, rendering services hereunder or for any losses that may be
sustained in the purchase, holding or sale of Fund Investments; provided,
however, that nothing herein shall relieve the Adviser and the Subadviser
from any of their obligations under applicable law, including, without
limitation, the federal and state securities laws and the CEA.
(b) Indemnification. The Subadviser shall indemnify the Adviser and
the Trust, and their respective Affiliates and Controlling Persons for any
liability and expenses, including reasonable attorneys' fees, which the
Adviser and the Trust and their respective Affiliates and Controlling
Persons may sustain as a result of the Subadviser's wilful misfeasance,
bad faith, gross negligence, reckless disregard of its duties hereunder or
violation of applicable law, including, without limitation, the federal
and state securities laws or the CEA. Notwithstanding any other provision
in this Agreement, the Subadviser will indemnify the Adviser and the
Trust, and their respective Affiliates and Controlling Persons for any
liability and expenses, including reasonable attorneys' fees, to which
they may be subjected as a result of the Subadviser providing inaccurate
historical performance calculationsconcerning the Subadviser's composite
account data or historical performance information on similarly managed
investment companies or accounts, except that the Adviser
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<PAGE> 9
and the Trust and their respective Affiliates and Controlling Persons
shall not be indemnified for any liability or expense resulting from their
negligence or willful misconduct in using such information.
The Adviser shall indemnify the Subadviser, its Affiliates and its
Controlling Persons, for any liability and expenses, including reasonable
attorneys' fees, which may be sustained as a result of the Adviser's
wilful misfeasance, bad faith, gross negligence, reckless disregard of its
duties hereunder or violation of applicable law, including, without
limitation, the federal and state securities laws or the CEA.
11. Duration and Termination.
(a) Duration. Unless sooner terminated, this Agreement shall
continue October 31, 1999, and thereafter shall continue automatically for
successive annual periods, provided such continuance is specifically
approved at least annually by the Trust's Board of Trustees or vote of the
lesser of (a) 67% of the shares of a Fund represented at a meeting if
holders of more than 50% of the outstanding shares of a Fund are present
in person or by proxy or (b) more than 50% of the outstanding shares of a
Fund; provided that in either event its continuance also is approved by a
majority of the Trust's Trustees who are not "interested persons" (as
defined in the 1940 Act) of any party to this Agreement, by vote cast in
person at a meeting called for the purpose of voting on such approval.
(b) Termination. Notwithstanding whatever may be provided herein to
the contrary, this Agreement may be terminated at any time, without
payment of any penalty:
(i) By vote of a majority of the Trust's Board of Trustees, or
by vote of a majority of the outstanding voting securities of the
Fund, or by the Adviser, in each case, upon at least 60 days'
written notice to the Subadviser;
(ii) By any party hereto immediately upon written notice to
the other parties in the event of a breach of any provision of this
Agreement by either of the other parties; or
(iii) By the Subadviser upon at least 60 days' written notice
to the Adviser and the Trust.
This Agreement shall not be assigned (as such term is defined in the 1940
Act) and shall terminate automatically in the event of its assignment or
upon the termination of the Advisory Agreement.
12. Duties of the Adviser. The Adviser shall continue to have
responsibility for all services to be provided to the Fund pursuant to the
Advisory Agreement and shall oversee and review the Subadviser's performance of
its duties under this Agreement. Nothing contained in this
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<PAGE> 10
Agreement shall obligate the Adviser to provide any funding or other support for
the purpose of directly or indirectly promoting investments in each Fund.
13. Reference to Subadviser. Neither the Adviser nor any Affiliate or
agent of it shall make reference to or use the name of Subadviser or any of its
Affiliates, or any of their clients, except references concerning the identity
of and services provided by Subadviser to a Fund, which references shall not
differ in substance from those included in the Fund's Prospectus and this
Agreement, in any advertising or promotional materials without the prior
approval of Subadviser, which approval shall not be unreasonably withheld or
delayed. The Adviser hereby agrees to make all reasonable efforts to cause the
Fund and any Affiliate thereof to satisfy the foregoing obligation.
14. Amendment. This Agreement may be amended by mutual consent of the
parties, provided that the terms of any material amendment shall be approved by:
a) the Trust's Board of Trustees or by a vote of a majority of the outstanding
voting securities of the Fund (as required by the 1940 Act) and b) the vote of a
majority of those Trustees of the Trust who are not "interested persons" of any
party to this Agreement cast in person at a meeting called for the purpose of
voting on such approval, if such approval is required by applicable law.
15. Confidentiality. Subject to the duties of the Adviser, the Funds and
the Subadviser to comply with applicable law, including any demand of any
regulatory or taxing authority having jurisdiction, the parties hereto shall
treat as confidential all information pertaining to the Funds and the actions of
the Subadviser, the Adviser and the Funds in respect thereof.
16. Notice. Any notice that is required to be given by the parties to each
other under the terms of this Agreement shall be in writing, delivered, or
mailed postpaid to the other parties, or transmitted by facsimile with
acknowledgment of receipt, to the parties at the following addresses or
facsimile numbers, which may from time to time be changed by the parties by
notice to the other party:
(a) If to the Subadviser:
Federated Investment Counseling
Federated Investors Tower
Pittsburgh, PA 15222-3779
Attention: _________________
Facsimile: _________________
(b) If to the Adviser:
Nationwide Advisory Services, Inc.
Three Nationwide Plaza, 26th Floor
Columbus, OH 43215
Attention: James F. Laird, Jr.
Facsimile: (614) 249-7424
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(c) If to the Trust:
Nationwide Separate Account Trust
Three Nationwide Plaza, 26th Floor
Columbus, OH 43215
Attention: James F. Laird, Jr.
Facsimile: (614) 249-7424
16. Jurisdiction. This Agreement shall be governed by and construed to be
consistent with the Advisory Agreement and in accordance with substantive laws
of the Commonwealth of Massachusetts without reference to choice of law
principles thereof and in accordance with the 1940 Act. In the case of any
conflict, the 1940 Act shall control.
17. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, all of which shall
together constitute one and the same instrument.
18. Certain Definitions. For the purposes of this Agreement and except as
otherwise provided herein, "interested person," "affiliated person," and
"assignment" shall have their respective meanings as set forth in the 1940 Act,
subject, however, to such exemptions as may be granted by the SEC.
19. Captions. The captions herein are included for convenience of
reference only and shall be ignored in the construction or interpretation
hereof.
20. Severability. If any provision of this Agreement shall be held or made
invalid by a court decision or applicable law, the remainder of the Agreement
shall not be affected adversely and shall remain in full force and effect.
21. Nationwide Separate Account Trust and its Trustees. The terms
"Nationwide Separate Account Trust" and the "Trustees of Nationwide Separate
Account Trust" refer respectively to the Trust created and the Trustees, as
trustees but not individually or personally, acting from time to time under a
Declaration of Trust dated as of June 30, 1981, as has been or may be amended
from time to time, and to which reference is hereby made and a copy of which is
on file at the office of the Secretary of State of The Commonwealth of
Massachusetts and elsewhere as required by law, and to any and all amendments
thereto so filed or hereafter filed. The obligations of the Trust entered into
in the name or on behalf thereof by any of Nationwide Separate Account Trust's
Trustees, representatives, or agents are not made individually, but only in
their capacities with respect to Nationwide Separate Account Trust. Such
obligations are not binding upon any of the Trustees, shareholders, or
representatives of the Trust personally, but bind only the assets of the Trust.
All persons dealing with any series of Shares of the Trust must look solely to
the assets of the Trust belonging to such series for the enforcement of any
claims against the Trust.
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22. Federated Investment Counseling. The Trust and the Adviser are hereby
expressly put on notice of the limitation of liability as set forth in the
Declaration of Trust of the Subadviser and agree that the obligations assumed by
the Subadviser pursuant to this Subadvisory Agreement will be limited in any
case to the Subadviser and its assets and the Adviser and the Trust shall not
seek satisfaction of any such obligations from the shareholders of the
Subadviser, the trustees of the Subadviser, officers, employees or agents of the
Subadviser, or any of them.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
day and year first written above.
TRUST
NATIONWIDE SEPARATE ACCOUNT TRUST
By:__________________________________
Name:
Title:
ADVISER
NATIONWIDE ADVISORY SERVICES, INC.
By:__________________________________
Name:
Title:
SUBADVISER
FEDERATED INVESTMENT COUNSELING
By:__________________________________
Name:
Title:
12
<PAGE> 13
EXHIBIT A
SUBADVISORY AGREEMENT
BETWEEN NATIONWIDE SEPARATE
ACCOUNT TRUST, NATIONWIDE ADVISORY
SERVICES, INC. and FEDERATED INVESTMENT COUNSELING
Effective October 31, 1997
<TABLE>
<CAPTION>
Funds of the Trust Advisory Fees (Applicable for each Fund)
- ------------------ ----------------------------------------
<S> <C>
Nationwide High Income Bond 0.40% on Subadviser Assets up to $50 million
Fund and Nationwide Equity
Income Fund 0.25% on Subadviser Assets of $50 million
and more but less than $250 million
0.20% on Subadviser Assets of $250 million
and more but less than $500 million
0.15% for Subadviser Assets of $500 million
and more
</TABLE>
13
<PAGE> 1
EXHIBIT (5)(g)(iv)
SUBADVISORY AGREEMENT
THIS AGREEMENT is made and entered into on this 31st day of October, 1997,
among NATIONWIDE SEPARATE ACCOUNT TRUST, a Massachusetts business trust (the
"Trust"),NATIONWIDE ADVISORY SERVICES, INC. (the "Adviser"), an Ohio corporation
registered under the Investment Advisers Act of 1940 (the "Advisers Act"), and
THE DREYFUS CORPORATION, a New York corporation (the "Subadviser"), also
registered under the Advisers Act.
WITNESSETH:
WHEREAS, the Trust is registered with the Securities and Exchange
Commission (the "SEC") as an open-end management investment company under the
Investment Company Act of 1940 (the "1940 Act");
WHEREAS, the Adviser has, pursuant to an Advisory Agreement with the Trust
dated as of October 31, 1997 (the "Advisory Agreement"), been retained to act as
investment adviser for certain of the series of the Trust which are listed on
Exhibit A to this Agreement (each, a "Fund").
WHEREAS, the Advisory Agreement permits the Adviser to delegate certain of
its duties under the Advisory Agreement to other investment advisers, subject to
the requirements of the 1940 Act; and
WHEREAS, the Adviser desires to retain Subadviser to assist it in the
provision of a continuous investment program for that portion of the Fund's
assets which the Adviser will assign to the Subadviser (the "Subadviser
Assets"), and Subadviser is willing to render such services subject to the terms
and conditions set forth in this Agreement.
NOW, THEREFORE, the parties do mutually agree and promise as follows:
1. Appointment as Subadviser. The Adviser hereby retains the Subadviser to
act as investment adviser for and to manage the Subadviser Assets subject to the
supervision of the Adviser and the Board of Trustees of the Trust and subject to
the terms of this Agreement; and the Subadviser hereby accepts such employment.
In such capacity, the Subadviser shall be responsible for the investment
management of the Subadviser Assets. It is recognized that the Subadviser now
acts, and that from time to time hereafter may act, as investment adviser to one
or more other investment companies and to fiduciary or other managed accounts
and that the Adviser and the Trust have no objection to such activities.
2. Duties of Subadviser.
(a) Investments. The Subadviser is hereby authorized and directed
and hereby agrees, subject to the stated investment policies and
restrictions of the Fund as set forth in the Fund's prospectus and
statement of additional information as currently in effect and as
supplemented or amended from time to time (collectively referred to
hereinafter as the "Prospectus") and subject to the directions of the
Adviser and the Fund's Board of Trustees, to purchase, hold and sell
investments for the Subadviser Assets and to monitor on a continuous basis
the performance of such Fund Investments. In providing these services, the
Subadviser will conduct a continual program of investment, evaluation and,
if appropriate,
1
<PAGE> 2
sale and reinvestment of the Subadviser Assets. The Adviser agrees to
provide the Subadviser with such assistance as may be reasonably requested
by the Subadviser in connection with its activities under this Agreement,
including, without limitation, information concerning the Fund, its funds
available, or to become available, for investment and generally as to the
conditions of the Fund's affairs.
(b) Compliance with Applicable Laws and Governing Documents. In the
performance of its duties and obligations under this Agreement, the
Subadviser shall act in conformity with the Trust's Declaration of Trust
and By-Laws and the Prospectus and with the instructions and directions
received in writing from the Adviser or the Trustees of the Trust and will
conform to and comply with the requirements of the 1940 Act, the Internal
Revenue Code of 1986, as amended (the "Code") (including the requirements
for qualification as a regulated investment company), and all other
applicable federal and state laws and regulations. Notwithstanding the
foregoing, the Adviser shall remain responsible for ensuring the Fund's
overall compliance with the 1940 Act, the Code and all other applicable
federal and state laws and regulations and the Subadviser is only
obligated to comply with this subsection (b) with respect to the
Subadviser Assets.
The Adviser will provide the Subadviser with reasonable advance
notice of any change in the Fund's investment objectives, policies and
restrictions as stated in the Prospectus, and the Subadviser shall, in the
performance of its duties and obligations under this Agreement, manage the
Fund Investments consistent with such changes, provided the Subadviser has
received notice of the effectiveness of such changes from the Trust or the
Adviser. For purposes of this subsection, receipt of a modified Prospectus
by the Subadviser shall constitute notice of the effectiveness of such
changes. The Adviser acknowledges and agrees that the Prospectus will at
all times be in compliance with all disclosure requirements under all
applicable federal and state laws and regulations relating to the Trust or
the Fund, including, without limitation, the 1940 Act, and the rules and
regulations thereunder, and that the Subadviser shall have no liability in
connection therewith, except as to the accuracy of material information
furnished by the Subadviser to the Fund or to the Adviser specifically for
inclusion in the Prospectus. The Subadviser hereby agrees to provide to
the Adviser in a timely manner such information relating to the Subadviser
and its relationship to, and actions for, the Fund as may be required to
be contained in the Prospectus.
(c) Voting of Proxies. The Subadviser shall have the power to vote,
either in person or by proxy, all securities in which the Subadviser
Assets may be invested from time to time, and shall not be required to
seek or take instructions from the Adviser or the Fund or take any action
with respect thereto. If both the Subadviser and another entity managing
assets of the Fund have invested in the same security, the Subadviser and
such other entity will each have the power to vote its pro rata share of
the security.
(d) Agent. Subject to any other written instructions of the Adviser
or the Trust, the Subadviser is hereby appointed the Adviser's and the
Trust's agent and attorney-in-fact for the limited purposes of executing
account documentation, agreements, contracts and other documents as the
Subadviser shall be requested by brokers, dealers, counterparties and
other persons in connection with its management of the Subadviser Assets.
The Subadviser agrees to provide the Adviser and the Trust with copies of
any such agreements executed on behalf of the Adviser or the Trust.
(e) Brokerage. The Subadviser is authorized, subject to the
supervision of the Adviser and the Trust's Board of Trustees, to establish
and maintain accounts on behalf of the Fund with, and place orders for the
purchase and sale of the Subadviser Assets with or through, such persons,
brokers or dealers ("brokers") as Subadviser may elect and negotiate
2
<PAGE> 3
commissions to be paid on such transactions. The Subadviser shall place
all orders for the purchase and sale of Fund Investments for the Fund's
account with brokers selected by the Subadviser. In the selection of such
brokers and the placing of such orders, the Subadviser shall seek to
obtain for the Fund, in its opinion, the most favorable price and
execution available, except to the extent it may be permitted to pay
higher brokerage commissions for brokerage and research services, as
provided below. In using its reasonable efforts to obtain for the Fund the
most favorable price and execution available, the Subadviser, bearing in
mind the Fund's best interests at all times, shall consider all factors it
deems relevant, including price, the size of the transaction, the nature
of the market for the security, the amount of the commission, if any, the
timing of the transaction, market prices and trends, the reputation,
experience and financial stability of the broker involved, and the quality
of service rendered by the broker or dealer in other transactions. Subject
to such policies as the Trustees may determine, or as may be mutually
agreed to by the Adviser and the Subadviser, the Subadviser shall not be
deemed to have acted unlawfully or to have breached any duty created by
this Agreement or otherwise solely by reason of its having caused the Fund
to pay a broker that provides brokerage and research services to the
Subadviser an amount of commission for effecting a Fund investment
transaction that is in excess of the amount of commission that another
broker would have charged for effecting that transaction.
It is recognized that the services provided by such brokers may be
useful to the Subadviser in connection with the Subadviser's services to
other clients. On occasions when the Subadviser deems the purchase or sale
of a security to be in the best interests of the Fund as well as other
clients of the Subadviser, the Subadviser, to the extent permitted by
applicable laws and regulations, may, but shall be under no obligation to,
aggregate the securities to be sold or purchased in order to obtain the
most favorable price or lower brokerage commissions and efficient
execution. In such event allocation of securities so sold or purchased, as
well as the expenses incurred in the transaction, will be made by the
Subadviser in the manner the Subadviser considers to be the most equitable
and consistent with its fiduciary obligations to the Fund and to such
other clients. It is recognized that in some cases, this procedure may
adversely affect the price paid or received by the Fund or the size of the
position obtainable for, or disposed of by, the Fund.
(f) Securities Transactions. The Subadviser and any affiliated
person of the Subadviser will not purchase securities or other instruments
from or sell securities or other instruments to the Fund; provided,
however, the Subadviser and any affiliated person of the Subadviser may
purchase securities or other instruments from or sell securities or other
instruments to the Fund if such transaction is permissible under
applicable laws and regulations, including, without limitation, the 1940
Act and the Advisers Act and the rules and regulations promulgated
thereunder.
The Subadviser, including its Access Persons (as defined in
subsection (e) of Rule 17j-1 under the 1940 Act), agrees to observe and
comply with Rule 17j-1 and the Subadviser's Code of Ethics (which shall
comply in all material respects with Rule 17j-1), as the same may be
amended from time to time. On a quarterly basis, the Subadviser will
either (i) certify to the Adviser that, to the best of its knowledge at
that time, the Subadviser and its Access Persons have complied with the
Subadviser's Code of Ethics with respect to the Subadviser Assets or (ii)
identify any material violations which have occurred with respect to the
Subadviser Assets.
(g) Books and Records. Pursuant to the 1940 Act and the rules and
regulations promulgated thereunder, the Subadviser shall maintain separate
books and detailed records of all matters pertaining to the Subadviser
Assets (the "Fund's Books and Records"), including, without limitation, a
daily ledger of such assets and liabilities relating thereto and
3
<PAGE> 4
brokerage and other records of all securities transactions. The Fund's
Books and Records (relating to the Subadviser Assets) shall be available
to the Adviser at any time upon request and shall be available for
telecopying without delay to the Adviser during any day that the Fund is
open for business.
(h) Information Concerning Subadviser Assets and Subadviser. From
time to time as the Adviser or the Fund may reasonably request, the
Subadviser will furnish the requesting party reports on portfolio
transactions and reports on Fund Investments held in the portfolio, all in
such detail as the Adviser or the Fund may reasonably request. The
Subadviser will also inform the Adviser in a timely manner of material
changes in primary portfolio manager(s) responsible for Subadviser Assets
or of material changes in the control of the Subadviser. The Subadviser
will make available one or more of its officers and employees to meet with
the Trust's Board of Trustees on reasonable due notice to review the Fund
Investments.
The Subadviser will also provide such information or perform such
additional acts as are customarily performed by a subadviser and may be
required for the Fund or the Adviser to comply with their respective
obligations under applicable laws, including, without limitation, the
Code, the 1940 Act, the Advisers Act, the Securities Act of 1933, as
amended (the "Securities Act") and any state securities laws, and any rule
or regulation thereunder.
(i) Custody Arrangements. The Subadviser shall on each business day
provide the Adviser and the Trust's custodian such information as the
Adviser and the Trust's custodian may reasonably request relating to all
transactions concerning the Subadviser Assets.
(j) Historical Performance Information. To the extent agreed upon by
the parties, the Subadviser will provide the Trust with historical
performance information on similarly managed investment companies or for
other accounts to be included in the Prospectus, or for any other uses
permitted by applicable law.
3. Independent Contractor. In the performance of its duties hereunder, the
Subadviser is and shall be an independent contractor and unless otherwise
expressly provided herein or otherwise authorized in writing, shall have no
authority to act for or represent the Fund, the Trust or the Adviser in any way
or otherwise be deemed an agent of the Fund, the Trust or the Adviser.
4. Expenses. During the term of this Agreement, Subadviser will pay all
expenses incurred by it in connection with its activities under this Agreement
other than the cost of securities, commodities and other investments (including
brokerage commissions and other transaction charges, if any) purchased for the
Fund. The Subadviser shall, at its sole expense, employ or associate itself with
such persons as it believes to be particularly fitted to assist it in the
execution of its duties under this Agreement. The Subadviser shall not be
responsible for the Trust's, the Fund's or Adviser's expenses. The Trust or the
Adviser, as the case may be, shall reimburse the Subadviser for any expenses of
the Fund or the Adviser as may be reasonably incurred by such Subadviser on
behalf of the Fund or the Adviser. The Subadviser shall keep and supply to the
Trust and the Adviser reasonable records of all such expenses.
5. Compensation. For the services provided and the expenses assumed with
respect to the Fund pursuant to this Agreement, the Subadviser will be entitled
to a the fee listed for each Fund on Exhibit A. Such fees will be computed daily
and payable no later than the seventh (7th) business day following the end of
each month, from the Adviser or the Trust, calculated at an annual rate based on
the Subadviser Assets' average daily net assets.
4
<PAGE> 5
The method of determining net assets of the Fund for purposes hereof shall
be the same as the method of determining net assets for purposes of establishing
the offering and redemption price of the Shares as described in the Fund's
Prospectus. If this Agreement shall be effective for only a portion of a month,
the aforesaid fee shall be prorated for the portion of such month during which
this Agreement is in effect.
Notwithstanding any other provision of this Agreement, the Subadviser may
from time to time agree not to impose all or a portion of its fee otherwise
payable hereunder (in advance of the time such fee or portion thereof would
otherwise accrue). Any such fee reduction may be discontinued or modified by the
Subadviser at any time.
6. Representations and Warranties of Subadviser. The Subadviser represents
and warrants to the Adviser and the Fund as follows:
(a) The Subadviser is registered as an investment adviser under the
Advisers Act;
(b) The Subadviser has filed a notice of exemption pursuant to Rule
4.14 under the Commodity Exchange Act (the "CEA") with the Commodity
Futures Trading Commission (the "CFTC") and the National Futures
Association ("NFA"), or is not required to file such exemption;
(c) The Subadviser is a corporation duly organized and validly
existing under the laws of the State of New York with the power to own and
possess its assets and carry on its business as it is now being conducted;
(d) The execution, delivery and performance by the Subadviser of
this Agreement are within the Subadviser's powers and have been duly
authorized by all necessary action on the part of its shareholders, and no
action by or in respect of, or filing with, any governmental body, agency
or official is required on the part of the Subadviser for the execution,
delivery and performance by the Subadviser of this Agreement, and the
execution, delivery and performance by the Subadviser of this Agreement do
not contravene or constitute a default under (i) any provision of
applicable law, rule or regulation, (ii) the Subadviser's governing
instruments, or (iii) any agreement, judgment, injunction, order, decree
or other instrument binding upon the Subadviser; and
(e) The Form ADV of the Subadviser previously provided to the
Adviser is a true and complete copy of the form as currently filed with
the SEC and the information contained therein is accurate and complete in
all material respects and does not omit to state any material fact
necessary in order to make the statements made, in light of the
circumstances under which they were made, not misleading.
7. Representations and Warranties of Adviser. The Adviser represents and
warrants to the Subadviser as follows:
(a) The Adviser is registered as an investment adviser under the
Advisers Act;
(b) The Adviser has filed a notice of exemption pursuant to Rule
4.14 under the CEA with the CFTC and the NFA or is not required to file
such exemption;
(c) The Adviser is a corporation duly organized and validly existing
under the laws of the State of Ohio with the power to own and possess its
assets and carry on its business as it is now being conducted;
5
<PAGE> 6
(d) The execution, delivery and performance by the Adviser of this
Agreement are within the Adviser's powers and have been duly authorized by
all necessary action on the part of its shareholders or directors, and no
action by or in respect of, or filing with, any governmental body, agency
or official is required on the part of the Adviser for the execution,
delivery and performance by the Adviser of this Agreement, and the
execution, delivery and performance by the Adviser of this Agreement do
not contravene or constitute a default under (i) any provision of
applicable law, rule or regulation, (ii) the Adviser's governing
instruments, or (iii) any agreement, judgment, injunction, order, decree
or other instrument binding upon the Adviser;
(e) The Form ADV of the Adviser previously provided to the
Subadviser is a true and complete copy of the form filed with the SEC and
the information contained therein is accurate and complete in all material
respects and does not omit to state any material fact necessary in order
to make the statements made, in light of the circumstances under which
they were made, not misleading; and
(f) The Adviser acknowledges that it received a copy of the
Subadviser's Form ADV prior to the execution of this Agreement.
8. Representations and Warranties of the Trust. The Trust represents and
warrants to the Adviser and the Subadviser as follows:
(a) The Trust is a business trust duly organized and validly
existing under the laws of the Commonwealth of Massachusetts with the
power to own and possess its assets and carry on its business as it is now
being conducted;
(b) The Trust is registered as an investment company under the 1940
Act and the Fund's shares are registered under the Securities Act of 1933;
and
(c) The execution, delivery and performance by the Trust of this
Agreement are within the Trust's powers and have been duly authorized by
all necessary action on the part of the Trust and its Board of Trustees,
and no action by or in respect of, or filing with, any governmental body,
agency or official is required on the part of the Trust for the execution,
delivery and performance by the Adviser of this Agreement, and the
execution, delivery and performance by the Trust of this Agreement do not
contravene or constitute a default under (i) any provision of applicable
law, rule or regulation, (ii) the Trust's governing instruments, or (iii)
any agreement, judgment, injunction, order, decree or other instrument
binding upon the Trust.
9. Survival of Representations and Warranties; Duty to Update Information.
All representations and warranties made by the Subadviser and the Adviser
pursuant to Sections 6, 7 and 8, respectively, shall survive for the duration of
this Agreement and the parties hereto shall promptly notify each other in
writing upon becoming aware that any of the foregoing representations and
warranties are no longer true.
10. Liability and Indemnification.
(a) Liability. In the absence of wilful misfeasance, bad faith or
gross negligence on its part in the performance of its duties or reckless
disregard of its obligations and duties hereunder, the Subadviser, any
affiliated person of the Subadviser and each person, if any, who within
the meaning of the Securities Act controls the Subadviser ("Controlling
Persons") shall not be liable to the Adviser, the Trust or the Fund or any
of the Fund's shareholders for any error of judgment or mistake of law or
for any loss suffered by the
6
<PAGE> 7
Adviser or the Fund in connection with the matters to which the Agreement
relates, and, in the absence of wilful misfeasance, bad faith or gross
negligence on the part of the Adviser or a reckless disregard of its
duties hereunder, the Adviser, any affiliated person of the Adviser and
each of its Controlling Persons shall not be subject to any liability to
the Subadviser, for any act or omission in the case of, or connected with,
rendering services hereunder or for any losses that may be sustained in
the purchase, holding or sale of Subadviser Assets.
(b) Indemnification. The Subadviser shall indemnify the Adviser and
the Trust, and their respective officers and directors and trustees, for
any liability and expenses, including reasonable attorneys' fees, which
may be sustained as a result of the Subadviser's wilful misfeasance, bad
faith, or gross negligence in the performance of its duties, or reckless
disregard of its duties hereunder. Notwithstanding any other provision in
this Agreement, the Subadviser will indemnify the Adviser and the Trust,
and their respective affiliated persons and Controlling Persons for any
liability and expenses, including reasonable attorneys' fees, to which
they may be subjected as a result of the Subadviser providing inaccurate
historical performance calculations concerning the Subadviser's composite
account data or historical performance information on similarly managed
investment companies or accounts, except that the Adviser and the Trust
and their respective affiliated persons and Controlling Persons shall not
be indemnified for any liability or expense resulting from their
negligence or willful misconduct in using such information.
The Adviser shall indemnify the Subadviser, its affiliated persons, its
Controlling Persons and its officers and directors, for any liability and
expenses, including attorneys fees, which may be sustained as a result of
the Adviser's wilful misfeasance, bad faith, gross negligence, reckless
disregard of its duties hereunder or violation of applicable law,
including, without limitation, the federal and state securities laws or
the CEA.
11. Duration and Termination.
(a) Duration. Unless sooner terminated, this Agreement shall
continue until October 31, 1999 and thereafter shall continue
automatically for successive annual periods, provided such continuance is
specifically approved at least annually by the Trust's Board of Trustees
or vote of the lesser of (a) 67% of the shares of the Fund represented at
a meeting if holders of more than 50% of the outstanding shares of the
Fund are present in person or by proxy or (b) more than 50% of the
outstanding shares of the Fund; provided that in either event its
continuance also is approved by a majority of the Trust's Trustees who are
not "interested persons" (as defined in the 1940 Act) of any party to this
Agreement, by vote cast in person at a meeting called for the purpose of
voting on such approval.
(b) Termination. Notwithstanding whatever may be provided herein to
the contrary, this Agreement may be terminated at any time, without
payment of any penalty:
(i) By vote of a majority of the Trust's Board of Trustees, or
by vote of a majority of the outstanding voting securities of the
Fund, or by the Adviser, in each case, upon at least sixty (60)
days' written notice to the Subadviser;
(ii) By any party hereto immediately upon written notice to
the other parties in the event of a material breach of any provision
of this Agreement by any of the other parties; or
(iii) By the Subadviser upon at least 120 days' written notice
to the Adviser and the Trust.
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<PAGE> 8
This Agreement shall not be assigned (as such term is defined in the 1940
Act) and shall terminate automatically in the event of its assignment or
upon the termination of the Advisory Agreement.
12. Duties of the Adviser. The Adviser shall continue to have
responsibility for all services to be provided to the Fund pursuant to the
Advisory Agreement and shall oversee and review the Subadviser's performance of
its duties under this Agreement. Nothing contained in this Agreement shall
obligate the Adviser to provide any funding or other support for the purpose of
directly or indirectly promoting investments in the Fund.
13. Reference to Subadviser. Neither the Adviser nor any affiliate or
agent of it shall make reference to or use the name of Subadviser or any of its
affiliates, or any of their clients, except references concerning the identity
of and services provided by Subadviser to the Fund, which references shall not
differ in substance from those included in the Fund's Prospectus and this
Agreement, in any advertising or promotional materials without the prior
approval of Subadviser, which approval shall not be unreasonably withheld or
delayed. The Adviser hereby agrees to make all reasonable efforts to cause the
Fund and any affiliate thereof to satisfy the foregoing obligation.
14. Amendment. This Agreement may be amended by mutual consent of the
parties, provided that the terms of any material amendment shall be approved by:
a) the Trust's Board of Trustees or by a vote of a majority of the outstanding
voting securities of the Fund (as required by the 1940 Act) and b) the vote of a
majority of those Trustees of the Trust who are not "interested persons" of any
party to this Agreement cast in person at a meeting called for the purpose of
voting on such approval, if such approval is required by applicable law.
15. Confidentiality. Subject to the duties of the Adviser, the Fund and
the Subadviser to comply with applicable law, including any demand of any
regulatory or taxing authority having jurisdiction, the parties hereto shall
treat as confidential all information pertaining to the Fund and the actions of
the Subadviser, the Adviser and the Fund in respect thereof.
16. Notice. Any notice that is required to be given by the parties to each
other under the terms of this Agreement shall be in writing, delivered, or
mailed postpaid to the other party, or transmitted by facsimile with
acknowledgment of receipt, to the parties at the following addresses or
facsimile numbers, which may from time to time be changed by the parties by
notice to the other party:
(a) If to the Subadviser:
The Dreyfus Corporation
200 Park Avenue
New York, New York 10166
Attention: General Counsel
Facsimile: (212) 922-6880
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<PAGE> 9
(b) If to the Adviser:
Nationwide Advisory Services, Inc.
Three Nationwide Plaza, 26th Floor
Columbus, OH 43215
Attention: James F. Laird, Jr.
Facsimile: (614) 249-7424
(c) If to the Trust:
Nationwide Separate Account Trust
Three Nationwide Plaza, 26th Floor
Columbus, OH 43215
Attention: James F. Laird, Jr.
Facsimile: (614)249-7424
17. Jurisdiction. This Agreement shall be governed by and construed to be
in accordance with substantive laws of the Commonwealth of Massachusetts without
reference to choice of law principles thereof and in accordance with the 1940
Act. In the case of any conflict, the 1940 Act shall control.
18. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, all of which shall
together constitute one and the same instrument.
19. Certain Definitions. For the purposes of this Agreement and except as
otherwise provided herein, "interested person," "affiliated person," and
"assignment" shall have their respective meanings as set forth in the 1940 Act,
subject, however, to such exemptions as may be granted by the SEC.
20. Captions. The captions herein are included for convenience of
reference only and shall be ignored in the construction or interpretation
hereof.
21. Severability. If any provision of this Agreement shall be held or made
invalid by a court decision or applicable law, the remainder of the Agreement
shall not be affected adversely and shall remain in full force and effect.
22. Nationwide Separate Account Trust and its Trustees. The terms
"Nationwide Separate Account Trust" and the "Trustees of Nationwide Separate
Account Trust" refer respectively to the Trust created and the Trustees, as
trustees but not individually or personally, acting from time to time under a
Declaration of Trust dated as of June 30, 1981, as has been or may be amended
from time to time, and to which reference is hereby made and a copy of which is
on file at the office of the Secretary of State of The Commonwealth of
Massachusetts and elsewhere as required by law, and to any and all amendments
thereto so filed or hereafter filed. The obligations of the Trust entered into
in the name or on behalf thereof by any of Nationwide Separate Account Trust's
Trustees, representatives, or agents are not made individually, but only in
their capacities with respect to Nationwide Separate Account Trust. Such
obligations are not binding upon any of the Trustees, shareholders, or
representatives of the Trust personally, but bind only the assets of the Trust.
All persons dealing with any series of Shares of the Trust must look solely to
the assets of the Trust belonging to such series for the enforcement of any
claims against the Trust.
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<PAGE> 10
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
day and year first written above.
TRUST
NATIONWIDE SEPARATE ACCOUNT TRUST
By:__________________________________
Name:
Title:
ADVISER
NATIONWIDE ADVISORY SERVICES, INC.
By:__________________________________
Name:
Title:
SUBADVISER
THE DREYFUS CORPORATION
By:__________________________________
Name:
Title:
10
<PAGE> 11
EXHIBIT A
SUBADVISORY AGREEMENT
BETWEEN NATIONWIDE SEPARATE
ACCOUNT TRUST, NATIONWIDE ADVISORY
SERVICES, INC. and THE DREYFUS CORPORATION
Effective October 31, 1997
<TABLE>
<CAPTION>
Funds of the Trust Advisory Fees
- ------------------ -------------
<S> <C>
Nationwide Small Cap Value Fund 0.50% on Subadviser Assets up to
$200 million
0.45% for Subadviser Assets of
$200 million and more
</TABLE>
11
<PAGE> 1
EXHIBIT (5)(g)(v)
SUBADVISORY AGREEMENT
THIS AGREEMENT is made and entered into on this 31st day of October, 1997
among NATIONWIDE SEPARATE ACCOUNT TRUST, a Massachusetts business trust (the
"Trust"), NATIONWIDE ADVISORY SERVICES, INC. (the "Adviser"), an Ohio
corporation registered under the Investment Advisers Act of 1940 (the "Advisers
Act"), and J.P. Morgan Investment Management Inc., a Delaware corporation (the
"Subadviser"), also registered under the Advisers Act.
W I T N E S S E T H :
WHEREAS, the Trust is registered with the Securities and Exchange
Commission (the "SEC") as an open-end management investment company under the
Investment Company Act of 1940 (the "1940 Act");
WHEREAS, the Adviser has, pursuant to an Advisory Agreement with the Trust
dated as of October 31, 1997 (the "Advisory Agreement"), been retained to act as
investment adviser for certain of the series of the Trust which are listed on
Exhibit A to this Agreement (each a "Fund");
WHEREAS, the Advisory Agreement permits the Adviser to delegate certain of
its duties under the Advisory Agreement to other investment advisers, subject to
the requirements of the 1940 Act; and
WHEREAS, the Adviser desires to retain Subadviser to assist it in the
provision of a continuous investment program for that portion of the Fund's
assets which the Adviser will assign to the Subadviser (the "Subadviser
Assets"), and Subadviser is willing to render such services subject to the terms
and conditions set forth in this Agreement.
NOW, THEREFORE, the parties do mutually agree and promise as follows:
1. Appointment as Subadviser. The Adviser hereby retains the Subadviser to
act as investment adviser for and to manage the Subadviser Assets subject to the
supervision of the Adviser and the Board of Trustees of the Trust and subject to
the terms of this Agreement; and the Subadviser hereby accepts such employment.
In such capacity, the Subadviser shall be responsible for the investment
management of the Subadviser Assets. It is recognized that the Subadviser now
acts, and that from time to time hereafter may act, as investment adviser to one
or more other investment companies and to fiduciary or other managed accounts
and that the Adviser and the Trust have no objection to such activities.
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<PAGE> 2
2. Duties of Subadviser.
(a) Investments. The Subadviser is hereby authorized and directed
and hereby agrees, subject to the stated investment policies and
restrictions of the Fund as set forth in the Fund's prospectus and
statement of additional information as currently in effect and as
supplemented or amended from time to time (collectively referred to
hereinafter as the "Prospectus") and subject to the directions of the
Adviser and the Trust's Board of Trustees, to purchase, hold and sell
investments for the Subadviser Assets ("Fund Investments") and to monitor
on a continuous basis the performance of such Fund Investments. In
providing these services, the Subadviser will conduct a continual program
of investment, evaluation and, if appropriate, sale and reinvestment of
the Subadviser Assets. The Adviser agrees to provide the Subadviser with
such assistance as may be reasonably requested by the Subadviser in
connection with its activities under this Agreement, including, without
limitation, information concerning the Fund, its funds available, or to
become available, for investment and generally as to the conditions of the
Fund's affairs.
(b) Compliance with Applicable Laws and Governing Documents. In the
performance of its duties and obligations under this Agreement, the
Subadviser shall act in conformity with the Trust's Declaration of Trust
and By-Laws and the Prospectus and with the instructions and directions
received in writing from the Adviser or the Trustees of the Trust and will
conform to and comply with the requirements of the 1940 Act, the Internal
Revenue Code of 1986, as amended (the "Code"), and all other applicable
federal and state laws and regulations. Notwithstanding the foregoing, the
Adviser shall remain responsible for ensuring the Fund's overall
compliance with the 1940 Act, the Code and all other applicable federal
and state laws and regulations and the Subadviser is only obligated to
comply with this subsection (b) with respect to the Subadviser Assets.
The Adviser will provide the Subadviser with reasonable advance
notice of any change in the Fund's investment objectives, policies and
restrictions as stated in the Prospectus, and the Subadviser shall, in the
performance of its duties and obligations under this Agreement, manage the
Fund Investments consistent with such changes, provided the Subadviser has
received prompt notice of the effectiveness of such changes from the Trust
or the Adviser. In addition to such notice, the Adviser shall provide to
the Subadviser a copy of a modified Prospectus reflecting such changes.
The Adviser acknowledges and agrees that the Prospectus will at all times
be in compliance with all disclosure requirements under all applicable
federal and state laws and regulations relating to the Trust or the Fund,
including, without limitation, the 1940 Act, and the rules and regulations
thereunder, and that the Subadviser shall have no liability in connection
therewith, except as to the accuracy of material information furnished in
writing by the Subadviser to the Fund or to the Adviser specifically for
inclusion in the Prospectus. The Subadviser hereby agrees to provide to
the Adviser in a timely manner such information relating to the Subadviser
and its relationship to, and actions for, the Fund as may be required to
be contained in the Prospectus.
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<PAGE> 3
(c) Voting of Proxies. The Subadviser shall have the power to vote,
either in person or by proxy, all securities in which the Subadviser
Assets may be invested from time to time, and shall not be required to
seek or take instructions from, the Adviser or the Fund or take any action
with respect thereto. If both the Subadviser and another entity managing
assets of the Fund have invested in the same security, the Subadviser and
such other entity will each have the power to vote its pro rata share of
the security.
(d) Agent. Subject to any other written instructions of the Adviser
or the Trust, the Subadviser is hereby appointed the Adviser's and the
Trust's agent and attorney-in-fact for the limited purposes of executing
account documentation, agreements, contracts and other documents as the
Subadviser shall be requested by brokers, dealers, counterparties and
other persons in connection with its management of the Subadviser Assets.
The Subadviser agrees to provide the Adviser and the Trust with copies of
any such agreements executed on behalf of the Adviser or the Trust.
(e) Brokerage. The Subadviser is authorized, subject to the
supervision of the Adviser and the Trust's Board of Trustees, to establish
and maintain accounts on behalf of the Fund with, and place orders for the
purchase and sale of the Subadviser Assets with or through, such persons,
brokers or dealers ("brokers") as Subadviser may elect and negotiate
commissions to be paid on such transactions. The Subadviser, however, is
not required to obtain the consent of the Adviser or the Trust's Board of
Trustees prior to establishing any such brokerage account. The Subadviser
shall place all orders for the purchase and sale of portfolio investments
for the Fund's account with brokers selected by the Subadviser. In the
selection of such brokers and the placing of such orders, the Subadviser
shall seek to obtain for the Fund the most favorable price and execution
available, except to the extent it may be permitted to pay higher
brokerage commissions for brokerage and research services, as provided
below. In using its reasonable efforts to obtain for the Fund the most
favorable price and execution available, the Subadviser, bearing in mind
the Fund's best interests at all times, shall consider all factors it
deems relevant, including price, the size of the transaction, the breadth
and nature of the market for the security, the difficulty of the
execution, the amount of the commission, if any, the timing of the
transaction, market prices and trends, the reputation, experience and
financial stability of the broker involved, and the quality of service
rendered by the broker in other transactions. Subject to such policies as
the Trustees may determine, or as may be mutually agreed to by the Adviser
and the Subadviser, the Subadviser shall not be deemed to have acted
unlawfully or to have breached any duty created by this Agreement or
otherwise solely by reason of its having caused the Fund to pay a broker
that provides brokerage and research services (within the meaning of
Section 29(e) of the Securities Exchange Act of 1934) to the Subadviser an
amount of commission for effecting a Fund investment transaction that is
in excess of the amount of commission that another broker would have
charged for effecting that transaction if, but only if, the Subadviser
determines in good faith that such commission was reasonable in relation
to the value of the brokerage and research services provided by such
broker or dealer viewed in
3
<PAGE> 4
terms of either that particular transaction or the overall responsibility
of the Subadviser with respect to the accounts as to which it exercises
investment discretion.
It is recognized that the services provided by such brokers may be
useful to the Subadviser in connection with the Subadviser's services to
other clients. On occasions when the Subadviser deems the purchase or sale
of a security to be in the best interests of the Fund as well as other
clients of the Subadviser, the Subadviser, to the extent permitted by
applicable laws and regulations, may, but shall be under no obligation to,
aggregate the securities to be sold or purchased in order to obtain the
most favorable price or lower brokerage commissions and efficient
execution. In such event, allocation of securities so sold or purchased,
as well as the expenses incurred in the transaction, will be made by the
Subadviser in the manner the Subadviser considers to be the most equitable
and consistent with its fiduciary obligations to the Fund and to such
other clients. It is recognized that in some cases, this procedure may
adversely affect the price paid or received by the Fund or the size of the
position obtainable for, or disposed of by, the Fund.
(f) Securities Transactions. The Subadviser and any affiliated
person of the Subadviser will not purchase securities or other instruments
from or sell securities or other instruments to the Fund; provided,
however, the Subadviser may purchase securities or other instruments from
or sell securities or other instruments to the Fund if such transaction is
permissible under applicable laws and regulations, including, without
limitation, the 1940 Act and the Advisers Act and the rules and
regulations promulgated thereunder.
The Subadviser, including its Access Persons (as defined in
subsection (e) of Rule 17j- 1 under the 1940 Act), agrees to observe and
comply with Rule 17j-1 and its Code of Ethics (which shall comply in all
material respects with Rule 17j-1), as the same may be amended from time
to time. On a quarterly basis, the Subadviser will either (i) certify to
the Adviser that the Subadviser and its Access Persons have complied with
the Subadviser's Code of Ethics with respect to the Subadviser Assets or
(ii) identify any violations which have occurred with respect to the
Subadviser Assets.
(g) Books and Records. The Subadviser shall maintain separate
detailed records of all matters pertaining to the Subadviser Assets (the
"Fund's Records"), including, without limitation, brokerage and other
records of all securities transactions. The Subadviser acknowledges that
the Fund's Records are property of the Trust. The Fund's Records (relating
to the Subadviser Assets) shall be available to the Adviser at any time
upon reasonable request during normal business hours and shall be
available for telecopying without delay to the Adviser during any day that
the Fund is open for business.
(h) Information Concerning Fund Investments and Subadviser. From
time to time as the Adviser or the Fund may request, the Subadviser will
furnish the requesting party reports on portfolio transactions and reports
on Fund Investments held in the portfolio, all in such detail as the
Adviser or the Fund may reasonably request. The Subadviser will also
4
<PAGE> 5
inform the Adviser in a timely manner of material changes in portfolio
managers responsible for Subadviser Assets, any changes in the ownership
or management of the Subadviser, or of material changes in the control of
the Subadviser. Upon reasonable request, the Subadviser will make
available its officers and employees to meet with the Trust's Board of
Trustees to review the Fund Investments.
The Subadviser will also provide such information or perform such
additional acts as are customarily performed by a subadviser and may be
required for the Fund or the Adviser to comply with their respective
obligations under applicable laws, including, without limitation, the
Code, the 1940 Act, the Advisers Act, the Securities Act of 1933, as
amended (the "Securities Act") and any state securities laws, and any rule
or regulation thereunder.
(i) Custody Arrangements. The Subadviser shall on each business day
provide the Adviser and the Trust's custodian such information as the
Adviser and the Trust's custodian may reasonably request relating to all
transactions concerning the Fund Investments.
(j) Historical Performance Information. To the extent agreed upon by
the parties, the Subadviser will provide the Trust with historical
performance information on similarly managed investment companies or for
other accounts to be included in the Prospectus or for any other uses
permitted by applicable law.
3. Independent Contractor. In the performance of its duties hereunder, the
Subadviser is and shall be an independent contractor and unless otherwise
expressly provided herein or otherwise authorized in writing, shall have no
authority to act for or represent the Fund, the Trust or the Adviser in any way
or otherwise be deemed an agent of the Fund, the Trust or the Adviser.
4. Expenses. During the term of this Agreement, Subadviser will pay all
expenses incurred by it in connection with its activities under this Agreement
other than the cost of securities, commodities and other investments (including
brokerage commissions and other transaction charges, if any) purchased for the
Fund. The Subadviser shall, at its sole expense, employ or associate itself with
such persons as it believes to be particularly fitted to assist it in the
execution of its duties under this Agreement. The Subadviser shall not be
responsible for the Trust's, the Fund's or Adviser's expenses. The Trust or the
Adviser, as the case may be, shall reimburse the Subadviser for any expenses of
the Fund or the Adviser as may be reasonably incurred by such Subadviser on
behalf of the Fund or the Adviser. The Subadviser shall keep and supply to the
Trust and the Adviser reasonable records of all such expenses.
5. Compensation. For the services provided and the expenses assumed with
respect to the Fund pursuant to this Agreement, the Subadviser will be entitled
to the fee listed for each Fund on Exhibit A. Such fees will be computed daily
and payable no later than the seventh (7th) business day following the end of
each month, from the Adviser or the Trust, calculated at an annual rate based on
the Subadviser Assets' average daily net assets.
5
<PAGE> 6
The method of determining net assets of the Fund for purposes hereof shall
be the same as the method of determining net assets for purposes of establishing
the offering and redemption price of the Shares as described in the Fund's
Prospectus. If this Agreement shall be effective for only a portion of a month,
the aforesaid fee shall be prorated for the portion of such month during which
this Agreement is in effect.
6. Representations and Warranties of Subadviser. The Subadviser represents
and warrants to the Adviser and the Fund as follows:
(a) The Subadviser is registered as an investment adviser under the
Advisers Act;
(b) The Subadviser is registered as a Commodity Trading Advisor
under the Commodity Exchange Act (the "CEA") with the Commodity Futures
Trading Commission (the "CFTC");
(c) The Subadviser is a corporation duly organized and validly
existing under the laws of the State of Delaware with the power to own and
possess its assets and carry on its business as it is now being conducted;
(d) The execution, delivery and performance by the Subadviser of
this Agreement are within the Subadviser's powers and have been duly
authorized by all necessary action on the part of its Board of Directors
and no action by or in respect of, or filing with, any governmental body,
agency or official is required on the part of the Subadviser for the
execution, delivery and performance by the Subadviser of this Agreement,
and the execution, delivery and performance by the Subadviser of this
Agreement do not contravene or constitute a default under (i) any
provision of applicable law, rule or regulation, (ii) the Subadviser's
governing instruments, or (iii) any agreement, judgment, injunction,
order, decree or other instrument binding upon the Subadviser;
(e) The Form ADV of the Subadviser previously provided to the
Adviser is a true and complete copy of the form as currently filed with
the SEC and the information contained therein is accurate and complete in
all material respects and does not omit to state any material fact
necessary in order to make the statements made, in light of the
circumstances under which they were made, not misleading.
7. Representations and Warranties of Adviser. The Adviser represents and
warrants to the Subadviser as follows:
(a) The Adviser is registered as an investment adviser under the
Advisers Act;
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<PAGE> 7
(b) The Adviser has filed a notice of exemption pursuant to Rule
4.14 under the CEA with the CFTC and the National Futures Association or
is not required to file such exemption;
(c) The Adviser is a corporation duly organized and validly existing
under the laws of the State of Ohio with the power to own and possess its
assets and carry on its business as it is now being conducted;
(d) The execution, delivery and performance by the Adviser of this
Agreement are within the Adviser's powers and have been duly authorized by
all necessary action on the part of its shareholders or directors, and no
action by or in respect of, or filing with, any governmental body, agency
or official is required on the part of the Adviser for the execution,
delivery and performance by the Adviser of this Agreement, and the
execution, delivery and performance by the Adviser of this Agreement do
not contravene or constitute a default under (i) any provision of
applicable law, rule or regulation, (ii) the Adviser's governing
instruments, or (iii) any agreement, judgment, injunction, order, decree
or other instrument binding upon the Adviser;
(e) The Form ADV of the Adviser previously provided to the
Subadviser is a true and complete copy of the form filed with the SEC and
the information contained therein is accurate and complete in all material
respects and does not omit to state any material fact necessary in order
to make the statements made, in light of the circumstances under which
they were made, not misleading;
(f) The Adviser acknowledges that it received a copy of the
Subadviser's Form ADV prior to the execution of this Agreement; and
(g) The Adviser and the Trust have duly entered into the Advisory
Agreement pursuant to which the Trust authorized the Adviser to enter into
this Agreement.
8. Representations and Warranties of the Trust. The Trust represents and
warrants to the Adviser and the Subadviser as follows:
(a) The Trust is a business trust duly organized and validly
existing under the laws of the Commonwealth of Massachusetts with the
power to own and possess its assets and carry on its business as it is now
being conducted;
(b) The Trust is registered as an investment company under the 1940
Act and the Fund's shares are registered under the Securities Act; and
7
<PAGE> 8
(c) The execution, delivery and performance by the Trust of this
Agreement are within the Trust's powers and have been duly authorized by
all necessary action on the part of the Trust and its Board of Trustees,
and no action by or in respect of, or filing with, any governmental body,
agency or official is required on the part of the Trust for the execution,
delivery and performance by the Adviser of this Agreement, and the
execution, delivery and performance by the Trust of this Agreement do not
contravene or constitute a default under (i) any provision of applicable
law, rule or regulation, (ii) the Trust's governing instruments, or (iii)
any agreement, judgment, injunction, order, decree or other instrument
binding upon the Trust.
9. Survival of Representations and Warranties; Duty to Update Information.
All representations and warranties made by the Subadviser, the Adviser and the
Trust pursuant to Sections 6, 7 and 8, respectively, shall survive for the
duration of this Agreement and the parties hereto shall promptly notify each
other in writing upon becoming aware that any of the foregoing representations
and warranties are no longer true.
10. Liability and Indemnification.
(a) Liability. In the absence of wilful misfeasance, bad faith or
gross negligence on the part of the Subadviser or a reckless disregard of
its duties hereunder, the Subadviser, each of its affiliates and all
respective partners, officers, directors and employees ("Affiliates") and
each person, if any, who within the meaning of the Securities Act controls
the Subadviser ("Controlling Persons") shall not be subject to any
expenses or liability to the Adviser, the Trust or the Fund or any of the
Fund's shareholders. In the absence of wilful misfeasance, bad faith or
gross negligence on the part of the Adviser or a reckless disregard of its
duties hereunder, the Adviser, any of its Affiliates and each of the
Adviser's Controlling Persons, if any, shall not be subject to any
liability to the Subadviser, for any act or omission in the case of, or
connected with, rendering services hereunder or for any losses that may be
sustained in the purchase, holding or sale of Fund Investments; provided,
however, that nothing herein shall relieve the Adviser and the Subadviser
from any of their obligations under applicable law, including, without
limitation, the federal and state securities laws and the CEA.
(b) Indemnification. The Subadviser shall indemnify the Adviser and
the Trust, and their respective Affiliates and Controlling Persons for any
liability and expenses, including reasonable attorneys' fees, which the
Adviser and the Trust and their respective Affiliates and Controlling
Persons may sustain as a result of the Subadviser's wilful misfeasance,
bad faith, gross negligence, reckless disregard of its duties hereunder or
violation of applicable law, including, without limitation, the federal
and state securities laws or the CEA. Notwithstanding any other provision
in this Agreement, the Subadviser will indemnify the Adviser and the
Trust, and their respective Affiliates and Controlling Persons for any
liability and expenses, including reasonable attorneys' fees, to which
they may be
8
<PAGE> 9
subjected as a result of their reliance upon and use of the historical
performance calculations provided by the Subadviser for use in the
Prospectus concerning the Subadviser's composite account data or
historical performance information on similarly managed investment
companies or accounts, except that the Adviser and the Trust and their
respective Affiliates and Controlling Persons shall not be indemnified for
a loss or expense resulting from their negligence or willful misconduct in
using such information.
The Adviser shall indemnify the Subadviser, its Affiliates and its
Controlling Persons, for any liability and expenses, including reasonable
attorneys' fees, howsoever arising from, or in connection with, this
Agreement or the performance by the Subadviser of its duties hereunder;
provided, however, that the Subadviser shall not be indemnified for any
liability or expenses which may be sustained as a result of the
Subadviser's wilful misfeasance, bad faith, gross negligence, reckless
disregard of its duties hereunder or violation of applicable law,
including, without limitation, the federal and state securities laws or
the CEA.
11. Duration and Termination.
(a) Duration. Unless sooner terminated, this Agreement shall
continue until October 31, 1999, and thereafter shall continue
automatically for successive annual periods, provided such continuance is
specifically approved at least annually by the Trust's Board of Trustees
or vote of the lesser of (a) 67% of the shares of the Fund represented at
a meeting if holders of more than 50% of the outstanding shares of the
Fund are present in person or by proxy or (b) more than 50% of the
outstanding shares of the Fund; provided that in either event its
continuance also is approved by a majority of the Trust's Trustees who are
not "interested persons" (as defined in the 1940 Act) of any party to this
Agreement, by vote cast in person at a meeting called for the purpose of
voting on such approval.
(b) Termination. Notwithstanding whatever may be provided herein to
the contrary, this Agreement may be terminated at any time, without
payment of any penalty:
(i) By vote of a majority of the Trust's Board of Trustees, or
by vote of a majority of the outstanding voting securities of the
Fund, or by the Adviser, in each case, upon at least 60 days'
written notice to the Subadviser;
(ii) By any party hereto immediately upon written notice to
the other parties in the event of a breach of any provision of this
Agreement by either of the other parties; or
(iii) By the Subadviser upon at least 60 days' written notice
to the Adviser and the Trust.
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<PAGE> 10
This Agreement shall not be assigned (as such term is defined in the 1940
Act) and shall terminate automatically in the event of its assignment or
upon the termination of the Advisory Agreement.
12. Duties of the Adviser. The Adviser shall continue to have
responsibility for all services to be provided to the Fund pursuant to the
Advisory Agreement and shall oversee and review the Subadviser's performance of
its duties under this Agreement. Nothing contained in this Agreement shall
obligate the Adviser to provide any funding or other support for the purpose of
directly or indirectly promoting investments in the Fund.
13. Reference to Subadviser. Neither the Adviser nor any Affiliate or
agent of it shall make reference to or use the name of Subadviser or any of its
Affiliates, or any of their clients, in any disclosure document or any
advertising or promotional materials without the prior approval of Subadviser,
which approval shall not be unreasonably withheld or delayed. The Adviser hereby
agrees to make all reasonable efforts to cause the Fund and any Affiliate
thereof to satisfy the foregoing obligation.
14. Amendment. This Agreement may be amended by mutual consent of the
parties, provided that the terms of any material amendment shall be approved by:
a) the Trust's Board of Trustees or by a vote of a majority of the outstanding
voting securities of the Fund (as required by the 1940 Act) and b) the vote of a
majority of those Trustees of the Trust who are not "interested persons" of any
party to this Agreement cast in person at a meeting called for the purpose of
voting on such approval, if such approval is required by applicable law.
15. Confidentiality. Subject to the duties of the Adviser, the Fund and
the Subadviser to comply with applicable law, including any demand of any
regulatory or taxing authority having jurisdiction, the parties hereto shall
treat as confidential all information pertaining to the Fund and the actions of
the Subadviser, the Adviser and the Fund in respect thereof.
16. Notice. Any notice that is required to be given by the parties to each
other under the terms of this Agreement shall be in writing, delivered, or
mailed postpaid to the other parties, or transmitted by facsimile with
acknowledgment of receipt, to the parties at the following addresses or
facsimile numbers, which may from time to time be changed by the parties by
notice to the other party:
(a) If to the Subadviser:
J.P. Morgan Investment Management Inc.
522 Fifth Avenue
New York, NY 10036
Attention: Diane Minardi
Facsimile: (212) 837-1063
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<PAGE> 11
(b) If to the Adviser:
Nationwide Advisory Services, Inc.
Three Nationwide Plaza, 26th Floor
Columbus, OH 43215
Attention: James F. Laird, Jr.
Facsimile: (614) 249-7424
(c) If to the Trust:
Nationwide Separate Account Trust
Three Nationwide Plaza, 26th Floor
Columbus, OH 43215
Attention: James F. Laird, Jr.
Facsimile: (614) 249-7424
16. Jurisdiction. This Agreement shall be governed by and construed to be
consistent with the Advisory Agreement and in accordance with substantive laws
of the Commonwealth of Massachusetts without reference to choice of law
principles thereof and in accordance with the 1940 Act. In the case of any
conflict, the 1940 Act shall control.
17. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, all of which shall
together constitute one and the same instrument.
18. Certain Definitions. For the purposes of this Agreement and except as
otherwise provided herein, "interested person," "affiliated person," and
"assignment" shall have their respective meanings as set forth in the 1940 Act,
subject, however, to such exemptions as may be granted by the SEC.
19. Captions. The captions herein are included for convenience of
reference only and shall be ignored in the construction or interpretation
hereof.
20. Severability. If any provision of this Agreement shall be held or made
invalid by a court decision or applicable law, the remainder of the Agreement
shall not be affected adversely and shall remain in full force and effect.
21. Nationwide Separate Account Trust and its Trustees. The terms
"Nationwide Separate Account Trust" and the "Trustees of Nationwide Separate
Account Trust" refer respectively to the Trust created and the Trustees, as
trustees but not individually or personally, acting from time to time under a
Declaration of Trust dated as of June 30, 1981, as has been or may be amended
from time to time, and to which reference is hereby made and a copy of which is
on file at the office of the Secretary of State of The Commonwealth of
Massachusetts and elsewhere as required by law,
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<PAGE> 12
and to any and all amendments thereto so filed or hereafter filed. The
obligations of the Trust entered into in the name or on behalf thereof by any of
Nationwide Separate Account Trust's Trustees, representatives, or agents are not
made individually, but only in their capacities with respect to Nationwide
Separate Account Trust. Such obligations are not binding upon any of the
Trustees, shareholders, or representatives of the Trust personally, but bind
only the assets of the Trust. All persons dealing with any series of Shares of
the Trust must look solely to the assets of the Trust belonging to such series
for the enforcement of any claims against the Trust.
22. IMRO Regulation. Under the United Kingdom Financial Services Act of
1986, the Subadviser is a member of the Investment Management Regulatory
Organisation Limited ("IMRO") and as such is regulated by IMRO in the conduct of
its investment business in the United Kingdom. All services provided by the
Subadviser under this Agreement are provided on the basis that the Trust and the
Adviser are a non-private customer as that term is defined in IMRO's rules.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
day and year first written above.
TRUST
NATIONWIDE SEPARATE ACCOUNT TRUST
By:
-----------------------------
Name:
Title:
ADVISER
NATIONWIDE ADVISORY SERVICES, INC.
By:
-----------------------------
Name:
Title:
SUBADVISER
J. P. MORGAN INVESTMENT
MANAGEMENT INC.
By:
-----------------------------
Name:
Title:
12
<PAGE> 13
EXHIBIT A
SUBADVISORY AGREEMENT
BETWEEN NATIONWIDE SEPARATE
ACCOUNT TRUST, NATIONWIDE ADVISORY
SERVICES, INC. and J.P. MORGAN INVESTMENT MANAGEMENT, INC.
Effective October 31, 1997
<TABLE>
<CAPTION>
Funds of the Trust Advisory Fees
- ------------------ -------------
<S> <C>
Nationwide Global Equity Fund 0.60% on Subadviser Assets
up to $50 million
0.55% for Subadviser Assets
of $50 million and more
</TABLE>
13
<PAGE> 1
EXHIBIT (5)(g)(vi)
SUBADVISORY AGREEMENT
THIS AGREEMENT is made and entered into on this 31st day of October among
NATIONWIDE SEPARATE ACCOUNT TRUST, a Massachusetts business trust (the "Trust"),
NATIONWIDE ADVISORY SERVICES, INC. (the "Adviser"), an Ohio corporation
registered under the Investment Advisers Act of 1940 (the "Advisers Act"), and
First Pacific Advisors, Inc., a Massachusetts corporation (the "Subadviser"),
also registered under the Advisers Act.
W I T N E S S E T H :
WHEREAS, the Trust is registered with the Securities and Exchange
Commission (the "SEC") as an open-end management investment company under the
Investment Company Act of 1940 (the "1940 Act");
WHEREAS, the Adviser has, pursuant to an Advisory Agreement with the Trust
dated as of October 31, 1997 (the "Advisory Agreement"), been retained to act as
investment adviser for certain of the series of the Trust which are listed on
Exhibit A to this Agreement (each a "Fund");
WHEREAS, the Advisory Agreement permits the Adviser to delegate certain of
its duties under the Advisory Agreement to other investment advisers, subject to
the requirements of the 1940 Act; and
WHEREAS, the Adviser desires to retain Subadviser to assist it in the
provision of a continuous investment program for that portion of a Fund's assets
which the Adviser will assign to the Subadviser (the "Subadviser Assets"), and
Subadviser is willing to render such services subject to the terms and
conditions set forth in this Agreement.
NOW, THEREFORE, the parties do mutually agree and promise as follows:
1. Appointment as Subadviser. The Adviser hereby retains the Subadviser to
act as investment adviser for and to manage the Subadviser Assets subject to the
supervision of the Adviser and the Board of Trustees of the Trust and subject to
the terms of this Agreement; and the Subadviser hereby accepts such employment.
In such capacity, the Subadviser shall be responsible for the investment
management of the Subadviser Assets. It is recognized that the Subadviser now
acts, and that from time to time hereafter may act, as investment adviser to one
or more other investment companies and to fiduciary or other managed accounts
and that the Adviser and the Trust have no objection to such activities.
1
<PAGE> 2
2. Duties of Subadviser.
(a) Investments. The Subadviser is hereby authorized and directed
and hereby agrees, subject to the stated investment policies and
restrictions of the Fund as set forth in the Fund's prospectus and
statement of additional information as currently in effect and as
supplemented or amended from time to time (collectively referred to
hereinafter as the "Prospectus") and subject to the directions of the
Adviser and the Fund's Board of Trustees, to purchase, hold and sell
investments for the Subadviser Assets ("Fund Investments") and to monitor
on a continuous basis the performance of such Fund Investments. In
providing these services, the Subadviser will conduct a continual program
of investment, evaluation and, if appropriate, sale and reinvestment of
the Subadviser Assets. The Adviser agrees to provide the Subadviser with
such assistance as may be reasonably requested by the Subadviser in
connection with its activities under this Agreement, including, without
limitation, information concerning the Fund, its funds available, or to
become available, for investment and generally as to the conditions of the
Fund's affairs.
(b) Compliance with Applicable Laws and Governing Documents. In the
performance of its duties and obligations under this Agreement, the
Subadviser shall act in conformity with the Trust's Declaration of Trust
and By-Laws and the Prospectus and with the instructions and directions
received in writing from the Adviser or the Trustees of the Trust and will
conform to and comply with the requirements of the 1940 Act, the Internal
Revenue Code of 1986, as amended (the "Code"), and all other applicable
federal and state laws and regulations. Notwithstanding the foregoing, the
Adviser shall remain responsible for ensuring the Fund's overall
compliance with the 1940 Act, the Code and all other applicable federal
and state laws and regulations and the Subadviser is only obligated to
comply with this subsection (b) with respect to the Subadviser Assets.
The Adviser will provide the Subadviser with reasonable advance
notice of any change in the Fund's investment objectives, policies and
restrictions as stated in the Prospectus, and the Subadviser shall, in the
performance of its duties and obligations under this Agreement, manage the
Fund Investments consistent with such changes, provided the Subadviser has
received prompt notice of the effectiveness of such changes from the Trust
or the Adviser. In addition to such notice, the Adviser shall provide to
the Subadviser a copy of a modified Prospectus reflecting such changes.
The Adviser acknowledges and agrees that the Prospectus will at all times
be in compliance with all disclosure requirements under all applicable
federal and state laws and regulations relating to the Trust or the Fund,
including, without limitation, the 1940 Act, and the rules and regulations
thereunder, and that the Subadviser shall have no liability in connection
therewith, except as to the accuracy of material information furnished by
the Subadviser to the Fund or to the Adviser specifically for inclusion in
the Prospectus. The Subadviser hereby agrees to provide to the Adviser in
a timely manner such information relating to the Subadviser and its
relationship to, and actions for, the Fund as may be required to be
contained in the Prospectus.
2
<PAGE> 3
(c) Voting of Proxies. The Subadviser shall have the power to vote,
either in person or by proxy, all securities in which the Subadviser
Assets may be invested from time to time, and shall not be required to
seek or take instructions from the Adviser or the Fund or take any action
with respect thereto. If both the Subadviser and another entity managing
assets of the Fund have invested in the same security, the Subadviser and
such other entity will each have the power to independently vote its pro
rata share of the security.
(d) Agent. Subject to any other written instructions of the Adviser
or the Trust, the Subadviser is hereby appointed the Adviser's and the
Trust's agent and attorney-in-fact for the limited purposes of executing
account documentation, agreements, contracts and other documents as the
Subadviser shall be requested by brokers, dealers, counterparties and
other persons in connection with its management of the Subadviser Assets.
The Subadviser agrees to provide the Adviser and the Trust with copies of
any such agreements executed on behalf of the Adviser or the Trust.
(e) Brokerage. The Subadviser is authorized, subject to the
supervision of the Adviser and the Trust's Board of Trustees, to establish
and maintain accounts on behalf of the Fund, and place orders for the
purchase and sale of the Subadviser Assets with or through, such persons,
brokers or dealers ("brokers") as Subadviser may elect and negotiate
commissions to be paid on such transactions. The Subadviser, however, is
not required to obtain the consent of the Adviser or the Trust's Board of
Trustees prior to establishing any such brokerage account. The Subadviser
shall place all orders for the purchase and sale of portfolio investments
for the Fund's account with brokers selected by the Subadviser. In the
selection of such brokers and the placing of such orders, the Subadviser
shall seek to obtain for the Fund the most favorable price and execution
available, except to the extent it may be permitted to pay higher
brokerage commissions for brokerage and research services, as provided
below. In using its reasonable efforts to obtain for the Fund the most
favorable price and execution available, the Subadviser, bearing in mind
the Fund's best interests at all times, shall consider all factors it
deems relevant, including price, the size of the transaction, the breadth
and nature of the market for the security, the difficulty of the
execution, the amount of the commission, if any, the timing of the
transaction, market prices and trends, the reputation, experience and
financial stability of the broker involved, and the quality of service
rendered by the broker in other transactions. Subject to such policies as
the Trustees may determine, or as may be mutually agreed to by the Adviser
and the Subadviser, the Subadviser shall not be deemed to have acted
unlawfully or to have breached any duty created by this Agreement or
otherwise solely by reason of its having caused the Fund to pay a broker
that provides brokerage and research services (within the meaning of
Section 29(e) of the Securities Exchange Act of 1934) to the Subadviser an
amount of commission for effecting a Fund investment transaction that is
in excess of the amount of commission that another broker would have
charged for effecting that transaction if, but only if, the Subadviser
determines in good faith that such commission was reasonable in relation
to the value of the brokerage and research services provided by such
broker or dealer viewed in
3
<PAGE> 4
terms of either that particular transaction or the overall responsibility
of the Subadviser with respect to the accounts as to which it exercises
investment discretion.
It is recognized that the services provided by such brokers may be
useful to the Subadviser in connection with the Subadviser's services to
other clients. On occasions when the Subadviser deems the purchase or sale
of a security to be in the best interests of the Fund as well as other
clients of the Subadviser, the Subadviser, to the extent permitted by
applicable laws and regulations, may, but shall be under no obligation to,
aggregate the securities to be sold or purchased in order to obtain the
most favorable price or lower brokerage commissions and efficient
execution. In such event, allocation of securities so sold or purchased,
as well as the expenses incurred in the transaction, will be made by the
Subadviser in the manner the Subadviser considers to be the most equitable
and consistent with its fiduciary obligations to the Fund and to such
other clients. It is recognized that in some cases, this procedure may
adversely affect the price paid or received by the Fund or the size of the
position obtainable for, or disposed of by, the Fund.
(f) Securities Transactions. The Subadviser and any affiliated
person of the Subadviser will not purchase securities or other instruments
from or sell securities or other instruments to the Fund; provided,
however, the Subadviser may purchase securities or other instruments from
or sell securities or other instruments to the Fund if such transaction is
permissible under applicable laws and regulations, including, without
limitation, the 1940 Act and the Advisers Act and the rules and
regulations promulgated thereunder.
The Subadviser, including its Access Persons (as defined in
subsection (e) of Rule 17j- 1 under the 1940 Act), agrees to observe and
comply with Rule 17j-1 and its Code of Ethics (which shall comply in all
material respects with Rule 17j-1), as the same may be amended from time
to time. On a quarterly basis, the Subadviser will either (i) certify to
the Adviser that the Subadviser and its Access Persons have complied with
the Subadviser's Code of Ethics with respect to the Subadviser Assets or
(ii) identify any violations which have occurred with respect to the
Subadviser Assets.
(g) Books and Records. The Subadviser shall maintain separate
detailed records of all matters pertaining to the Subadviser Assets (the
"Fund's Records"), including, without limitation, brokerage and other
records of all securities transactions. The Subadviser acknowledges that
the Fund's Records are property of the Trust. The Fund's Records (relating
to the Subadviser Assets) shall be available to the Adviser at any time
upon reasonable request during normal business hours and shall be
available for telecopying without delay to the Adviser during any day that
the Fund is open for business.
(h) Information Concerning Fund Investments and Subadviser. From
time to time as the Adviser or the Fund may request, the Subadviser will
furnish the requesting party reports on portfolio transactions and reports
on Fund Investments held in the portfolio, all in such detail as the
Adviser or the Fund may reasonably request. The Subadviser will also
4
<PAGE> 5
inform the Adviser in a timely manner of material changes in portfolio
managers responsible for Subadviser Assets, any changes in the ownership
or management of the Subadviser, or of material changes in the control of
the Subadviser. Upon reasonable request, the Subadviser will make
available its officers and employees to meet with the Trust's Board of
Trustees to review the Fund Investments.
The Subadviser will also provide such information or perform such
additional acts as are customarily performed by a subadviser and may be
required for the Fund or the Adviser to comply with their respective
obligations under applicable laws, including, without limitation, the
Code, the 1940 Act, the Advisers Act, the Securities Act of 1933, as
amended (the "Securities Act") and any state securities laws, and any rule
or regulation thereunder.
(i) Custody Arrangements. The Subadviser shall on each business day
provide the Adviser and the Trust's custodian such information as the
Adviser and the Trust's custodian may reasonably request relating to all
transactions concerning the Fund Investments.
(j) Historical Performance Information. To the extent agreed upon by
the parties, the Subadviser will provide the Trust with historical
performance information on similarly managed investment companies or for
other accounts to be included in the Prospectus or for any other uses
permitted by applicable law.
3. Independent Contractor. In the performance of its duties hereunder, the
Subadviser is and shall be an independent contractor and unless otherwise
expressly provided herein or otherwise authorized in writing, shall have no
authority to act for or represent the Fund, the Trust or the Adviser in any way
or otherwise be deemed an agent of the Fund, the Trust or the Adviser.
4. Expenses. During the term of this Agreement, Subadviser will pay all
expenses incurred by it in connection with its activities under this Agreement
other than the cost of securities, commodities and other investments (including
brokerage commissions and other transaction charges, if any) purchased for the
Fund. The Subadviser shall, at its sole expense, employ or associate itself with
such persons as it believes to be particularly suited to assist it in the
execution of its duties under this Agreement. The Subadviser shall not be
responsible for the Trust's, the Fund's or Adviser's expenses. The Trust or the
Adviser, as the case may be, shall reimburse the Subadviser for any expenses of
the Fund or the Adviser as may be reasonably incurred by such Subadviser on
behalf of the Fund or the Adviser. The Subadviser shall keep and supply to the
Trust and the Adviser reasonable records of all such expenses.
5. Compensation. For the services provided and the expenses assumed with
respect to the Fund pursuant to this Agreement, the Subadviser will be entitled
to the fee listed for each Fund on Exhibit A. Such fees will be computed daily
and payable no later than the seventh (7th) business day following the end of
each month, from the Adviser or the Trust, calculated at an annual rate based on
the Subadviser Assets' average daily net assets.
5
<PAGE> 6
The method of determining net assets of the Fund for purposes hereof shall
be the same as the method of determining net assets for purposes of establishing
the offering and redemption price of the Shares as described in the Fund's
Prospectus. If this Agreement shall be effective for only a portion of a month,
the aforesaid fee shall be prorated for the portion of such month during which
this Agreement is in effect.
6. Representations and Warranties of Subadviser. The Subadviser represents
and warrants to the Adviser and the Fund as follows:
(a) The Subadviser is registered as an investment adviser under the
Advisers Act;
(b) The Subadviser has filed a notice of exemption pursuant to Rule
4.14 under the Commodity Exchange Act (the "CEA") with the Commodity
Futures Trading Commission (the "CFTC") and the National Futures
Association (the "NFA"), or is not required to file such exemption;
(c) The Subadviser is a corporation duly organized and validly
existing under the laws of the Commonwealth of Massachusetts with the
power to own and possess its assets and carry on its business as it is now
being conducted;
(d) The execution, delivery and performance by the Subadviser of
this Agreement are within the Subadviser's powers and have been duly
authorized by all necessary action on the part of its Shareholder, and no
action by or in respect of, or filing with, any governmental body, agency
or official is required on the part of the Subadviser for the execution,
delivery and performance by the Subadviser of this Agreement, and the
execution, delivery and performance by the Subadviser of this Agreement do
not contravene or constitute a default under (i) any provision of
applicable law, rule or regulation, (ii) the Subadviser's governing
instruments, or (iii) any agreement, judgment, injunction, order, decree
or other instrument binding upon the Subadviser;
(e) The Form ADV of the Subadviser previously provided to the
Adviser is a true and complete copy of the form as currently filed with
the SEC and the information contained therein is accurate and complete in
all material respects and does not omit to state any material fact
necessary in order to make the statements made, in light of the
circumstances under which they were made, not misleading.
7. Representations and Warranties of Adviser. The Adviser represents and
warrants to the Subadviser as follows:
(a) The Adviser is registered as an investment adviser under the
Advisers Act;
(b) The Adviser has filed a notice of exemption pursuant to Rule
4.14 under the CEA with the CFTC and the NFA or is not required to file
such exemption;
6
<PAGE> 7
(c) The Adviser is a corporation duly organized and validly existing
under the laws of the State of Ohio with the power to own and possess its
assets and carry on its business as it is now being conducted;
(d) The execution, delivery and performance by the Adviser of this
Agreement are within the Adviser's powers and have been duly authorized by
all necessary action on the part of its shareholders or directors, and no
action by or in respect of, or filing with, any governmental body, agency
or official is required on the part of the Adviser for the execution,
delivery and performance by the Adviser of this Agreement, and the
execution, delivery and performance by the Adviser of this Agreement do
not contravene or constitute a default under (i) any provision of
applicable law, rule or regulation, (ii) the Adviser's governing
instruments, or (iii) any agreement, judgment, injunction, order, decree
or other instrument binding upon the Adviser;
(e) The Form ADV of the Adviser previously provided to the
Subadviser is a true and complete copy of the form filed with the SEC and
the information contained therein is accurate and complete in all material
respects and does not omit to state any material fact necessary in order
to make the statements made, in light of the circumstances under which
they were made, not misleading;
(f) The Adviser acknowledges that it received a copy of the
Subadviser's Form ADV prior to the execution of this Agreement; and
(g) The Adviser and the Trust have duly entered into the Advisory
Agreement pursuant to which the Trust authorized the Adviser to enter into
this Agreement.
8. Representations and Warranties of the Trust. The Trust represents and
warrants to the Adviser and the Subadviser as follows:
(a) The Trust is a business trust duly organized and validly
existing under the laws of the Commonwealth of Massachusetts with the
power to own and possess its assets and carry on its business as it is now
being conducted;
(b) The Trust is registered as an investment company under the 1940
Act and the Fund's shares are registered under the Securities Act; and
(c) The execution, delivery and performance by the Trust of this
Agreement are within the Trust's powers and have been duly authorized by
all necessary action on the part of the Trust and its Board of Trustees,
and no action by or in respect of, or filing with, any governmental body,
agency or official is required on the part of the Trust for the execution,
delivery and performance by the Adviser of this Agreement, and the
execution, delivery and performance by the Trust of this Agreement do not
contravene or constitute a default under (i) any provision of applicable
law, rule or regulation, (ii) the Trust's governing instruments,
7
<PAGE> 8
or (iii) any agreement, judgment, injunction, order, decree or other
instrument binding upon the Trust.
9. Survival of Representations and Warranties; Duty to Update Information.
All representations and warranties made by the Subadviser, the Adviser and the
Trust pursuant to Sections 6, 7 and 8, respectively, shall survive for the
duration of this Agreement and the parties hereto shall promptly notify each
other in writing upon becoming aware that any of the foregoing representations
and warranties are no longer true.
10. Liability and Indemnification.
(a) Liability. Except to the extent that the Subadviser is liable to
the Trust or any other party as a direct result of the action or inaction
of the Subadviser and in the absence of wilful misfeasance, bad faith or
gross negligence on the part of the Subadviser or a reckless disregard of
its duties hereunder, the Subadviser, each of its affiliates and all
respective partners, officers, directors and employees ("Affiliates") and
each person, if any, who within the meaning of the Securities Act controls
the Subadviser ("Controlling Persons") shall not be subject to any
expenses or liability to the Adviser, the Trust or the Fund or any of the
Fund's shareholders. In the absence of wilful misfeasance, bad faith or
gross negligence on the part of the Adviser or a reckless disregard of its
duties hereunder, the Adviser, any of its Affiliates and each of the
Adviser's Controlling Persons, if any, shall not be subject to any
liability to the Subadviser, for any act or omission in the case of, or
connected with, rendering services hereunder or for any losses that may be
sustained in the purchase, holding or sale of Fund Investments; provided,
however, that nothing herein shall relieve the Adviser and the Subadviser
from any of their obligations under applicable law, including, without
limitation, the federal and state securities laws and the CEA.
(b) Indemnification. The Subadviser shall indemnify the Adviser and
the Trust, and their respective Affiliates and Controlling Persons for any
liability and expenses, including reasonable attorneys' fees, which the
Adviser and the Trust and their respective Affiliates and Controlling
Persons may sustain as a result of the Subadviser's wilful misfeasance,
bad faith, gross negligence, reckless disregard of its duties hereunder or
violation of applicable law, including, without limitation, the federal
and state securities laws or the CEA. Notwithstanding any other provision
in this Agreement, the Subadviser will indemnify the Adviser and the
Trust, and their respective Affiliates and Controlling Persons for any
liability and expenses, including reasonable attorneys' fees, to which
they may be subjected as a result of their reliance upon and use of the
historical performance calculations provided by the Subadviser concerning
the Subadviser's composite account data or historical performance
information on similarly managed investment companies or accounts, except
that the Adviser and the Trust and their respective Affiliates and
Controlling Persons shall not be indemnified for a loss or expense
resulting from their negligence or willful misconduct in using such
information.
8
<PAGE> 9
The Adviser shall indemnify the Subadviser, its Affiliates and its
Controlling Persons, for any liability and expenses, including reasonable
attorneys' fees, which may be sustained as a result of the Adviser's wilful
misfeasance, bad faith, gross negligence, reckless disregard of its duties
hereunder or violation of applicable law, including, without limitation, the
federal and state securities laws or the CEA.
11. Duration and Termination.
(a) Duration. Unless sooner terminated, this Agreement shall
continue until October 31, 1999, and thereafter shall continue
automatically for successive annual periods, provided such continuance is
specifically approved at least annually by the Trust's Board of Trustees
or vote of the lesser of (a) 67% of the shares of the Fund represented at
a meeting if holders of more than 50% of the outstanding shares of the
Fund are present in person or by proxy or (b) more than 50% of the
outstanding shares of the Fund; provided that in either event its
continuance also is approved by a majority of the Trust's Trustees who are
not "interested persons" (as defined in the 1940 Act) of any party to this
Agreement, by vote cast in person at a meeting called for the purpose of
voting on such approval.
(b) Termination. Notwithstanding whatever may be provided herein to
the contrary, this Agreement may be terminated at any time, without
payment of any penalty:
(i) By vote of a majority of the Trust's Board of Trustees, or
by vote of a majority of the outstanding voting securities of the
Fund, or by the Adviser, in each case, upon at least 60 days'
written notice to the Subadviser;
(ii) By any party hereto immediately upon written notice to
the other parties in the event of a breach of any provision of this
Agreement by either of the other parties; or
(iii) By the Subadviser upon at least 60 days written notice
to the Adviser and the Trust.
This Agreement shall not be assigned (as such term is defined in the 1940
Act) and shall terminate automatically in the event of its assignment or
upon the termination of the Advisory Agreement.
12. Duties of the Adviser. The Adviser shall continue to have
responsibility for all services to be provided to the Fund pursuant to the
Advisory Agreement and shall oversee and review the Subadviser's performance of
its duties under this Agreement. Nothing contained in this Agreement shall
obligate the Adviser to provide any funding or other support for the purpose of
directly or indirectly promoting investments in the Fund.
9
<PAGE> 10
13. Reference to Subadviser. Neither the Adviser nor any Affiliate or
agent of it shall make reference to or use the name of Subadviser or any of its
Affiliates, or any of their clients, except references concerning the identity
of and services provided by Subadviser to the Fund, which references shall not
differ in substance from those included in the Fund's Prospectus and this
Agreement, in any advertising or promotional materials without the prior
approval of Subadviser, which approval shall not be unreasonably withheld or
delayed. The Adviser hereby agrees to make all reasonable efforts to cause the
Fund and any Affiliate thereof to satisfy the foregoing obligation.
14. Amendment. This Agreement may be amended by mutual consent of the
parties, provided that the terms of any material amendment shall be approved by:
a) the Trust's Board of Trustees or by a vote of a majority of the outstanding
voting securities of the Fund (as required by the 1940 Act) and b) the vote of a
majority of those Trustees of the Trust who are not "interested persons" of any
party to this Agreement cast in person at a meeting called for the purpose of
voting on such approval, if such approval is required by applicable law.
15. Confidentiality. Subject to the duties of the Adviser, the Fund and
the Subadviser to comply with applicable law, including any demand of any
regulatory or taxing authority having jurisdiction, the parties hereto shall
treat as confidential all information pertaining to the Fund and the actions of
the Subadviser, the Adviser and the Fund in respect thereof.
16. Notice. Any notice that is required to be given by the parties to each
other under the terms of this Agreement shall be in writing, delivered, or
mailed postpaid to the other parties, or transmitted by facsimile with
acknowledgment of receipt, to the parties at the following addresses or
facsimile numbers, which may from time to time be changed by the parties by
notice to the other party:
(a) If to the Subadviser:
First Pacific Advisors, Inc.
11400 W. Olympic Blvd., Suite 1200
Los Angeles, CA 90064
Attention: Daryl Ann Weber
Facsimile: (310) 996-5450
(b) If to the Adviser:
Nationwide Advisory Services, Inc.
Three Nationwide Plaza, 26th Floor
Columbus, OH 43215
Attention: James F. Laird, Jr.
Facsimile: (614) 249-7424
10
<PAGE> 11
(c) If to the Trust:
Nationwide Separate Account Trust
Three Nationwide Plaza, 26th Floor
Columbus, OH 43215
Attention: James F. Laird, Jr.
Facsimile: (614) 249-7424
16. Jurisdiction. This Agreement shall be governed by and construed to be
consistent with the Advisory Agreement and in accordance with substantive laws
of the Commonwealth of Massachusetts without reference to choice of law
principles thereof and in accordance with the 1940 Act. In the case of any
conflict, the 1940 Act shall control.
17. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, all of which shall
together constitute one and the same instrument.
18. Certain Definitions. For the purposes of this Agreement and except as
otherwise provided herein, "interested person," "affiliated person," and
"assignment" shall have their respective meanings as set forth in the 1940 Act,
subject, however, to such exemptions as may be granted by the SEC.
19. Captions. The captions herein are included for convenience of
reference only and shall be ignored in the construction or interpretation
hereof.
20. Severability. If any provision of this Agreement shall be held or made
invalid by a court decision or applicable law, the remainder of the Agreement
shall not be affected adversely and shall remain in full force and effect.
21. Nationwide Separate Account Trust and its Trustees. The terms
"Nationwide Separate Account Trust" and the "Trustees of Nationwide Separate
Account Trust" refer respectively to the Trust created and the Trustees, as
trustees but not individually or personally, acting from time to time under a
Declaration of Trust dated as of June 30, 1981, as has been or may be amended
from time to time, and to which reference is hereby made and a copy of which is
on file at the office of the Secretary of State of The Commonwealth of
Massachusetts and elsewhere as required by law, and to any and all amendments
thereto so filed or hereafter filed. The obligations of the Trust entered into
in the name or on behalf thereof by any of Nationwide Separate Account Trust's
Trustees, representatives, or agents are not made individually, but only in
their capacities with respect to Nationwide Separate Account Trust. Such
obligations are not binding upon any of the Trustees, shareholders, or
representatives of the Trust personally, but bind only the assets of the Trust.
All persons dealing with any series of Shares of the Trust must look solely to
the assets of the Trust belonging to such series for the enforcement of any
claims against the Trust.
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<PAGE> 12
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
day and year first written above.
TRUST
NATIONWIDE SEPARATE ACCOUNT TRUST
By:
-----------------------------
Name:
Title:
ADVISER
NATIONWIDE ADVISORY SERVICES, INC.
By:
-----------------------------
Name:
Title:
SUBADVISER
FIRST PACIFIC ADVISORS, INC.
By:
-----------------------------
Name:
Title:
12
<PAGE> 13
EXHIBIT A
SUBADVISORY AGREEMENT
BETWEEN NATIONWIDE SEPARATE
ACCOUNT TRUST, NATIONWIDE ADVISORY
SERVICES, INC. and FIRST PACIFIC ADVISORS, INC.
Effective October 31, 1997
<TABLE>
<CAPTION>
Funds of the Trust Advisory Fees
- ------------------ -------------
<S> <C>
Nationwide Select Advisers Mid Cap 0.65% on Subadviser Assets up to
$50 million
0.50% for Subadviser Assets of
$50 million and more
</TABLE>
13
<PAGE> 1
EXHIBIT (5)(g)(vii)
SUBADVISORY AGREEMENT
THIS AGREEMENT is made and entered into on this 31st day of October, 1997
among NATIONWIDE SEPARATE ACCOUNT TRUST, a Massachusetts business trust (the
"Trust"), NATIONWIDE ADVISORY SERVICES, INC. (the "Adviser"), an Ohio
corporation registered under the Investment Advisers Act of 1940 (the "Advisers
Act"), and Pilgrim Baxter & Associates, a Delaware corporation (the
"Subadviser"), also registered under the Advisers Act.
W I T N E S S E T H :
WHEREAS, the Trust is registered with the Securities and Exchange
Commission (the "SEC") as an open-end management investment company under the
Investment Company Act of 1940 (the "1940 Act");
WHEREAS, the Adviser has, pursuant to an Advisory Agreement with the Trust
dated as of October 31, 1997 (the "Advisory Agreement"), been retained to act as
investment adviser for certain of the series of the Trust which are listed on
Exhibit A to this Agreement (each a "Fund");
WHEREAS, the Advisory Agreement permits the Adviser to delegate certain of
its duties under the Advisory Agreement to other investment advisers, subject to
the requirements of the 1940 Act; and
WHEREAS, the Adviser desires to retain Subadviser to assist it in the
provision of a continuous investment program for that portion of a Fund's assets
which the Adviser will assign to the Subadviser (the "Subadviser Assets"), and
Subadviser is willing to render such services subject to the terms and
conditions set forth in this Agreement.
NOW, THEREFORE, the parties do mutually agree and promise as follows:
1. Appointment as Subadviser. The Adviser hereby retains the Subadviser to
act as investment adviser for and to manage the Subadviser Assets subject to the
supervision of the Adviser and the Board of Trustees of the Trust and subject to
the terms of this Agreement; and the Subadviser hereby accepts such employment.
In such capacity, the Subadviser shall be responsible for the investment
management of the Subadviser Assets. It is recognized that the Subadviser now
acts, and that from time to time hereafter may act, as investment adviser to one
or more other investment companies and to fiduciary or other managed accounts
and that the Adviser and the Trust have no objection to such activities.
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<PAGE> 2
2. Duties of Subadviser.
(a) Investments. The Subadviser is hereby authorized and directed
and hereby agrees, subject to the stated investment policies and
restrictions of the Fund as set forth in the Fund's prospectus and
statement of additional information as currently in effect and as
supplemented or amended from time to time (collectively referred to
hereinafter as the "Prospectus") and subject to the directions of the
Adviser and the Fund's Board of Trustees, to purchase, hold and sell
investments for the Subadviser Assets ("Fund Investments") and to monitor
on a continuous basis the performance of such Fund Investments. In
providing these services, the Subadviser will conduct a continual program
of investment, evaluation and, if appropriate, sale and reinvestment of
the Fund Investments. The Adviser agrees to provide the Subadviser with
such assistance as may be reasonably requested by the Subadviser in
connection with its activities under this Agreement, including, without
limitation, information concerning the Fund, its funds available, or to
become available, for investment and generally as to the conditions of the
Fund's affairs.
(b) Compliance with Applicable Laws and Governing Documents. In the
performance of its duties and obligations under this Agreement, the
Subadviser shall act in conformity with the Trust's Declaration of Trust
and By-Laws and the Prospectus and with the instructions and directions
received in writing from the Adviser or the Trustees of the Trust and will
conform to and comply with the requirements of the 1940 Act, the Internal
Revenue Code of 1986, as amended (the "Code"), and all other applicable
federal and state laws and regulations. Notwithstanding the foregoing, the
Adviser shall remain responsible for ensuring the Fund's overall
compliance with the 1940 Act, the Code and all other applicable federal
and state laws and regulations and the Subadviser is only obligated to
comply with this subsection (b) with respect to the Subadviser Assets.
The Adviser will provide the Subadviser with reasonable advance
notice of any change in the Fund's investment objectives, policies and
restrictions as stated in the Prospectus, and the Subadviser shall, in the
performance of its duties and obligations under this Agreement, manage the
Fund Investments consistent with such changes, provided the Subadviser has
received prompt notice of the effectiveness of such changes from the Trust
or the Adviser. In addition to such notice, the Adviser shall provide to
the Subadviser a copy of a modified Prospectus reflecting such changes.
The Adviser acknowledges and agrees that the Prospectus will at all times
be in compliance with all disclosure requirements under all applicable
federal and state laws and regulations relating to the Trust or the Fund,
including, without limitation, the 1940 Act, and the rules and regulations
thereunder, and that the Subadviser shall have no liability in connection
therewith, except as to the accuracy of material information furnished by
the Subadviser to the Fund or to the Adviser specifically for inclusion in
the Prospectus. The Subadviser hereby agrees to provide to the Adviser in
a timely manner such information relating to the Subadviser and its
relationship to, and actions for, the Fund as may be required to be
contained in the Prospectus.
2
<PAGE> 3
(c) Voting of Proxies. The Subadviser shall have the power to vote,
either in person or by proxy, all securities in which the Subadviser
Assets may be invested from time to time, and shall not be required to
seek or take instructions from the Adviser or the Fund or take any action
with respect thereto. If both the Subadviser and another entity managing
assets of the Fund have invested in the same security, the Subadviser and
such other entity will each have the power to vote independently its pro
rata share of the security.
(d) Agent. Subject to any other written instructions of the Adviser
or the Trust, the Subadviser is hereby appointed the Adviser's and the
Trust's agent and attorney-in-fact for the limited purposes of executing
account documentation, agreements, contracts and other documents as the
Subadviser shall be requested by brokers, dealers, counterparties and
other persons in connection with its management of the Subadviser Assets.
The Subadviser agrees to provide the Adviser and the Trust with copies of
any such agreements executed on behalf of the Adviser or the Trust, upon
the request of the Adviser or the Trust.
(e) Brokerage. The Subadviser is authorized, subject to the
supervision of the Adviser and the Trust's Board of Trustees, to establish
and maintain accounts on behalf of the Fund with, and place orders for the
purchase and sale of the Subadviser Assets with or through, such persons,
brokers or dealers ("brokers") as Subadviser may elect and negotiate
commissions to be paid on such transactions. The Subadviser, however, is
not required to obtain the consent of the Adviser or the Trust's Board of
Trustees prior to establishing any such brokerage account. The Subadviser
shall place all orders for the purchase and sale of portfolio investments
for the Fund's account with brokers selected by the Subadviser. In the
selection of such brokers and the placing of such orders, the Subadviser
shall seek to obtain for the Fund the most favorable price and execution
available, except to the extent it may be permitted to pay higher
brokerage commissions for brokerage and research services, as provided
below. In using its reasonable efforts to obtain for the Fund the most
favorable price and execution available, the Subadviser, bearing in mind
the Fund's best interests at all times, shall consider all factors it
deems relevant, including price, the size of the transaction, the breadth
and nature of the market for the security, the difficulty of the
execution, the amount of the commission, if any, the timing of the
transaction, market prices and trends, the reputation, experience and
financial stability of the broker involved, and the quality of service
rendered by the broker in other transactions. Subject to such policies as
the Trustees may determine, or as may be mutually agreed to by the Adviser
and the Subadviser, the Subadviser shall not be deemed to have acted
unlawfully or to have breached any duty created by this Agreement or
otherwise solely by reason of its having caused the Fund to pay a broker
that provides brokerage and research services (within the meaning of
Section 29(e) of the Securities Exchange Act of 1934) to the Subadviser an
amount of commission for effecting a Fund investment transaction that is
in excess of the amount of commission that another broker would have
charged for effecting that transaction if, but only if, the Subadviser
determines in good faith that such commission was reasonable in relation
to the value of the brokerage and research services provided by such
broker or dealer viewed in
3
<PAGE> 4
terms of either that particular transaction or the overall responsibility
of the Subadviser with respect to the accounts as to which it exercises
investment discretion.
It is recognized that the services provided by such brokers may be
useful to the Subadviser in connection with the Subadviser's services to
other clients. On occasions when the Subadviser deems the purchase or sale
of a security to be in the best interests of the Fund as well as other
clients of the Subadviser, the Subadviser, to the extent permitted by
applicable laws and regulations, may, but shall be under no obligation to,
aggregate the securities to be sold or purchased for the Fund with those
sold or purchased for the Subadviser's other clients. In such event,
allocation of securities so sold or purchased, as well as the expenses
incurred in the transaction, will be made by the Subadviser in the manner
the Subadviser considers to be the most equitable and consistent with its
fiduciary obligations to the Fund and to such other clients. It is
recognized that in some cases, this procedure may adversely affect the
price paid or received by the Fund or the size of the position obtainable
for, or disposed of by, the Fund.
(f) Securities Transactions. The Subadviser and any affiliated
person of the Subadviser will not purchase securities or other instruments
from or sell securities or other instruments to the Fund; provided,
however, the Subadviser may purchase securities or other instruments from
or sell securities or other instruments to the Fund if such transaction is
permissible under applicable laws and regulations, including, without
limitation, the 1940 Act and the Advisers Act and the rules and
regulations promulgated thereunder.
The Subadviser, including its Access Persons (as defined in
subsection (e) of Rule 17j- 1 under the 1940 Act), agrees to observe and
comply with Rule 17j-1 and its Code of Ethics (which shall comply in all
material respects with Rule 17j-1), as the same may be amended from time
to time. On a quarterly basis, the Subadviser will either (i) certify to
the Adviser that the Subadviser and its Access Persons have complied with
the material provisions of the Subadviser's Code of Ethics with respect to
the Subadviser Assets or (ii) identify any material violations which have
occurred with respect to the Subadviser Assets.
(g) Books and Records. The Subadviser shall maintain separate
detailed records of all matters pertaining to the Subadviser Assets (the
"Fund's Records"), including, without limitation, brokerage and other
records of all securities transactions. The Subadviser acknowledges that
the Fund's Records are property of the Trust. The Fund's Records (relating
to the Subadviser Assets) shall be available to the Adviser at any time
upon reasonable request during normal business hours and shall be
available for telecopying without delay to the Adviser during any day that
the Fund is open for business.
(h) Information Concerning Fund Investments and Subadviser. From
time to time as the Adviser or the Fund may request, the Subadviser will
furnish the requesting party reports on portfolio transactions and reports
on Fund Investments held in the portfolio, all in such detail as the
Adviser or the Fund may reasonably request. The Subadviser will also
4
<PAGE> 5
inform the Adviser in a timely manner of material changes in portfolio
managers responsible for Subadviser Assets, any changes in the ownership
or senior management of the Subadviser, or of material changes in the
control of the Subadviser. Upon reasonable request, the Subadviser will
make available its officers and employees to meet with the Trust's Board
of Trustees to review the Fund Investments.
Subject to the provisions of paragraph 2(b) hereof, The Subadviser
will also provide such information or perform such additional acts as are
customarily performed by a subadviser and may be required for the Fund or
the Adviser to comply with their respective obligations under applicable
laws, including, without limitation, the Code, the 1940 Act, the Advisers
Act, the Securities Act of 1933, as amended (the "Securities Act") and any
state securities laws, and any rule or regulation thereunder.
(i) Custody Arrangements. The Subadviser shall on each business day
provide the Adviser and the Trust's custodian such information as the
Adviser and the Trust's custodian may reasonably request relating to all
transactions concerning the Fund Investments.
(j) Historical Performance Information. To the extent agreed upon by
the parties, the Subadviser will provide the Trust with historical
performance information on similarly managed investment companies or for
other accounts to be included in the Prospectus or for any other uses
permitted by applicable law.
3. Independent Contractor. In the performance of its duties hereunder, the
Subadviser is and shall be an independent contractor and unless otherwise
expressly provided herein or otherwise authorized in writing, shall have no
authority to act for or represent the Fund, the Trust or the Adviser in any way
or otherwise be deemed an agent of the Fund, the Trust or the Adviser.
4. Expenses. During the term of this Agreement, Subadviser will pay all
expenses incurred by it in connection with its activities under this Agreement
other than the cost of securities, commodities and other investments (including
brokerage commissions and other transaction charges, if any) purchased for the
Fund. The Subadviser shall, at its sole expense, employ or associate itself with
such persons as it believes to be particularly fitted to assist it in the
execution of its duties under this Agreement. The Subadviser shall not be
responsible for the Trust's, the Fund's or Adviser's expenses. The Trust or the
Adviser, as the case may be, shall reimburse the Subadviser for any expenses of
the Fund or the Adviser as may be reasonably incurred by such Subadviser on
behalf of the Fund or the Adviser. The Subadviser shall keep and supply to the
Trust and the Adviser reasonable records of all such expenses.
5. Compensation. For the services provided and the expenses assumed with
respect to the Fund pursuant to this Agreement, the Subadviser will be entitled
to the fee listed for each Fund on Exhibit A. Such fees will be computed daily
and payable no later than the seventh (7th) business
5
<PAGE> 6
day following the end of each month, from the Adviser or the Trust, calculated
at an annual rate based on the Subadviser Assets' average daily net assets.
The method of determining net assets of the Fund for purposes hereof shall
be the same as the method of determining net assets for purposes of establishing
the offering and redemption price of the Shares as described in the Fund's
Prospectus. If this Agreement shall be effective for only a portion of a month,
the aforesaid fee shall be prorated for the portion of such month during which
this Agreement is in effect.
6. Representations and Warranties of Subadviser. The Subadviser represents
and warrants to the Adviser and the Fund as follows:
(a) The Subadviser is registered as an investment adviser under the
Advisers Act;
(b) The Subadviser has filed a notice of exemption pursuant to Rule
4.14 under the Commodity Exchange Act (the "CEA") with the Commodity
Futures Trading Commission (the "CFTC") and the National Futures
Association (the "NFA"), or is not required to file such exemption;
(c) The Subadviser is a corporation duly organized and validly
existing under the laws of the State of Delaware with the power to own and
possess its assets and carry on its business as it is now being conducted;
(d) The execution, delivery and performance by the Subadviser of
this Agreement are within the Subadviser's powers and have been duly
authorized by all necessary action on the part of its shareholders, and no
action by or in respect of, or filing with, any governmental body, agency
or official is required on the part of the Subadviser for the execution,
delivery and performance by the Subadviser of this Agreement, and the
execution, delivery and performance by the Subadviser of this Agreement do
not contravene or constitute a default under (i) any provision of
applicable law, rule or regulation, (ii) the Subadviser's governing
instruments, or (iii) any agreement, judgment, injunction, order, decree
or other instrument binding upon the Subadviser;
(e) The Form ADV of the Subadviser previously provided to the
Adviser is a true and complete copy of the form as currently filed with
the SEC and the information contained therein, as of the date of such Form
ADV, is accurate and complete in all material respects and does not omit
to state any material fact necessary in order to make the statements made,
in light of the circumstances under which they were made, not misleading.
7. Representations and Warranties of Adviser. The Adviser represents and
warrants to the Subadviser as follows:
(a) The Adviser is registered as an investment adviser under the
Advisers Act;
6
<PAGE> 7
(b) The Adviser has filed a notice of exemption pursuant to Rule
4.14 under the CEA with the CFTC and the NFA or is not required to file
such exemption;
(c) The Adviser is a corporation duly organized and validly existing
under the laws of the State of Ohio with the power to own and possess its
assets and carry on its business as it is now being conducted;
(d) The execution, delivery and performance by the Adviser of this
Agreement are within the Adviser's powers and have been duly authorized by
all necessary action on the part of its shareholders or directors, and no
action by or in respect of, or filing with, any governmental body, agency
or official is required on the part of the Adviser for the execution,
delivery and performance by the Adviser of this Agreement, and the
execution, delivery and performance by the Adviser of this Agreement do
not contravene or constitute a default under (i) any provision of
applicable law, rule or regulation, (ii) the Adviser's governing
instruments, or (iii) any agreement, judgment, injunction, order, decree
or other instrument binding upon the Adviser;
(e) The Form ADV of the Adviser previously provided to the
Subadviser is a true and complete copy of the form filed with the SEC and
the information contained therein is accurate and complete in all material
respects and does not omit to state any material fact necessary in order
to make the statements made, in light of the circumstances under which
they were made, not misleading;
(f) The Adviser acknowledges that it received a copy of the
Subadviser's Form ADV prior to the execution of this Agreement; and
(g) The Adviser and the Trust have duly entered into the Advisory
Agreement pursuant to which the Trust authorized the Adviser to enter into
this Agreement.
8. Representations and Warranties of the Trust. The Trust represents and
warrants to the Adviser and the Subadviser as follows:
(a) The Trust is a business trust duly organized and validly
existing under the laws of the Commonwealth of Massachusetts with the
power to own and possess its assets and carry on its business as it is now
being conducted;
(b) The Trust is registered as an investment company under the 1940
Act and the Fund's shares are registered under the Securities Act; and
(c) The execution, delivery and performance by the Trust of this
Agreement are within the Trust's powers and have been duly authorized by
all necessary action on the part of the Trust and its Board of Trustees,
and no action by or in respect of, or filing with, any governmental body,
agency or official is required on the part of the Trust for the execution,
7
<PAGE> 8
delivery and performance by the Adviser of this Agreement, and the
execution, delivery and performance by the Trust of this Agreement do not
contravene or constitute a default under (i) any provision of applicable
law, rule or regulation, (ii) the Trust's governing instruments, or (iii)
any agreement, judgment, injunction, order, decree or other instrument
binding upon the Trust.
9. Survival of Representations and Warranties; Duty to Update Information.
All representations and warranties made by the Subadviser, the Adviser and the
Trust pursuant to Sections 6, 7 and 8, respectively, shall survive for the
duration of this Agreement and the parties hereto shall promptly notify each
other in writing during the term of this Agreement upon becoming aware that any
of the foregoing representations and warranties are no longer true.
10. Liability and Indemnification.
(a) Liability. Except to the extent that the Subadviser is liable to
the Trust or any other party as a direct result of the wilful misfeasance,
bad faith or gross negligence on the part of the Subadviser or a reckless
disregard of its duties hereunder, the Subadviser, each of its affiliates
and all respective partners, officers, directors and employees
("Affiliates") and each person, if any, who within the meaning of the
Securities Act controls the Subadviser ("Controlling Persons") shall not
be subject to any expenses or liability to the Adviser, the Trust or the
Fund or any of the Fund's shareholders. In the absence of wilful
misfeasance, bad faith or gross negligence on the part of the Adviser or a
reckless disregard of its duties hereunder, the Adviser, any of its
Affiliates and each of the Adviser's Controlling Persons, if any, shall
not be subject to any liability to the Subadviser, for any act or omission
in the case of, or connected with, rendering services hereunder or for any
losses that may be sustained in the purchase, holding or sale of Fund
Investments; provided, however, that nothing herein shall relieve the
Adviser and the Subadviser from any of their obligations under applicable
law, including, without limitation, the federal and state securities laws
and the CEA.
(b) Indemnification. The Subadviser shall indemnify the Adviser and
the Trust, and their respective Affiliates and Controlling Persons for any
liability and expenses, including reasonable attorneys' fees, which the
Adviser and the Trust and their respective Affiliates and Controlling
Persons may sustain as a result of the Subadviser's wilful misfeasance,
bad faith, gross negligence, reckless disregard of its duties hereunder or
violation of applicable law, including, without limitation, the federal
and state securities laws or the CEA. Notwithstanding any other provision
in this Agreement, the Subadviser will indemnify the Adviser and the
Trust, and their respective Affiliates and Controlling Persons for any
liability and expenses, including reasonable attorneys' fees, to which
they may be subjected as a result of their reliance upon and use of the
historical performance calculations provided by the Subadviser concerning
the Subadviser's composite account data or historical performance
information on similarly managed investment companies or accounts, except
that the Adviser and the Trust and their respective Affiliates and
Controlling Persons shall
8
<PAGE> 9
not be indemnified for a loss or expense resulting from their negligence
or willful misconduct in using or presenting such information.
The Adviser shall indemnify the Subadviser, its Affiliates and its
Controlling Persons, for any liability and expenses, including reasonable
attorneys' fees, which may be sustained by Subadviser, including, but not
limited to, those resulting from the use of hypothetical performance data
by the Adviser or the Trust, provided however, Subadviser shall not be
indemnified for any liability or expenses resulting from Subadviser's own
wilful misfeasance, bad faith, gross negligence, reckless disregard of its
duties hereunder or violation of applicable law, including, without
limitation, the federal and state securities laws or the CEA.
11. Duration and Termination.
(a) Duration. Unless sooner terminated, this Agreement shall
continue until October 31, 1999 and thereafter shall continue
automatically for successive annual periods, provided such continuance is
specifically approved at least annually by the Trust's Board of Trustees
or vote of the lesser of (a) 67% of the shares of the Fund represented at
a meeting if holders of more than 50% of the outstanding shares of the
Fund are present in person or by proxy or (b) more than 50% of the
outstanding shares of the Fund; provided that in either event its
continuance also is approved by a majority of the Trust's Trustees who are
not "interested persons" (as defined in the 1940 Act) of any party to this
Agreement, by vote cast in person at a meeting called for the purpose of
voting on such approval.
(b) Termination. Notwithstanding whatever may be provided herein to
the contrary, this Agreement may be terminated at any time, without
payment of any penalty:
(i) By vote of a majority of the Trust's Board of Trustees, or
by vote of a majority of the outstanding voting securities of the
Fund, or by the Adviser, in each case, upon at least 60 days'
written notice to the Subadviser;
(ii) By any party hereto immediately upon written notice to
the other parties in the event of a breach of any provision of this
Agreement by either of the other parties; or
(iii) By the Subadviser upon at least 60 days written notice
to the Adviser and the Trust.
This Agreement shall not be assigned (as such term is defined in the 1940
Act) and shall terminate automatically in the event of its assignment or
upon the termination of the Advisory Agreement.
9
<PAGE> 10
12. Duties of the Adviser. The Adviser shall continue to have
responsibility for all services to be provided to the Fund pursuant to the
Advisory Agreement and shall oversee and review the Subadviser's performance of
its duties under this Agreement. Nothing contained in this Agreement shall
obligate the Adviser to provide any funding or other support for the purpose of
directly or indirectly promoting investments in the Fund.
13. Reference to Subadviser. Neither the Adviser nor any Affiliate or
agent of the Adviser shall make reference to or use the name of Subadviser or
any of its Affiliates, or any of their clients, except references concerning the
identity of and services provided by Subadviser to the Fund, which references
shall not differ in substance from those included in the Fund's Prospectus and
this Agreement, in any advertising or promotional materials without the prior
approval of Subadviser, which approval shall not be unreasonably withheld or
delayed. The Adviser and the Trust hereby agrees to make all reasonable efforts
to cause the Fund and any Affiliate thereof to satisfy the foregoing obligation.
14. Amendment. This Agreement may be amended by mutual consent of the
parties, provided that the terms of any material amendment shall be approved by:
a) the Trust's Board of Trustees or by a vote of a majority of the outstanding
voting securities of the Fund (as required by the 1940 Act) and b) the vote of a
majority of those Trustees of the Trust who are not "interested persons" of any
party to this Agreement cast in person at a meeting called for the purpose of
voting on such approval, if such approval is required by applicable law.
15. Confidentiality. Subject to the duties of the Adviser, the Fund and
the Subadviser to comply with applicable law, including any demand of any
regulatory or taxing authority having jurisdiction, the parties hereto shall
treat as confidential all information pertaining to the Fund and the actions of
the Subadviser, the Adviser and the Fund in respect thereof.
16. Notice. Any notice that is required to be given by the parties to each
other under the terms of this Agreement shall be in writing, delivered, or
mailed postpaid to the other parties, or transmitted by facsimile with
acknowledgment of receipt, to the parties at the following addresses or
facsimile numbers, which may from time to time be changed by the parties by
notice to the other party:
(a) If to the Subadviser:
Pilgrim Baxter & Associates, Ltd.
1255 Drummers Lane, Suite 300
Wayne, PA 19087
Attention: John M. Zerr, Esquire
Facsimile: (616) 995-9519
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<PAGE> 11
(b) If to the Adviser:
Nationwide Advisory Services, Inc.
Three Nationwide Plaza, 26th Floor
Columbus, OH 43215
Attention: James F. Laird, Jr.
Facsimile: (614) 249-7424
(c) If to the Trust:
Nationwide Separate Account Trust
Three Nationwide Plaza, 26th Floor
Columbus, OH 43215
Attention: James F. Laird, Jr.
Facsimile: (614) 249-7424
16. Jurisdiction. This Agreement shall be governed by and construed to be
consistent with the Advisory Agreement and in accordance with substantive laws
of the Commonwealth of Massachusetts without reference to choice of law
principles thereof and in accordance with the 1940 Act. In the case of any
conflict, the 1940 Act shall control.
17. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, all of which shall
together constitute one and the same instrument.
18. Certain Definitions. For the purposes of this Agreement and except as
otherwise provided herein, "interested person," "affiliated person," and
"assignment" shall have their respective meanings as set forth in the 1940 Act,
subject, however, to such exemptions as may be granted by the SEC.
19. Captions. The captions herein are included for convenience of
reference only and shall be ignored in the construction or interpretation
hereof.
20. Severability. If any provision of this Agreement shall be held or made
invalid by a court decision or applicable law, the remainder of the Agreement
shall not be affected adversely and shall remain in full force and effect.
21. Nationwide Separate Account Trust and its Trustees. The terms
"Nationwide Separate Account Trust" and the "Trustees of Nationwide Separate
Account Trust" refer respectively to the Trust created and the Trustees, as
trustees but not individually or personally, acting from time to time under a
Declaration of Trust dated as of June 30, 1981, as has been or may be amended
from time to time, and to which reference is hereby made and a copy of which is
on file at the office of the Secretary of State of The Commonwealth of
Massachusetts and elsewhere as required by law,
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<PAGE> 12
and to any and all amendments thereto so filed or hereafter filed. The
obligations of the Trust entered into in the name or on behalf thereof by any of
Nationwide Separate Account Trust's Trustees, representatives, or agents are not
made individually, but only in their capacities with respect to Nationwide
Separate Account Trust. Such obligations are not binding upon any of the
Trustees, shareholders, or representatives of the Trust personally, but bind
only the assets of the Trust. All persons dealing with any series of Shares of
the Trust must look solely to the assets of the Trust belonging to such series
for the enforcement of any claims against the Trust.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
day and year first written above.
TRUST
NATIONWIDE SEPARATE ACCOUNT TRUST
By:
---------------------------
Name:
Title:
ADVISER
NATIONWIDE ADVISORY SERVICES, INC.
By:
---------------------------
Name:
Title:
SUBADVISER
PILGRIM BAXTER & ASSOCIATES, LTD.
By:
---------------------------
Name:
Title:
12
<PAGE> 13
EXHIBIT A
SUBADVISORY AGREEMENT
BETWEEN NATIONWIDE SEPARATE
ACCOUNT TRUST, NATIONWIDE ADVISORY
SERVICES, INC. and PILGRIM BAXTER & ASSOCIATES, LTD.
Effective October 31, 1997
<TABLE>
<CAPTION>
Funds of the Trust Advisory Fees
- ------------------ -------------
<S> <C>
Nationwide Select Advisers Mid Cap Fund 0.65% on Subadviser Assets
up to $50 Million
0.50% for Subadviser Assets
of $50 Million and more
</TABLE>
13
<PAGE> 1
EXHIBIT (5)(g)(viii)
SUBADVISORY AGREEMENT
THIS AGREEMENT is made and entered into on this 31st day of October, 1997,
among NATIONWIDE SEPARATE ACCOUNT TRUST, a Massachusetts business trust (the
"Trust"), NATIONWIDE ADVISORY SERVICES, INC. (the "Adviser"), an Ohio
corporation registered under the Investment Advisers Act of 1940 (the "Advisers
Act"), and Rice, Hall, James & Associates, a California corporation (the
"Subadviser"), also registered under the Advisers Act.
W I T N E S S E T H :
WHEREAS, the Trust is registered with the Securities and Exchange
Commission (the "SEC") as an open-end management investment company under the
Investment Company Act of 1940 (the "1940 Act");
WHEREAS, the Adviser has, pursuant to an Advisory Agreement with the Trust
dated as of October 31, 1997 (the "Advisory Agreement"), been retained to act as
investment adviser for certain of the series of the Trust which are listed on
Exhibit A to this Agreement (each a "Fund");
WHEREAS, the Advisory Agreement permits the Adviser to delegate certain of
its duties under the Advisory Agreement to other investment advisers, subject to
the requirements of the 1940 Act; and
WHEREAS, the Adviser desires to retain Subadviser to assist it in the
provision of a continuous investment program for that portion of a Fund's assets
which the Adviser will assign to the Subadviser (the "Subadviser Assets"), and
Subadviser is willing to render such services subject to the terms and
conditions set forth in this Agreement.
NOW, THEREFORE, the parties do mutually agree and promise as follows:
1. Appointment as Subadviser. The Adviser hereby retains the Subadviser to
act as investment adviser for and to manage the Subadviser Assets subject to the
supervision of the Adviser and the Board of Trustees of the Trust and subject to
the terms of this Agreement; and the Subadviser hereby accepts such employment.
In such capacity, the Subadviser shall be responsible for the investment
management of the Subadviser Assets. It is recognized that the Subadviser now
acts, and that from time to time hereafter may act, as investment adviser to one
or more other investment companies and to fiduciary or other managed accounts
and that the Adviser and the Trust have no objection to such activities.
1
<PAGE> 2
2. Duties of Subadviser.
(a) Investments. The Subadviser is hereby authorized and directed
and hereby agrees, subject to the stated investment policies and
restrictions of the Fund as set forth in the Fund's prospectus and
statement of additional information as currently in effect and as
supplemented or amended from time to time (collectively referred to
hereinafter as the "Prospectus") and subject to the directions of the
Adviser and the Fund's Board of Trustees, to purchase, hold and sell
investments for the Subadviser Assets ("Fund Investments") and to monitor
on a continuous basis the performance of such Fund Investments. In
providing these services, the Subadviser will conduct a continual program
of investment, evaluation and, if appropriate, sale and reinvestment of
the Subadviser Assets. The Adviser agrees to provide the Subadviser with
such assistance as may be reasonably requested by the Subadviser in
connection with its activities under this Agreement, including, without
limitation, information concerning the Fund, its funds available, or to
become available, for investment and generally as to the conditions of the
Fund's affairs.
(b) Compliance with Applicable Laws and Governing Documents. In the
performance of its duties and obligations under this Agreement, the
Subadviser shall act in conformity with the Trust's Declaration of Trust
and By-Laws and the Prospectus and with the instructions and directions
received in writing from the Adviser or the Trustees of the Trust and will
conform to and comply with the requirements of the 1940 Act, the Internal
Revenue Code of 1986, as amended (the "Code"), and all other applicable
federal and state laws and regulations. Notwithstanding the foregoing, the
Adviser shall remain responsible for ensuring the Fund's overall
compliance with the 1940 Act, the Code and all other applicable federal
and state laws and regulations and the Subadviser is only obligated to
comply with this subsection (b) with respect to the Subadviser Assets.
The Adviser will provide the Subadviser with reasonable advance
notice of any change in the Fund's investment objectives, policies and
restrictions as stated in the Prospectus, and the Subadviser shall, in the
performance of its duties and obligations under this Agreement, manage the
Fund Investments consistent with such changes, provided the Subadviser has
received prompt notice of the effectiveness of such changes from the Trust
or the Adviser. In addition to such notice, the Adviser shall provide to
the Subadviser a copy of a modified Prospectus reflecting such changes.
The Adviser acknowledges and agrees that the Prospectus will at all times
be in compliance with all disclosure requirements under all applicable
federal and state laws and regulations relating to the Trust or the Fund,
including, without limitation, the 1940 Act, and the rules and regulations
thereunder, and that the Subadviser shall have no liability in connection
therewith, except as to the accuracy of material information furnished by
the Subadviser to the Fund or to the Adviser specifically for inclusion in
the Prospectus. The Subadviser hereby agrees to provide to the Adviser in
a timely manner such information relating to the Subadviser and its
relationship to, and actions for, the Fund as may be required to be
contained in the Prospectus.
2
<PAGE> 3
(c) Voting of Proxies. The Subadviser shall have the power to vote,
either in person or by proxy, all securities in which the Subadviser
Assets may be invested from time to time, and shall not be required to
seek or take instructions from the Adviser or the Fund or take any action
with respect thereto. If both the Subadviser and another entity managing
assets of the Fund have invested in the same security, the Subadviser and
such other entity will each have the power to vote its pro rata share of
the security.
(d) Agent. Subject to any other written instructions of the Adviser
or the Trust, the Subadviser is hereby appointed the Adviser's and the
Trust's agent and attorney-in-fact for the limited purposes of executing
account documentation, agreements, contracts and other documents as the
Subadviser shall be requested by brokers, dealers, counterparties and
other persons in connection with its management of the Subadviser Assets.
The Subadviser agrees to provide the Adviser and the Trust with copies of
any such agreements executed on behalf of the Adviser or the Trust upon
the written request of the Adviser or the Trust.
(e) Brokerage. The Subadviser is authorized, subject to the
supervision of the Adviser and the Trust's Board of Trustees, to establish
and maintain accounts on behalf of the Fund with, and place orders for the
purchase and sale of the Subadviser Assets with or through, such persons,
brokers or dealers ("brokers") as Subadviser may elect and negotiate
commissions to be paid on such transactions. The Subadviser, however, is
not required to obtain the consent of the Adviser or the Trust's Board of
Trustees prior to establishing any such brokerage account. The Subadviser
shall place all orders for the purchase and sale of portfolio investments
for the Fund's account with brokers selected by the Subadviser. In the
selection of such brokers and the placing of such orders, the Subadviser
shall seek to obtain for the Fund the most favorable price and execution
available, except to the extent it may be permitted to pay higher
brokerage commissions for brokerage and research services, as provided
below. In using its reasonable efforts to obtain for the Fund the most
favorable price and execution available, the Subadviser, bearing in mind
the Fund's best interests at all times, shall consider all factors it
deems relevant, including price, the size of the transaction, the breadth
and nature of the market for the security, the difficulty of the
execution, the amount of the commission, if any, the timing of the
transaction, market prices and trends, the reputation, experience and
financial stability of the broker involved, and the quality of service
rendered by the broker in other transactions. Subject to such policies as
the Trustees may determine, or as may be mutually agreed to by the Adviser
and the Subadviser, the Subadviser shall not be deemed to have acted
unlawfully or to have breached any duty created by this Agreement or
otherwise solely by reason of its having caused the Fund to pay a broker
that provides brokerage and research services (within the meaning of
Section 29(e) of the Securities Exchange Act of 1934) to the Subadviser an
amount of commission for effecting a Fund investment transaction that is
in excess of the amount of commission that another broker would have
charged for effecting that transaction if, but only if, the Subadviser
determines in good faith that such commission was reasonable in relation
to the value of the brokerage and research services provided by such
broker or dealer viewed in
3
<PAGE> 4
terms of either that particular transaction or the overall responsibility
of the Subadviser with respect to the accounts as to which it exercises
investment discretion.
It is recognized that the services provided by such brokers may be
useful to the Subadviser in connection with the Subadviser's services to
other clients. On occasions when the Subadviser deems the purchase or sale
of a security to be in the best interests of the Fund as well as other
clients of the Subadviser, the Subadviser, to the extent permitted by
applicable laws and regulations, may, but shall be under no obligation to,
aggregate the securities to be sold or purchased in order to obtain the
most favorable price or lower brokerage commissions and efficient
execution. In such event, allocation of securities so sold or purchased,
as well as the expenses incurred in the transaction, will be made by the
Subadviser in the manner the Subadviser considers to be the most equitable
and consistent with its fiduciary obligations to the Fund and to such
other clients. It is recognized that in some cases, this procedure may
adversely affect the price paid or received by the Fund or the size of the
position obtainable for, or disposed of by, the Fund.
(f) Securities Transactions. The Subadviser and any affiliated
person of the Subadviser will not purchase securities or other instruments
from or sell securities or other instruments to the Fund; provided,
however, the Subadviser may purchase securities or other instruments from
or sell securities or other instruments to the Fund if such transaction is
permissible under applicable laws and regulations, including, without
limitation, the 1940 Act and the Advisers Act and the rules and
regulations promulgated thereunder.
The Subadviser, including its Access Persons (as defined in
subsection (e) of Rule 17j- 1 under the 1940 Act), agrees to observe and
comply with Rule 17j-1 and its Code of Ethics (which shall comply in all
material respects with Rule 17j-1), as the same may be amended from time
to time. On a quarterly basis, the Subadviser will either (i) certify to
the Adviser that the Subadviser and its Access Persons have complied with
the Subadviser's Code of Ethics with respect to the Subadviser Assets or
(ii) identify any violations which have occurred with respect to the
Subadviser Assets.
(g) Books and Records. The Subadviser shall maintain separate
detailed records of all matters pertaining to the Subadviser Assets (the
"Fund's Records"), including, without limitation, brokerage and other
records of all securities transactions. The Subadviser acknowledges that
the Fund's Records are property of the Trust. The Fund's Records (relating
to the Subadviser Assets) shall be available to the Adviser at any time
upon reasonable request during normal business hours and shall be
available for telecopying without delay to the Adviser during any day that
the Fund is open for business.
(h) Information Concerning Fund Investments and Subadviser. From
time to time as the Adviser or the Fund may request, the Subadviser will
furnish the requesting party reports on portfolio transactions and reports
on Fund Investments held in the portfolio, all in such detail as the
Adviser or the Fund may reasonably request. The Subadviser will also
4
<PAGE> 5
inform the Adviser in a timely manner of material changes in portfolio
managers responsible for Subadviser Assets, any changes in the ownership
or management of the Subadviser, or of material changes in the control of
the Subadviser. Upon reasonable request, the Subadviser will make
available its officers and employees to meet with the Trust's Board of
Trustees to review the Fund Investments.
The Subadviser will also provide such information or perform such
additional acts as are customarily performed by a subadviser and may be
required for the Fund or the Adviser to comply with their respective
obligations under applicable laws, including, without limitation, the
Code, the 1940 Act, the Advisers Act, the Securities Act of 1933, as
amended (the "Securities Act") and any state securities laws, and any rule
or regulation thereunder.
(i) Custody Arrangements. The Subadviser shall on each business day
provide the Adviser and the Trust's custodian such information as the
Adviser and the Trust's custodian may reasonably request relating to all
transactions concerning the Fund Investments.
(j) Historical Performance Information. To the extent agreed upon by
the parties, the Subadviser will provide the Trust with historical
performance information on similarly managed investment companies or for
other accounts to be included in the Prospectus or for any other uses
permitted by applicable law.
3. Independent Contractor. In the performance of its duties hereunder, the
Subadviser is and shall be an independent contractor and unless otherwise
expressly provided herein or otherwise authorized in writing, shall have no
authority to act for or represent the Fund, the Trust or the Adviser in any way
or otherwise be deemed an agent of the Fund, the Trust or the Adviser.
4. Expenses. During the term of this Agreement, Subadviser will pay all
expenses incurred by it in connection with its activities under this Agreement
other than the cost of securities, commodities and other investments (including
brokerage commissions and other transaction charges, if any) purchased for the
Fund. The Subadviser shall, at its sole expense, employ or associate itself with
such persons as it believes to be particularly fitted to assist it in the
execution of its duties under this Agreement. The Subadviser shall not be
responsible for the Trust's, the Fund's or Adviser's expenses. The Trust or the
Adviser, as the case may be, shall reimburse the Subadviser for any expenses of
the Fund or the Adviser as may be reasonably incurred by such Subadviser on
behalf of the Fund or the Adviser. The Subadviser shall keep and supply to the
Trust and the Adviser reasonable records of all such expenses.
5. Compensation. For the services provided and the expenses assumed with
respect to the Fund pursuant to this Agreement, the Subadviser will be entitled
to the fee listed for each Fund on Exhibit A. Such fees will be computed daily
and payable no later than the seventh (7th) business day following the end of
each month, from the Adviser or the Trust, calculated at an annual rate based on
the Subadviser Assets' average daily net assets.
5
<PAGE> 6
The method of determining net assets of the Fund for purposes hereof shall
be the same as the method of determining net assets for purposes of establishing
the offering and redemption price of the Shares as described in the Fund's
Prospectus. If this Agreement shall be effective for only a portion of a month,
the aforesaid fee shall be prorated for the portion of such month during which
this Agreement is in effect.
6. Representations and Warranties of Subadviser. The Subadviser represents
and warrants to the Adviser and the Fund as follows:
(a) The Subadviser is registered as an investment adviser under the
Advisers Act;
(b) The Subadviser has filed a notice of exemption pursuant to Rule
4.14 under the Commodity Exchange Act (the "CEA") with the Commodity
Futures Trading Commission (the "CFTC") and the National Futures
Association (the "NFA"), or is not required to file such exemption;
(c) The Subadviser is a corporation duly organized and validly
existing under the laws of the State of California with the power to own
and possess its assets and carry on its business as it is now being
conducted;
(d) The execution, delivery and performance by the Subadviser of
this Agreement are within the Subadviser's powers and have been duly
authorized by all necessary action on the part of its shareholder, and no
action by or in respect of, or filing with, any governmental body, agency
or official is required on the part of the Subadviser for the execution,
delivery and performance by the Subadviser of this Agreement, and the
execution, delivery and performance by the Subadviser of this Agreement do
not contravene or constitute a default under (i) any provision of
applicable law, rule or regulation, (ii) the Subadviser's governing
instruments, or (iii) any agreement, judgment, injunction, order, decree
or other instrument binding upon the Subadviser;
(e) The Form ADV of the Subadviser previously provided to the
Adviser is a true and complete copy of the form as currently filed with
the SEC and the information contained therein is accurate and complete in
all material respects and does not omit to state any material fact
necessary in order to make the statements made, in light of the
circumstances under which they were made, not misleading.
7. Representations and Warranties of Adviser. The Adviser represents and
warrants to the Subadviser as follows:
(a) The Adviser is registered as an investment adviser under the
Advisers Act;
6
<PAGE> 7
(b) The Adviser has filed a notice of exemption pursuant to Rule
4.14 under the CEA with the CFTC and the NFA or is not required to file
such exemption;
(c) The Adviser is a corporation duly organized and validly existing
under the laws of the State of Ohio with the power to own and possess its
assets and carry on its business as it is now being conducted;
(d) The execution, delivery and performance by the Adviser of this
Agreement are within the Adviser's powers and have been duly authorized by
all necessary action on the part of its shareholders or directors, and no
action by or in respect of, or filing with, any governmental body, agency
or official is required on the part of the Adviser for the execution,
delivery and performance by the Adviser of this Agreement, and the
execution, delivery and performance by the Adviser of this Agreement do
not contravene or constitute a default under (i) any provision of
applicable law, rule or regulation, (ii) the Adviser's governing
instruments, or (iii) any agreement, judgment, injunction, order, decree
or other instrument binding upon the Adviser;
(e) The Form ADV of the Adviser previously provided to the
Subadviser is a true and complete copy of the form filed with the SEC and
the information contained therein is accurate and complete in all material
respects and does not omit to state any material fact necessary in order
to make the statements made, in light of the circumstances under which
they were made, not misleading;
(f) The Adviser acknowledges that it received a copy of the
Subadviser's Form ADV prior to the execution of this Agreement; and
(g) The Adviser and the Trust have duly entered into the Advisory
Agreement pursuant to which the Trust authorized the Adviser to enter into
this Agreement.
8. Representations and Warranties of the Trust. The Trust represents and
warrants to the Adviser and the Subadviser as follows:
(a) The Trust is a business trust duly organized and validly
existing under the laws of the Commonwealth of Massachusetts with the
power to own and possess its assets and carry on its business as it is now
being conducted;
(b) The Trust is registered as an investment company under the 1940
Act and the Fund's shares are registered under the Securities Act; and
(c) The execution, delivery and performance by the Trust of this
Agreement are within the Trust's powers and have been duly authorized by
all necessary action on the part of the Trust and its Board of Trustees,
and no action by or in respect of, or filing with, any governmental body,
agency or official is required on the part of the Trust for the execution,
7
<PAGE> 8
delivery and performance by the Adviser of this Agreement, and the
execution, delivery and performance by the Trust of this Agreement do not
contravene or constitute a default under (i) any provision of applicable
law, rule or regulation, (ii) the Trust's governing instruments, or (iii)
any agreement, judgment, injunction, order, decree or other instrument
binding upon the Trust.
9. Survival of Representations and Warranties; Duty to Update Information.
All representations and warranties made by the Subadviser, the Adviser and the
Trust pursuant to Sections 6, 7 and 8, respectively, shall survive for the
duration of this Agreement and the parties hereto shall promptly notify each
other in writing upon becoming aware that any of the foregoing representations
and warranties are no longer true.
10. Liability and Indemnification.
(a) Liability. Except to the extent that the Subadviser is liable to
the Trust or any other party as a direct result of the action or inaction
of the Subadviser and in the absence of wilful misfeasance, bad faith or
gross negligence on the part of the Subadviser or a reckless disregard of
its duties hereunder, the Subadviser, each of its affiliates and all
respective partners, officers, directors and employees ("Affiliates") and
each person, if any, who within the meaning of the Securities Act controls
the Subadviser ("Controlling Persons") shall not be subject to any
expenses or liability to the Adviser, the Trust or the Fund or any of the
Fund's shareholders. In the absence of wilful misfeasance, bad faith or
gross negligence on the part of the Adviser or a reckless disregard of its
duties hereunder, the Adviser, any of its Affiliates and each of the
Adviser's Controlling Persons, if any, shall not be subject to any
liability to the Subadviser, for any act or omission in the case of, or
connected with, rendering services hereunder or for any losses that may be
sustained in the purchase, holding or sale of Fund Investments; provided,
however, that nothing herein shall relieve the Adviser and the Subadviser
from any of their obligations under applicable law, including, without
limitation, the federal and state securities laws and the CEA.
(b) Indemnification. The Subadviser shall indemnify the Adviser and
the Trust, and their respective Affiliates and Controlling Persons for any
liability and expenses, including reasonable attorneys' fees, which the
Adviser and the Trust and their respective Affiliates and Controlling
Persons may sustain as a result of the Subadviser's wilful misfeasance,
bad faith, gross negligence, reckless disregard of its duties hereunder or
violation of applicable law, including, without limitation, the federal
and state securities laws or the CEA. Notwithstanding any other provision
in this Agreement, the Subadviser will indemnify the Adviser and the
Trust, and their respective Affiliates and Controlling Persons for any
liability and expenses, including reasonable attorneys' fees, to which
they may be subjected as a result of their reliance upon and use of the
historical performance calculations provided by the Subadviser concerning
the Subadviser's composite account data or historical performance
information on similarly managed investment companies or accounts, except
that the Adviser and the Trust and their respective Affiliates and
Controlling Persons shall
8
<PAGE> 9
not be indemnified for a loss or expense resulting from their negligence
or willful misconduct in using such information.
The Adviser shall indemnify the Subadviser, its Affiliates and its
Controlling Persons, for any liability and expenses, including reasonable
attorneys' fees, which may be sustained as a result of the Adviser's
wilful misfeasance, bad faith, gross negligence, reckless disregard of its
duties hereunder or violation of applicable law, including, without
limitation, the federal and state securities laws or the CEA.
11. Duration and Termination.
(a) Duration. Unless sooner terminated, this Agreement shall
continue until October 31, 1999, and thereafter shall continue
automatically for successive annual periods, provided such continuance is
specifically approved at least annually by the Trust's Board of Trustees
or vote of the lesser of (a) 67% of the shares of the Fund represented at
a meeting if holders of more than 50% of the outstanding shares of the
Fund are present in person or by proxy or (b) more than 50% of the
outstanding shares of the Fund; provided that in either event its
continuance also is approved by a majority of the Trust's Trustees who are
not "interested persons" (as defined in the 1940 Act) of any party to this
Agreement, by vote cast in person at a meeting called for the purpose of
voting on such approval.
(b) Termination. Notwithstanding whatever may be provided herein to
the contrary, this Agreement may be terminated at any time, without
payment of any penalty:
(i) By vote of a majority of the Trust's Board of Trustees, or
by vote of a majority of the outstanding voting securities of the
Fund, or by the Adviser, in each case, upon at least 60 days'
written notice to the Subadviser;
(ii) By any party hereto immediately upon written notice to
the other parties in the event of a breach of any provision of this
Agreement by either of the other parties; or
(iii) By the Subadviser upon at least 60 days' written notice
to the Adviser and the Trust.
This Agreement shall not be assigned (as such term is defined in the 1940
Act) and shall terminate automatically in the event of its assignment or
upon the termination of the Advisory Agreement.
12. Duties of the Adviser. The Adviser shall continue to have
responsibility for all services to be provided to the Fund pursuant to the
Advisory Agreement and shall oversee and review the Subadviser's performance of
its duties under this Agreement. Nothing contained in this
9
<PAGE> 10
Agreement shall obligate the Adviser to provide any funding or other support for
the purpose of directly or indirectly promoting investments in the Fund.
13. Reference to Subadviser. Neither the Adviser nor any Affiliate or
agent of it shall make reference to or use the name of Subadviser or any of its
Affiliates, or any of their clients, except references concerning the identity
of and services provided by Subadviser to the Fund, which references shall not
differ in substance from those included in the Fund's Prospectus and this
Agreement, in any advertising or promotional materials without the prior
approval of Subadviser, which approval shall not be unreasonably withheld or
delayed. The Adviser hereby agrees to make all reasonable efforts to cause the
Fund and any Affiliate thereof to satisfy the foregoing obligation.
14. Amendment. This Agreement may be amended by mutual consent of the
parties, provided that the terms of any material amendment shall be approved by:
a) the Trust's Board of Trustees or by a vote of a majority of the outstanding
voting securities of the Fund (as required by the 1940 Act) and b) the vote of a
majority of those Trustees of the Trust who are not "interested persons" of any
party to this Agreement cast in person at a meeting called for the purpose of
voting on such approval, if such approval is required by applicable law.
15. Confidentiality. Subject to the duties of the Adviser, the Fund and
the Subadviser to comply with applicable law, including any demand of any
regulatory or taxing authority having jurisdiction, the parties hereto shall
treat as confidential all information pertaining to the Fund and the actions of
the Subadviser, the Adviser and the Fund in respect thereof.
16. Notice. Any notice that is required to be given by the parties to each
other under the terms of this Agreement shall be in writing, delivered, or
mailed postpaid to the other parties, or transmitted by facsimile with
acknowledgment of receipt, to the parties at the following addresses or
facsimile numbers, which may from time to time be changed by the parties by
notice to the other party:
(a) If to the Subadviser:
Rice, Hall, James & Associates
600 West Broadway, Suite 1000
San Diego, CA 92101
Attention: Thomas McDowell
Facsimile: (619) 239-6034
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<PAGE> 11
(b) If to the Adviser:
Nationwide Advisory Services, Inc.
Three Nationwide Plaza, 26th Floor
Columbus, OH 43215
Attention: James F. Laird, Jr.
Facsimile: (614) 249-7424
(c) If to the Trust:
Nationwide Separate Account Trust
Three Nationwide Plaza, 26th Floor
Columbus, OH 43215
Attention: James F. Laird, Jr.
Facsimile: (614) 249-7424
16. Jurisdiction. This Agreement shall be governed by and construed to be
consistent with the Advisory Agreement and in accordance with substantive laws
of the Commonwealth of Massachusetts without reference to choice of law
principles thereof and in accordance with the 1940 Act. In the case of any
conflict, the 1940 Act shall control.
17. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, all of which shall
together constitute one and the same instrument.
18. Certain Definitions. For the purposes of this Agreement and except as
otherwise provided herein, "interested person," "affiliated person," and
"assignment" shall have their respective meanings as set forth in the 1940 Act,
subject, however, to such exemptions as may be granted by the SEC.
19. Captions. The captions herein are included for convenience of
reference only and shall be ignored in the construction or interpretation
hereof.
20. Severability. If any provision of this Agreement shall be held or made
invalid by a court decision or applicable law, the remainder of the Agreement
shall not be affected adversely and shall remain in full force and effect.
21. Nationwide Separate Account Trust and its Trustees. The terms
"Nationwide Separate Account Trust" and the "Trustees of Nationwide Separate
Account Trust" refer respectively to the Trust created and the Trustees, as
trustees but not individually or personally, acting from time to time under a
Declaration of Trust dated as of June 30, 1981, as has been or may be amended
from time to time, and to which reference is hereby made and a copy of which is
on file at the office of the Secretary of State of The Commonwealth of
Massachusetts and elsewhere as required by law,
11
<PAGE> 12
and to any and all amendments thereto so filed or hereafter filed. The
obligations of the Trust entered into in the name or on behalf thereof by any of
Nationwide Separate Account Trust's Trustees, representatives, or agents are not
made individually, but only in their capacities with respect to Nationwide
Separate Account Trust. Such obligations are not binding upon any of the
Trustees, shareholders, or representatives of the Trust personally, but bind
only the assets of the Trust. All persons dealing with any series of Shares of
the Trust must look solely to the assets of the Trust belonging to such series
for the enforcement of any claims against the Trust.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
day and year first written above.
TRUST
NATIONWIDE SEPARATE ACCOUNT TRUST
By:
---------------------------
Name:
Title:
ADVISER
NATIONWIDE ADVISORY SERVICES, INC.
By:
---------------------------
Name:
Title:
SUBADVISER
RICE, HALL, JAMES & ASSOCIATES
By:
---------------------------
Name:
Title:
12
<PAGE> 13
EXHIBIT A
SUBADVISORY AGREEMENT
BETWEEN NATIONWIDE SEPARATE
ACCOUNT TRUST, NATIONWIDE ADVISORY
SERVICES, INC. and RICE, HALL, JAMES & ASSOCIATES
Effective October 31, 1997
<TABLE>
<CAPTION>
Funds of the Trust Advisory Fees
- ------------------ -------------
<S> <C>
Nationwide Select Advisers Mid Cap 0.65% on Subadviser Assets up to $50
million
0.50% for Subadviser Assets of $50
million and more
</TABLE>
13
<PAGE> 1
Exhibit 11
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this Post-Effective Amendment
No. 26 to the Registration Statement of Nationwide Separate Account Trust on
Form N-1A (File No. 2-73024) of our report dated February 18, 1998 on our
audits of the financial statements and financial highlights of Nationwide
Separate Trust (comprising, respectively, the Total Return Fund, Capital
Appreciation Fund, Government Bond Fund, Money Market Fund, Small Company Fund,
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), which report is included in
the Annual Report to the Shareholders for the year ended December 31, 1997 which
is incorporated by reference in this Post-Effective Amendment No. 26 to the
Registration Statement. We also consent to the reference of our Firm under the
captions "Financial Highlights" and "Independent Auditors" in the Prospectuses
for the Total Return Fund, Capital Appreciation Fund, Government Bond Fund,
Money Market Fund, and Small Company Fund and under the captions "Financial
Highlights" and "Auditors" in the Prospectuses for the Select Advisers Mid Cap
Fund, Global Equity Fund, Small Cap Value Fund, Multi Sector Bond Fund,
Balanced Fund, High Income Bond Fund, Equity Income Fund, Strategic Value Fund,
and Strategic Growth Fund and under the caption "Auditors" in the Prospectus
for the Income Fund in this Post-Effective Amendment No. 26 to the Registration
Statement.
COOPERS & LYBRAND L.L.P.
Columbus, Ohio
April 30, 1998
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<CIK> 0000353905
<NAME> NATIONWIDE SEPARATE ACCOUNT TRUST
<SERIES>
<NUMBER> 8
<NAME> EQUITY INCOME FUND
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<TABLE> <S> <C>
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<CIK> 0000353905
<NAME> NATIONWIDE SEPARATE ACCOUNT TRUST
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<NAME> HIGH INCOME BOND FUND
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<TABLE> <S> <C>
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<CIK> 0000353905
<NAME> NATIONWIDE SEPARATE ACCOUNT TRUST
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<NAME> BALANCED FUND
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<TABLE> <S> <C>
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<CIK> 0000353905
<NAME> NATIONWIDE SEPARATE ACCOUNT TRUST
<SERIES>
<NUMBER> 11
<NAME> MULTI SECTOR BOND FUND
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<TABLE> <S> <C>
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<CIK> 0000353905
<NAME> NATIONWIDE SEPARATE ACCOUNT TRUST
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<NAME> SMALL CAP VALUE FUND
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<TABLE> <S> <C>
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<CIK> 0000353905
<NAME> NATIONWIDE SEPARATE ACCOUNT TRUST
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<NAME> GLOBAL EQUITY FUND
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<CIK> 0000353905
<NAME> NATIONWIDE SEPARATE ACCOUNT TRUST
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<NAME> SELECT ADVISORS MID CAP FUND
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