<PAGE> 1
'33 Act File No. 2-73024
'40 Act File No. 811-3213
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 24, 2000
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Post-Effective Amendment No. 34 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 35 [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 MID CAP FUND INDEX FUND (FORMERLY
NATIONWIDE SELECT ADVISERS MID CAP FUND)
NATIONWIDE SMALL CAP VALUE FUND
NATIONWIDE GLOBAL EQUITY FUND
NATIONWIDE SELECT ADVISERS SMALL CAP GROWTH FUND
NATIONWIDE GROWTH FOCUS FUND
NATIONWIDE NEW ECONOMY FUND
NATIONWIDE GLOBAL TECHNOLOGY & COMMUNICATIONS FUND
NATIONWIDE GLOBAL LIFE SCIENCES FUND
NATIONWIDE INTERNATIONAL EQUITY 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 STRADLEY, RONON, STEVENS AND YOUNG LLP
ONE NATIONWIDE PLAZA 2600 COMMERCE SQUARE
COLUMBUS, OHIO 43215 PHILADELPHIA, PENNSYLVANIA 19103
(NAME AND ADDRESS OF AGENT FOR SERVICE)
It is proposed that this filing will become effective: (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on [date] pursuant to paragraph (a)(1)
[X] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of rule 485.
If appropriate, check the following box:
[ ] This post-effective amendment designated a new effective date for a
previously filed post-effective amendment.
1
<PAGE> 2
Explanatory Note
This filing includes the Prospectus for the Nationwide Global Technology &
Communications Fund, Nationwide Global Life Sciences Fund, and Nationwide
International Equity Fund and the Statement of Additional Information
encompassing all series of Nationwide Separate Account Trust (the "Trust").
The prospectuses for the Trust's remaining series are incorporated by reference.
This filing of Post-Effective Amendment No. 34 to the registration statement
does not amend in any respect Post-Effective Amendment No. 32 filed on February
16, 2000 or Post-Effective Amendment No. 33 filed on March 2, 2000.
<PAGE> 3
NATIONWIDE(R) SEPARATE ACCOUNT TRUST
- - Nationwide Global Technology &
Communications Fund
- - Nationwide Global Life Sciences Fund
- - Nationwide International Equity Fund
June , 2000
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved these Funds' shares as an investment or determined
whether this prospectus is complete or accurate. To state otherwise is a crime.
<PAGE> 4
TABLE OF CONTENTS
FUND SUMMARIES.................................................................2
Nationwide Global Technology & Communications
Fund.............. 3
Nationwide Global Life Sciences
Fund.............. 5
Nationwide International Equity
Fund.............. 7
MORE ABOUT THE FUNDS.......................................................... 9
Risks and
Techniques........ 9
Temporary Defense
Positions......... 10
MANAGEMENT................................................................... 11
Investment
Adviser........... 11
Portfolio Management
Team.............. 11
BUYING AND SELLING FUND SHARES............................................... 12
Buying Shares..... 12
Selling Shares.... 12
Dividends and
Distributions..... 13
Tax Status........ 13
ADDITIONAL INFORMATION................................................BACK COVER
1
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FUND SUMMARIES
This prospectus provides information about three funds offered by the Nationwide
Separate Account Trust (together, the Funds).
A QUICK NOTE ABOUT THE FUNDS
This prospectus is designed to help you make informed decisions about some of
the investments available under your variable annuity contract or variable life
insurance policy. You'll find details about how your annuity contract or life
insurance policy works in the accompanying prospectus.
2
<PAGE> 6
FUND SUMMARIES
NATIONWIDE GLOBAL TECHNOLOGY & COMMUNICATIONS FUND
This section summarizes key information about the Funds. Use these summaries to
compare the Funds with other mutual funds. More detailed information about the
risks and investment techniques of the Funds can be found in "More About the
Funds" beginning on page nine.
OBJECTIVES AND PRINCIPAL STRATEGIES
The Fund seeks long term capital appreciation. The Fund's investment objective
may be changed without shareholder approval.
To achieve its objective, the Fund invests primarily and at least 65% of its
total assets, in equity securities issued by U.S. and foreign companies with
business operations in technology and communications and technology and
communications related industries. These companies may include, for example,
companies that develop, produce and distribute products or services in the
computer, semi-conductor, electronics, communications, health care, and
biotechnology sectors. A security will generally be considered appropriate if
(as determined by the investment adviser) at least 50% of the issuer's assets,
revenues, or net income is related to, or derived from, the industry or
industries designated for the Fund.
TECHNOLOGY:
The use of science to create new products and services. The industry comprises
information technology and communications as well as medical, environmental and
biotechnology.
The Fund may invest in companies domiciled in any country and allocates its
assets among securities that are expected to provide the best opportunities for
meeting its investment objective. However, normally at least 65% of its total
assets will be invested in companies in at least three different countries, one
of which may be the U.S. If the portfolio managers think that advantageous
investment opportunities exist in countries with emerging securities markets,
the Fund will invest in those countries.
The Fund may invest in companies of any size. The Fund may invest in securities
of large companies that are well established in the world technology market
because they can be expected to grow with the market. The Fund may also invest
in securities of small to mid-size companies to the extent that they provide
strong prospects for future growth.
In analyzing specific companies for possible investment, the Fund's portfolio
manager ordinarily looks for several of the following characteristics:
- Above-average per share earnings growth
- High return on invested capital
- A healthy balance sheet
- Sound financial and accounting policies and overall financial strength
- Strong competitive advantages
- Effective research and product development and marketing
- Development of new technologies
- Efficient service
- Pricing flexibility
- Strong management
- General operating characteristics that will enable the company to compete
successfully in its respective markets
The portfolio manager considers whether to sell a particular security when any
of those factors materially changes.
The Fund may also lend portfolio securities on a short-term or long-term basis
up to 30% of its total assets. The Investment Adviser expects a high portfolio
turnover rate of 300% or more.
PRINCIPAL RISKS
Because the value of an investment will fluctuate, there is the risk that a
shareholder will lose money. A shareholder's investment will decline in value if
the value of the Fund's investments decreases.
STOCK MARKET RISK. Stock market risk is the risk that the Fund could lose value
if the individual stocks in which the Fund has invested or the overall stock
market goes down. Individual stocks and the overall stock market may experience
short-term volatility as well as extended periods of decline or little growth.
Individual stocks are affected by factors such as corporate earnings,
production, management and sales. Individual stocks may also be affected by the
demand for a particular type of stock, such as growth stocks or the stocks of
companies with a particular market capitalization. The stock market is affected
by numerous factors, including interest rates, the outlook for corporate
profits, the health of the national and world economies, national and world
social and political events, and the fluctuations of other stock markets around
the world.
3
<PAGE> 7
FUND SUMMARIES
SMALL CAP RISK. The Fund's investments in smaller, newer companies may be
riskier than investments in larger, more established companies. The stocks of
smaller companies are usually less stable in price and less liquid than the
stocks of larger companies.
FOREIGN RISK. Investments in foreign securities involve risks in addition to
those of U.S. investments. These risks include political and economic risks,
currency fluctuations, higher transaction costs, and delayed settlement. To the
extent that the Fund invests in countries with emerging markets, the foreign
securities risks are magnified since these countries may have unstable
governments and less established markets.
SECTOR RISK. The Fund may be susceptible to factors affecting technology and
communications and technology-and communications-related industries and
therefore the value of the Fund's investments may be more volatile than other
funds that invest in a broader range of securities across different industries.
For more detailed information about the Fund's investments and risks, see "More
About the Funds" beginning on page nine.
PERFORMANCE
No performance information is provided because the Fund did not begin operations
until on or about June , 2000.
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
<TABLE>
<S> <C> <C> <C>
Shareholder Fees(1)
(paid directly from your
investment) None
...............................................................
Annual Fund Operating
Expenses
(deducted from Fund assets)
...............................................................
Management Fees 0.98%
...............................................................
Other Expenses 0.37%
- ---------------------------------------------------------------
TOTAL ANNUAL FUND 1.35%
OPERATING EXPENSES(2)
</TABLE>
(1) Sales charges may be imposed by variable annuity contracts or variable life
insurance policies if the Fund's shares are purchased by a life insurance
separate account as an investment option for these contracts or policies.
(2) Because the Fund did not begin operations until on or about May 1, 2000, and
has no operating history, the management fee is the fee to which the adviser
is entitled under its contract with the Fund. "Other Expenses" are estimates
of the other operating expenses (taking into account the expense limitation
agreement between the adviser and the Fund limiting Total Annual Fund
Operating Expenses) based on estimates for the Fund's first fiscal year
ending December 31, 2000. This waiver of management fees or reimbursement of
other expenses is subject to a possible reimbursement by the Fund within
five years of the Fund's commencement of operations if the reimbursement by
the Fund can be implemented within the annual expense limitation described
above.
EXAMPLE
This example shows what you could pay in expenses over time. You can also use
this example to compare the cost of this Fund with other mutual funds.
The example assumes that you invest $10,000 in the Fund for the time periods
indicated and then sell all of your shares at the end of those periods. It
assumes a 5% return each year and no changes in expenses. Although your actual
costs may be higher or lower, based on these assumptions your costs would be:
<TABLE>
<CAPTION>
1 year 3 years
- ----------------------------------------------------------
<S> <C> <C>
--
</TABLE>
4
<PAGE> 8
FUND SUMMARIES NATIONWIDE GLOBAL LIFE SCIENCES FUND
OBJECTIVES AND PRINCIPAL STRATEGIES
The Fund seeks long term capital appreciation. The Fund's investment objective
may be changed without shareholder approval.
To achieve its objective, the Fund invests primarily in equity securities issued
by U.S. and foreign companies engaged in the development, production, or
distribution of products and services that have a life science orientation.
Generally speaking, the "life sciences" relate to maintaining or improving
quality of life. So, for example, companies with a "life science orientation"
include companies engaged in research development, production or distribution of
products or services related to health and personal care, medicine or
pharmaceuticals. These companies may range in size from small companies to
large, established companies. The Fund normally invests at least 65% of its
total assets in the aggregate, in the following industry groups: health care;
pharmaceuticals; cosmetics/personal care; and biotechnology.
The Fund may invest in companies domiciled in any country and allocates its
assets among securities that are expected to provide the best opportunities for
meeting its investment objective. However, normally at least 65% of its total
assets will be invested in companies in at least three different countries, one
of which may be the U.S. If the portfolio managers think that advantageous
investment opportunities exist in countries with emerging securities markets,
the Fund will invest in those countries.
In selecting stocks, the adviser uses a "bottom up" approach, where stocks are
chosen based on the adviser's estimate of fundamental investment value. The
portfolio management team looks for high-quality balance sheets, able
management, and new product potential that will lead to above-average growth in
revenues and earnings.
A security will generally be considered appropriate if (as determined by the
portfolio management team) at least 50% of the issuer's assets, revenues, or net
income is related to, or derived from, the industry or industries designated for
the Fund. A security will be sold when the portfolio management team believes
that an alternative investment provides more attractive risk/return
characteristics.
PRINCIPAL RISKS
Because the value of an investment will fluctuate, there is the risk that a
shareholder will lose money. A shareholder's investment will decline in value if
the value of the Fund's investments decreases.
STOCK MARKET RISK. Stock market risk is the risk that the Fund could lose value
if the individual stocks in which the Fund has invested or the overall stock
market goes down. Individual stocks and the overall stock market may experience
short-term volatility as well as extended periods of decline or little growth.
Individual stocks are affected by factors such as corporate earnings,
production, management and sales. Individual stocks may also be affected by the
demand for a particular type of stock, such as growth stocks or the stocks of
companies with a particular market capitalization. The stock market is affected
by numerous factors, including interest rates, the outlook for corporate
profits, the health of the national and world economies, national and world
social and political events, and the fluctuations of other stock markets around
the world.
SMALL CAP RISK. The Fund's investments in smaller, newer companies may be
riskier than investments in larger, more established companies. The stocks of
smaller companies are usually less stable in price and less liquid than the
stocks of larger companies.
FOREIGN RISK. Investments in foreign securities involve risks in addition to
those of U.S. investments. These risks include political and economic risks,
currency fluctuations, higher transaction costs, and delayed settlement.
SECTOR RISK. The Fund may be susceptible to factors affecting life science
companies, especially those in health care and health care-related industries
and therefore the value of the Fund's investments may be more volatile than
other funds that invest in a broader range of securities across different
industries.
The Fund faces the risk that economic prospects of health-care companies may
fluctuate dramatically due to changes in the regulatory and competitive
environment. A significant portion of health-care services is funded or
subsidized by the government, so that changes in government policies--at the
state or federal level--may affect the demand for health-care products and
services. Other risks include: the possibility that regulatory approvals (which
often entail lengthy application and testing procedures) will not be granted for
new drugs and medical products; lawsuits against health-care companies related
to product liability issues; and the rapid speed at which many health-care
products and services become obsolete.
5
<PAGE> 9
FUND SUMMARIES
For more detailed information about the Fund's investments and risks, see "More
About the Funds" beginning on page nine.
PERFORMANCE
No performance information is provided because the Fund did not begin operations
until on or about June , 2000.
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
<TABLE>
<S> <C> <C> <C>
Shareholder Fees(1)
(paid directly from your
investment) None
...............................................................
Annual Fund Operating
Expenses
(deducted from Fund assets)
...............................................................
Management Fees 0.53%
Other Expenses 0.47%
- ---------------------------------------------------------------
TOTAL ANNUAL FUND 1.00%
OPERATING EXPENSES(2)
</TABLE>
(1) Sales charges may be imposed by variable annuity contracts or variable life
insurance policies if the Fund's shares are purchased by a life insurance
separate account as an investment option for these contracts or policies.
(2) Because the Fund did not begin operations until on or about May 1, 2000, and
has no operating history, the management fee is the fee to which the adviser
is entitled under its contract with the Fund. "Other Expenses" are estimates
of the other operating expenses (taking into account the expense limitation
agreement between the adviser and the Fund limiting Total Annual Fund
Operating Expenses) based on estimates for the Fund's first fiscal year
ending December 31, 2000. This waiver of management fees or reimbursement of
other expenses is subject to a possible reimbursement by the Fund within
five years of the Fund's commencement of operations if the reimbursement by
the Fund can be implemented within the annual expense limitations described
above.
EXAMPLE
This example shows what you could pay in expenses over time. You can also use
this example to compare the cost of this Fund with other mutual funds.
The example assumes that you invest $10,000 in the Fund for the time periods
indicated and then sell all of your shares at the end of those periods. It
assumes a 5% return each year and no changes in expenses. Although your actual
costs may be higher or lower, based on these assumptions your costs would be:
<TABLE>
<CAPTION>
1 year 3 years
- ----------------------------------------------------------
<S> <C> <C>
--
</TABLE>
6
<PAGE> 10
FUND SUMMARIES NATIONWIDE INTERNATIONAL EQUITY FUND
OBJECTIVES AND PRINCIPAL STRATEGIES
The Fund seeks long term capital appreciation. The Fund's investment objective
may be changed without shareholder approval.
To achieve its objective, the Fund invests primarily in common stock of foreign
companies. A stock is issued by a non-U.S. company if the company is organized
outside U.S., the principal market for the stock is outside the U.S. or the
company derives at least 50% of its revenues from business outside the U.S. The
Fund invests in such non-U.S. companies either directly or through Depositary
Receipts, including American Depositary Receipts and Global Depositary Receipts.
The portfolio management team generally intends to allocate investments across
countries and regions considering the size of the market in each country and
region relative to the size of the international market as a whole.
The Fund may invest in companies domiciled in any country. Under normal
conditions, the Fund invests at least 65% of its total assets in securities of
companies within not less than three foreign countries.
The portfolio management team uses fundamental analysis of each issuer's
financial condition and industry position and market and economic conditions to
select investments.
PRINCIPAL RISKS
Because the value of an investment will fluctuate, there is the risk that a
shareholder will lose money. A shareholder's investment will decline in value if
the value of the Fund's investments decreases.
STOCK MARKET RISK. Stock market risk is the risk that the Fund could lose value
if the individual stocks in which the Fund has invested or the overall stock
market goes down. Individual stocks and the overall stock market may experience
short-term volatility as well as extended periods of decline or little growth.
Individual stocks are affected by factors such as corporate earnings,
production, management and sales. Individual stocks may also be affected by the
demand for a particular type of stock, such as growth stocks or the stocks of
companies with a particular market capitalization. The stock market is affected
by numerous factors, including interest rates, the outlook for corporate
profits, the health of the national and world economies, national and world
social and political events, and the fluctuations of other stock markets around
the world.
FOREIGN RISK. Investments in foreign securities, particularly emerging markets,
involve risks in addition to those of investments in U.S. companies. These risks
include political and economic risks, currency fluctuations, higher transaction
costs, and delayed settlement.
For more detailed information about the Fund's investments and risks, see "More
About the Funds" beginning on page nine.
PERFORMANCE
No performance information is provided because the Fund did not begin operations
until on or about June , 2000.
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
<TABLE>
<S> <C> <C> <C>
Shareholder Fees(1)
(paid directly from your
investment) None
...............................................................
Annual Fund Operating
Expenses
(deducted from Fund assets)
...............................................................
Management Fees 0.83%
...............................................................
Other Expenses 0.47%
- ---------------------------------------------------------------
TOTAL ANNUAL FUND 1.30%
OPERATING EXPENSES(2)
</TABLE>
(1) Sales charges may be imposed by variable annuity contracts or variable life
insurance policies if the Fund's shares are purchased by a life insurance
separate account as an investment option for these contracts or policies.
(2) Because the Fund did not begin operations until on or about May 1, 2000, and
has no operating history, the management fee is the fee to which the adviser
is entitled under its contract with the Fund. "Other Expenses" are estimates
of the other operating expenses (without taking into account the expense
limitation agreement between the adviser and the Fund limiting Total Annual
Fund Operating Expenses) based on estimates for the Fund's first fiscal year
ending December 31, 2000. This waiver of management fees or reimbursement of
other expenses is subject to a possible reimbursement by the Fund within
five years of the Fund's commencement of operations if the reimbursement by
the Fund can be implemented within the annual expense limitations described
above.
7
<PAGE> 11
FUND SUMMARIES
EXAMPLE
This example shows what you could pay in expenses over time. You can also use
this example to compare the cost of this Fund with other mutual funds.
The example assumes that you invest $10,000 in the Fund for the time periods
indicated and then sell all of your shares at the end of those periods. It
assumes a 5% return each year and no changes in expenses. Although your actual
costs may be higher or lower, based on these assumptions your costs would be:
<TABLE>
<CAPTION>
1 year 3 years
- ----------------------------------------------------------
<S> <C> <C>
--
</TABLE>
8
<PAGE> 12
MORE ABOUT THE FUNDS
RISKS AND TECHNIQUES
The Funds may use the investment techniques to increase returns, protect assets
or diversify investments. These techniques are subject to certain risks. For
additional information about the Funds' investment strategies and techniques,
see the Statement of Additional Information (SAI).
PRINCIPAL RISKS
SMALL CAP RISK. Historically, the securities of small cap companies have been
more volatile in price than larger company securities, especially over the short
term. Among the reasons for the greater price volatility are the less certain
growth prospects of small companies, the lower degree of liquidity in the
markets for such securities, the greater impact caused by changes in investor
perception of value, and the greater sensitivity of small cap companies to
changing economic conditions. In addition, small cap companies may:
- lack depth of management
- lack a proven track record
- be unable to generate funds necessary for growth or development
- be developing or marketing new products or services for which markets are
not yet established and may never become established
- market products or services which may become quickly obsolete.
Small cap companies in the technology and biotechnology industries may be
subject to abrupt or erratic price movements. Therefore, while small cap
companies may offer greater opportunities for capital growth than larger, more
established companies, they also involve greater risks and should be considered
speculative.
FOREIGN RISK. Foreign security investment involves special risks not present in
U.S. investments that can increase the chances that a Fund will lose money.
- COUNTRY. General securities market movements in any country in which a Fund
has investments, are likely to affect the value of a Fund's securities that
trade in that country. These movements will affect a Fund's share price and
a Fund's performance. The political, economic and social structures of some
countries in which a Fund invests may be less stable and more volatile than
those in the U.S. The risks of investing in these countries include the
possibility of the imposition of exchange controls, currency devaluations,
foreign ownership limitations, expropriation, restrictions on removal of
currency or other assets, nationalization of assets, punitive taxes and
certain custody and settlement risks.
- COMPANY. Foreign companies are not subject to the same disclosure,
accounting, auditing and financial reporting standards and practices as U.S.
companies and their securities may not be as liquid as securities of similar
U.S. companies. Foreign stock exchanges, trading systems, brokers and
companies generally have less government supervision and regulation than in
the U.S. A Fund may have greater difficulty voting proxies, exercising
shareholder rights, pursuing legal remedies and obtaining judgments with
respect to foreign investments in foreign courts than with respect to U.S.
companies in U.S. courts.
- CURRENCY. Some of a Fund's investments may be denominated in foreign
currencies. Changes in foreign currency exchange rates will affect the value
of what a fund owns and a Fund's share price. Generally, when the U.S.
dollar rises in value against a foreign currency, an investment in that
country loses value because that currency is worth fewer U.S. dollars.
Devaluation of currency by a country's government or banking authority also
has a significant impact on the value of any securities denominated in that
currency. In addition, if the currency in which a Fund receives dividends,
interest or other payments declines in value against the U.S. dollar before
such income is distributed as dividends to shareholders or converted to U.S.
dollars, the Fund may have to sell portfolio securities to obtain sufficient
cash to pay such dividends.
- EUROPEAN ECONOMIC AND MONETARY UNION (EMU). A number of European countries
have entered into EMU in an effort to reduce trade barriers between
themselves and eliminate fluctuations in their currencies. EMU has
established a single European currency (the euro), which was introduced in
January 1, 1999 and is expected to replace the existing national currencies
of all initial EMU participants by July 1, 2002. Certain securities
(beginning with government and corporate bonds) were redenominated in the
euro. These securities trade and make dividend and other payments only in
euros. Like other investment companies and business organizations,
9
<PAGE> 13
MORE ABOUT THE FUNDS
including the companies in which the Funds invest, the Fund could be
adversely affected:
- If the transition to euro, or EMU as a whole, does not proceed as planned.
- If a participating country withdraws from EMU.
- If the computing, accounting and trading systems used by a Fund's service
providers, or by other entities with which the fund or its service providers
do business, are not capable of recognizing the euro as a distinct currency.
NON-PRINCIPAL TECHNIQUES
PREFERRED STOCK. Shareholders of preferred stocks normally have the right to
receive dividends at a fixed rate but do not participate in other amounts
available for distribution by the issuer. Dividends on preferred stock may be
cumulative, and cumulative dividends must be paid before common shareholders
receive any dividends. Because preferred stock usually must be paid before
common stock dividends, preferred stocks generally entail less risk than common
stocks. Upon liquidation, preferred stocks are entitled to a specified
liquidation preference, which is generally the same as the par or stated value,
and are senior in right of payment to common stock. Preferred stocks do not
represent a liability of the issuer and, therefore do not offer as great a
degree of protection of capital or assurance of continued income as investments
in corporate debt securities. In addition, preferred stocks are subordinated in
right of payment to all debt obligations and creditors of the issuer, and
convertible securities may be subordinated to other preferred stock of the same
issuer.
CONVERTIBLE SECURITIES. Convertible securities -- also known as convertibles --
include bonds, debentures, notes, preferred stocks, and other securities.
Convertibles are a hybrid security that have characteristics of both bonds and
stocks. Like bonds, they pay interest. Because they can be converted into common
stock within a set period of time, at a specified price or formula, convertibles
also offer the chance for capital appreciation, like common stocks.
Convertibles tend to be more stable in price than the underlying common stock,
although price changes in the underlying common stock can affect the
convertible's market value. For example, as an underlying common stock loses
value, convertibles present less opportunity for capital appreciation, and may
also lose value. Convertibles, however, may sustain their value better than the
common stock because they pay income, which tends to be higher than common stock
dividend yields.
Because of this fixed-income feature, convertibles may compete with bonds as a
good source of dependable income. Therefore, if interest rates increase and
"newer," better-paying bonds become more attractive, the value of convertibles
may decrease. Conversely, if interest rates decline, convertibles could increase
in value.
Convertibles tend to be more secure than common stock (companies must generally
pay holders of convertibles before they pay holders of common stock), but they
are typically less secure than similar non-convertible securities such as bonds
(bondholders must generally be paid before holders of convertibles and common
stock). Because convertibles are usually subordinate to bonds in terms of
payment priority, convertibles typically are rated below investment grade by a
nationally recognized rating agency, or they are not rated at all.
WARRANTS. A warrant is a security that gives the holder of the warrant the
right to buy common stock at a specified price for a specified period of time.
Warrants are considered speculative and have no value if they are not exercised
before their expiration date.
DERIVATIVES. A derivative is a contract whose value is based on the performance
of an underlying financial asset, index or other investment. For example, an
option is a derivative because its value changes in relation to the performance
of an underlying stock. The value of an option on a futures contract varies with
the value of the underlying futures contract, which in turn varies with the
value of the underlying commodity or security. Derivatives are available based
on the performance of assets, interest rates, currency exchange rates, and
various domestic foreign indexes. Derivatives afford leverage and can also be
used in hedging portfolios.
TEMPORARY DEFENSIVE POSITIONS
In response to economic, political or unusual market conditions, each Fund may
invest up to 100% of its assets in cash or money market obligations. Should this
occur, a Fund may not meet its investment objectives, and may miss potential
market upswings.
10
<PAGE> 14
MANAGEMENT
INVESTMENT ADVISER
Villanova Mutual Fund Capital Trust (VMF), Three Nationwide Plaza, Columbus, OH
43215, manages the investment of the Funds' assets and supervises the daily
business affairs of the Funds. VMF was organized in 1999 and advises mutual
funds. As of December 31, 1999, VMF and its affiliates had approximately $22.5
billion in assets under management.
Each Fund pays VMF a management fee as set forth below. The management fee is
based on the Fund's average daily net assets.
<TABLE>
<CAPTION>
Fund Fee
- ---------------------------------
<S> <C>
Global Technology & 0.98%
Communications Fund
.................................
Global Life Sciences Fund 0.53%
.................................
International Equity Fund 0.83%
</TABLE>
PORTFOLIO MANAGER --
GLOBAL TECHNOLOGY AND COMMUNICATIONS FUND
Aaron Harris is the portfolio manager for the Global Technology and
Communications Fund. Prior to joining VMF in April 2000, Mr. Harris was
portfolio manger for the Nicholas-Applegate Global Technology Fund from
1997-March 2000 and was an investment analyst in Global Research at
Nicholas-Applegate from 1995-1997.
PORTFOLIO MANAGEMENT TEAM --
GLOBAL LIFE SCIENCES FUND
AND INTERNATIONAL EQUITY FUND
The Global Life Sciences Fund and International Equity Funds are managed by a
team of portfolio managers and research analysts which is supervised by William
H. Miller, Sr. Portfolio Manager and Interim Chief Investment Officer of VMF.
The team, working closely with Mr. Miller, will determine how each Fund's assets
will be invested pursuant to the investment objective and policies of that Fund.
Prior to July 1999 when Mr. Miller joined VMF, he held the following positions:
Senior Portfolio Manager, Putnam Investments (1997-1999); Vice President and
Assistant Portfolio Manager Delaware Management Company (1994-1997); and Vice
President and Investment Manager, Rutherford Capital Management (1985-1994).
11
<PAGE> 15
BUYING AND SELLING FUND SHARES
BUYING SHARES
Shares of the Funds are currently sold to separate accounts of Nationwide Life
Insurance Company and its wholly owned subsidiary, Nationwide Life and Annuity
Insurance Company, to fund benefits payable under variable life insurance
policies and variable annuity contracts. Shares of the Funds may also be sold to
affiliated Funds of Funds, and may in the future be sold to other insurance
companies. Shares are not sold to individual investors.
The separate accounts purchase shares of a Fund in accordance with variable
account allocation instructions received from owners of the variable annuity
contracts or variable life insurance policies. A Fund then uses the proceeds to
buy securities for its portfolio. Because variable annuity contracts or variable
life insurance policies may have different provisions with respect to the timing
and method of purchases, exchanges and redemptions, contract or policy owners
should contact their insurance company directly for details concerning these
transactions.
PURCHASE PRICE. The purchase or "offering" price of each share of a Fund is its
"net asset value" (NAV) next determined after the order is received. No sales
charge is imposed on the purchase of a Fund's shares. Generally, NAV of a Fund's
shares is determined by dividing the total market value of the securities owned
by a Fund, less its liabilities, by the total number of its outstanding shares.
NAV is determined at the close of regular trading on the New York Stock Exchange
(usually 4 p.m. Eastern Time) on each day the Exchange is open for trading.
The Funds do not calculate NAV on the following days:
- Christmas Day
- New Year's Day
- Martin Luther King, Jr. Day
- Presidents' Day
- Good Friday
- Memorial Day
- Independence Day
- Labor Day
- Thanksgiving Day
- Other days when the New York Stock Exchange is not open.
Each Fund reserves the right not to determine its NAV when:
- It has not received any orders to purchase, sell or exchange shares
- Changes in the value of the Fund's portfolio do not affect its NAV
If current prices are not available, or if Villanova SA Capital Trust ("VSA") as
a Fund's administrator or its agent determines a price does not represent fair
value, a Fund's investments may be valued at fair market value in accordance
with procedures adopted by the Board of Trustees. To the extent that a Fund's
investments are traded in markets that are open when the New York Stock Exchange
is closed, the value of the Fund's investments may change on days when shares
cannot be purchased or redeemed.
SELLING SHARES
You can sell -- also known as redeeming -- at any time, subject to certain
restrictions described below. The redemption price will be the NAV next
determined after the order is received. Of course, the value of the shares sold
may be more or less than their original purchase price depending upon the market
value of a Fund's investments at the time of sale.
RESTRICTIONS ON SALES. Shares of a Fund may not be redeemed or a Fund may delay
paying you the proceeds from a sale when the New York Stock Exchange is closed
(other than customary weekend and holiday closings) or if trading is restricted
or if an emergency exists.
12
<PAGE> 16
DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
Substantially all of a Fund's net investment income, if any, will be paid as a
dividend each quarter in the form of additional shares of the Fund. Any net
capital gains realized by a Fund from the sale of its portfolio securities will
be declared and paid to shareholders annually.
TAX STATUS
The tax treatment of payments made under a variable annuity contract or variable
life insurance policy is described in the prospectus for the contract or policy.
Generally, the owners of variable annuity contracts and variable life insurance
policies are not taxed currently on income or gains realized under such
contracts until the income or gain is distributed. However, income distributions
from these contracts and policies will be taxable at ordinary income tax rates.
In addition, distributions made to an owner who is younger than 59 1/2 may be
subject to a 10% penalty tax. Investors should ask their own tax advisers for
more information on their own tax situation, including possible state or local
taxes.
Please refer to the SAI for more information regarding the tax treatment of the
Funds.
13
<PAGE> 17
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<PAGE> 18
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<PAGE> 19
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<PAGE> 20
INFORMATION FROM NATIONWIDE
Please read this Prospectus before you invest, and keep it with your records.
The following documents contain additional information about the Funds. To
obtain a document free of charge, contact us at the address or number listed
below.
- - SAI (incorporated by reference in this Prospectus)
- - Annual Report (as available)
- - Semi-Annual Report (as available)
FOR ADDITIONAL INFORMATION CONTACT:
Nationwide Life Insurance Company
One Nationwide Plaza
Columbus, Ohio 43215
Nationwide Logo
FOR INFORMATION AND ASSISTANCE:
1-800-848-6331 (toll free, 8 a.m. - 5 p.m. Eastern Time)
INFORMATION FROM THE SECURITIES AND EXCHANGE COMMISSION
You can obtain copies of the Funds' documents from the SEC as follows:
IN PERSON:
Public Reference Room in Washington, D.C. (for their hours of operation, call
1-202-942-8090)
BY MAIL:
Securities and Exchange Commission
Public Reference Section
Washington, D.C. 20549-6009
(The SEC charges a fee to copy any documents.)
ON THE EDGAR DATABASE VIA THE INTERNET:
www.sec.gov
BY ELECTRONIC REQUEST:
[email protected]
INVESTMENT COMPANY ACT FILE NO. 811-3213
<PAGE> 21
STATEMENT OF ADDITIONAL INFORMATION
JUNE ____, 2000
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 Small Cap Growth Fund
(formerly Nationwide Select Advisers Small Cap Growth Fund)
Nationwide Global 50 Fund
(formerly Nationwide Global Equity Fund)
Nationwide Mid Cap Index Fund
(formerly Nationwide Select Advisers Mid Cap Fund)
Nationwide Small Company Fund
Nationwide Income Fund
Total Return Fund
Capital Appreciation Fund
Government Bond Fund
Money Market Fund
Nationwide Growth Focus Fund
Nationwide New Economy Fund
Nationwide Global Technology & Communications Fund
Nationwide Global Life Sciences Fund
Nationwide International Equity Fund
Nationwide Separate Account Trust is a registered open-end investment
company consisting of 21 series. This Statement of Additional Information
relates to all series of the Trust (each, a "Fund" and collectively, the
"Funds").
This Statement of Additional Information is not a prospectus but the
Statement of Additional Information is incorporated by reference into the
Prospectuses. 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 for each Fund dated June , 2000. 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.
<PAGE> 22
<TABLE>
<CAPTION>
TABLE OF CONTENTS PAGE
- ----------------- ----
<S> <C>
General Information and History.............................................................................. 1
Additional Information on Portfolio Instruments and Investment Policies...................................... 1
Investment Restrictions For the Funds........................................................................ 40
Major Shareholders........................................................................................... 467
Trustees and Officers of the Trust........................................................................... 47
Calculating Yield and Total Return........................................................................... 50
Investment Advisory and Other Services....................................................................... 52
Brokerage Allocations........................................................................................ 68
Purchases, Redemptions and Pricing of Shares................................................................. 74
Additional Information....................................................................................... 75
Tax Status................................................................................................... 76
Other Tax Consequences....................................................................................... 78
Tax Consequences to Shareholders............................................................................. 79
Financial Statements......................................................................................... 79
Appendix A - Bond Ratings.................................................................................... 80
</TABLE>
ii
<PAGE> 23
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 currently offers shares in 21
separate series, each with its own investment objective. Each of the Funds,
except for the Nationwide Small Company Fund and the Nationwide Growth Focus
Fund, is a diversified fund as defined in the Investment Company Act of 1940.
ADDITIONAL INFORMATION ON PORTFOLIO INSTRUMENTS AND INVESTMENT POLICIES
The Funds invest in a variety of securities and employ a number of
investment techniques, which involve certain risks. The Prospectuses for the
Funds highlight the principal investment strategies, investment techniques and
risks. This Statement of Additional Information ("SAI") contains additional
information regarding both the principal and non-principal investment strategies
of the Funds. The following table sets forth additional information concerning
permissible investments and techniques for each of the Funds. A "Y" in the table
indicates that the Fund may invest in or follow the corresponding instrument or
technique. An empty box indicates that the Fund does not intend to invest in or
follow the corresponding instrument or technique.
1
<PAGE> 24
<TABLE>
<CAPTION>
Capital Strategic Strategic Mid Cap Index Small Company
Appreciation Growth Value
<S> <C> <C> <C> <C> <C>
Type of Investment or Technique
U.S. common stocks Y Y Y Y Y
Preferred stocks Y Y Y Y Y
Small company stocks Y Y Y Y
Special situation companies Y Y Y Y
Illiquid securities Y Y Y Y Y
Restricted securities Y Y Y Y Y
When-issued / delayed-delivery securities Y Y Y Y Y
Limited liability companies
Investment companies Y Y Y Y Y
Real estate securities Y Y Y Y
Securities of foreign issuers Y Y Y
Depository receipts Y Y
Securities from developing countries/emerging markets Y
Convertible securities Y Y Y Y Y
Long-term debt Y Y Y Y Y
Short-term debt Y Y Y Y Y
Floating and variable rate securities
Zero coupon securities Y Y Y
Step-coupon securities
Pay-in-kind bonds Y Y
Deferred payment securities Y Y
Brady bonds
Non-investment grade debt Y Y Y Y
Loan participations and assignments
Sovereign debt (foreign) Y
Foreign commercial paper Y
Duration
U.S. Government securities Y Y Y Y Y
Money market instruments Y Y Y Y Y
Mortgage-backed securities Y Y Y Y
</TABLE>
<TABLE>
<CAPTION>
Small Small Cap Global 50 Equity Total Balanced
Cap Value Income Return
Growth
<S> <C> <C> <C> <C> <C> <C>
Type of Investment or Technique
U.S. common stocks Y Y Y Y Y Y
Preferred stocks Y Y Y Y Y Y
Small company stocks Y Y Y Y Y
Special situation companies Y Y Y Y
Illiquid securities Y Y Y Y Y Y
Restricted securities Y Y Y Y Y Y
When-issued / delayed-delivery securities Y Y Y Y Y Y
Limited liability companies Y
Investment companies Y Y Y Y Y Y
Real estate securities Y Y Y
Securities of foreign issuers Y Y Y Y Y
Depository receipts Y Y Y Y
Securities from developing countries/emerging markets Y Y Y
Convertible securities Y Y Y Y Y Y
Long-term debt Y Y Y Y Y
Short-term debt Y Y Y Y Y Y
Floating and variable rate securities Y Y
Zero coupon securities Y Y Y
Step-coupon securities Y
Pay-in-kind bonds Y Y Y
Deferred payment securities Y Y Y
Brady bonds Y
Non-investment grade debt Y Y Y
Loan participations and assignments Y
Sovereign debt (foreign) Y
Foreign commercial paper Y
Duration
U.S. Government securities Y Y Y Y Y Y
Money market instruments Y Y Y Y Y Y
Mortgage-backed securities Y
</TABLE>
<TABLE>
<CAPTION>
Government Income Multi High Money Growth New
Bond Sector Income Market Focus Economy
Bond Bond
<S> <C> <C> <C> <C> <C> <C> <C>
Type of Investment or Technique
U.S. common stocks Y Y Y
Preferred stocks Y Y Y
Small company stocks Y Y Y
Special situation companies Y Y
Illiquid securities Y Y Y Y Y
Restricted securities Y Y Y Y Y Y
When-issued / delayed-delivery securities Y Y Y Y Y Y Y
Limited liability companies Y Y
Investment companies Y Y Y Y Y Y Y
Real estate securities Y Y Y Y
Securities of foreign issuers Y Y Y Y
Depository receipts Y Y Y Y
Securities from developing countries/emerging markets Y Y Y Y
Convertible securities Y Y Y Y
Long-term debt Y Y Y Y
Short-term debt Y Y Y Y Y Y Y
Floating and variable rate securities Y Y Y Y Y
Zero coupon securities Y Y Y Y
Step-coupon securities Y
Pay-in-kind bonds Y Y
Deferred payment securities Y Y
Brady bonds Y
Non-investment grade debt Y Y
Loan participations and assignments Y Y
Sovereign debt (foreign)
Foreign commercial paper Y Y
Duration Y Y
U.S. Government securities Y Y Y Y Y Y
Money market instruments Y Y Y Y Y Y
Mortgage-backed securities Y Y Y Y
</TABLE>
<TABLE>
<CAPTION>
Global Global International
Technology & Life Equity
Communications Sciences
<S> <C> <C> <C>
Type of Investment or Technique
U.S. common stocks Y Y Y
Preferred stocks Y Y
Small company stocks Y Y Y
Special situation companies Y Y
Illiquid securities Y Y Y
Restricted securities Y Y
When-issued / delayed-delivery securities Y
Limited liability companies
Investment companies Y Y Y
Real estate securities
Securities of foreign issuers Y Y Y
Depository receipts Y Y
Securities from developing countries/emerging markets Y Y Y
Convertible securities Y Y Y
Long-term debt
Short-term debt Y Y Y
Floating and variable rate securities
Zero coupon securities
Step-coupon securities
Pay-in-kind bonds
Deferred payment securities
Brady bonds
Non-investment grade debt
Loan participations and assignments
Sovereign debt (foreign)
Foreign commercial paper Y
Duration
U.S. Government securities Y Y Y
Money market instruments Y Y Y
Mortgage-backed securities
</TABLE>
2
<PAGE> 25
<TABLE>
<CAPTION>
Capital Strategic Strategic Mid Cap Small Small Small
Appreciation Growth Value Index Company Cap Cap
Growth Value
<S> <C> <C> <C> <C> <C> <C> <C>
Type of Investment or Technique
Stripped mortgage-backed securities
Collateralized mortgage obligations
Mortgage dollar rolls Y Y Y
Asset-backed securities Y Y Y
Bank obligations Y Y Y Y Y Y
Repurchase agreements Y Y Y Y Y Y Y
Reverse repurchase agreements Y Y Y Y Y Y
Warrants Y Y Y Y Y Y
Futures Y Y
Options Y Y
Foreign currencies Y Y Y Y Y
Forward currency contracts Y Y
Borrowing money Y Y Y Y Y Y Y
Lending of portfolio securities Y Y Y Y Y Y Y
Short sales Y Y Y Y
</TABLE>
<TABLE>
<CAPTION>
Global 50 Equity Total Balanced Government Income Multi
Income Return Bond Sector
Bond
<S> <C> <C> <C> <C> <C> <C> <C>
Type of Investment or Technique
Stripped mortgage-backed securities Y
Collateralized mortgage obligations Y Y Y Y
Mortgage dollar rolls Y Y Y
Asset-backed securities Y Y Y
Bank obligations Y Y Y Y Y Y
Repurchase agreements Y Y Y Y Y Y Y
Reverse repurchase agreements Y Y Y Y
Warrants Y Y Y
Futures Y Y Y
Options Y Y Y
Foreign currencies Y
Forward currency contracts
Borrowing money Y Y Y Y Y Y Y
Lending of portfolio securities Y Y Y Y Y Y Y
Short sales
</TABLE>
<TABLE>
<CAPTION>
High Money Growth New Global Global International
Income Market Focus Economy Technology Life Equity
Bond & Communications Sciences
<S> <C> <C> <C> <C> <C> <C> <C>
Type of Investment or Technique
Stripped mortgage-backed securities
Collateralized mortgage obligations
Mortgage dollar rolls Y Y Y
Asset-backed securities Y Y
Bank obligations Y Y Y Y Y Y
Repurchase agreements Y Y Y Y Y Y Y
Reverse repurchase agreements Y Y Y Y Y
Warrants Y Y Y Y
Futures Y Y Y Y Y Y
Options Y Y Y Y Y
Foreign currencies Y Y Y Y Y
Forward currency contracts Y Y Y Y Y
Borrowing money Y Y Y Y Y Y Y
Lending of portfolio securities Y Y Y Y Y Y Y
Short sales Y Y Y Y
</TABLE>
3
<PAGE> 26
DESCRIPTION OF PORTFOLIO INSTRUMENTS AND INVESTMENT POLICIES
INFORMATION CONCERNING DURATION
Duration is a measure of the average life of a fixed-income security that
was developed as a more precise alternative to the concepts of "term to
maturity" or "average dollar weighted maturity" as measures of "volatility" or
"risk" associated with changes in interest rates. Duration incorporates a
security's yield, coupon interest payments, final maturity and call features
into one measure.
Most debt obligations provide interest ("coupon") payments in addition to
final ("par") payment at maturity. Some obligations also have call provisions.
Depending on the relative magnitude of these payments and the nature of the call
provisions, the market values of debt obligations may respond differently to
changes in interest rates.
Traditionally, a debt security's "term-to-maturity" has been used as a
measure of the sensitivity of the security's price to changes in interest rates
(which is the "interest rate risk" or "volatility" of the security). However,
"term-to-maturity" measures only the time until a debt security provides its
final payment, taking no account of the pattern of the security's payments prior
to maturity. Average dollar weighted maturity is calculated by averaging the
terms of maturity of each debt security held with each maturity "weighted"
according to the percentage of assets that it represents. Duration is a measure
of the expected life of a debt security on a present value basis and reflects
both principal and interest payments. Duration takes the length of the time
intervals between the present time and the time that the interest and principal
payments are scheduled or, in the case of a callable security, expected to be
received, and weights them by the present values of the cash to be received at
each future point in time. For any debt security with interest payments
occurring prior to the payment of principal, duration is ordinarily less than
maturity. In general, all other factors being the same, the lower the stated or
coupon rate of interest of a debt security, the longer the duration of the
security; conversely, the higher the stated or coupon rate of interest of a debt
security, the shorter the duration of the security.
There are some situations where the standard duration calculation does not
properly reflect the interest rate exposure of a security. For example, floating
and variable rate securities often have final maturities of ten or more years;
however, their interest rate exposure corresponds the frequency of the coupon
reset. Another example where the interest rate exposure is not properly captured
by duration is the case of mortgage pass-through securities. The stated final
maturity of such securities is generally 30 years, but current prepayment rates
are more critical in determining the securities' interest rate exposure. In
these and other similar situations, a Fund's investment adviser or subadviser
will use more sophisticated analytical techniques to project the economic life
of a security and estimate its interest rate exposure. Since the computation of
duration is based on predictions of future events rather than known factors,
there can be no assurance that a Fund will at all times achieve its targeted
portfolio duration.
The change in market value of U.S. Government fixed-income securities is
largely a function of changes in the prevailing level of interest rates. When
interest rates are falling, a portfolio with a shorter duration generally will
not generate as high a level of total return as a portfolio with a longer
duration. When interest rates are stable, shorter duration portfolios generally
will not generate as high
4
<PAGE> 27
a level of total return as longer duration portfolios (assuming that long-term
interest rates are higher than short-term rates, which is commonly the case.)
When interest rates are rising, a portfolio with a shorter duration will
generally outperform longer duration portfolios. With respect to the composition
of a fixed-income portfolio, the longer the duration of the portfolio,
generally, the greater the anticipated potential for total return, with,
however, greater attendant interest rate risk and price volatility than for a
portfolio with a shorter duration.
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. Lower-rated securities are more likely to react to developments
affecting these risks than are more highly rated securities, which react
primarily to movements in the general level of interest rates. Although the
fluctuation in the price of debt securities 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 debt
securities in general and have caused the effective maturity of securities with
prepayment features to be extended, thus effectively converting short or
intermediate securities (which tend to be less volatile in price) into long term
securities (which tend to be more volatile in price).
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"),
such as Standard & Poor's Rating Group ("Standard & Poor's") or Moody's Investor
Services ("Moody's"). 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 also relies upon the independent advice of a Fund's adviser or
subadviser(s) to evaluate potential investments. This is particularly important
for lower-quality securities. Among the factors that will be considered are the
long-term ability of the issuer to pay principal and interest and general
economic trends, as well as an issuer's capital structure, existing debt and
earnings history. 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 adviser or
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.
Medium-Quality Securities. Certain Funds anticipate investing in
medium-quality obligations, which 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
5
<PAGE> 28
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.
Lower Quality (High-Risk) Securities. Non-investment grade debt or lower
quality/rated securities (hereinafter referred to as "lower-quality securities")
include (i) bonds rated as low as C by Moody's, Standard & Poor's, or Fitch/IBCA
Investors Service, Inc. ("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. There is more risk associated with these investments because of
reduced creditworthiness and increased risk of default. Under NRSRO guidelines,
lower quality securities and comparable unrated securities will likely have some
quality and protective characteristics that are outweighted by large
uncertainties or major risk exposures to adverse conditions. Lower quality
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. 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.
Effect of Interest Rates And Economic Changes. All interest-bearing
securities typically experience appreciation when interest rates decline and
depreciation when interest rates rise. The market values of lower-quality and
comparable unrated securities tend to reflect individual corporate developments
to a greater extent than do higher rated securities, which react primarily to
fluctuations in the general level of interest rates. Lower-quality and
comparable unrated securities also tend to be more sensitive to economic
conditions than are higher-rated securities. As a result, they generally involve
more credit risks than securities in the higher-rated categories. During an
economic downturn or a sustained period of rising interest rates, highly
leveraged issuers of lower-quality and comparable unrated securities may
experience financial stress and may not have sufficient revenues to meet their
payment obligations. The issuer's ability to service its debt obligations may
also be adversely affected by specific corporate developments, the issuer's
inability to meet specific projected business forecasts or the unavailability of
additional financing. The risk of loss due to default by an issuer of these
securities is significantly greater than issuers of higher-rated securities
because such securities are generally unsecured and are often subordinated to
other creditors. Further, if the issuer of a lower-quality or comparable unrated
security defaulted, the Fund might incur additional expenses to seek recovery.
Periods of economic uncertainty and changes would also generally result in
increased volatility in the market prices of these securities and thus in the
Fund's net asset value.
As previously stated, the value of a lower-quality or comparable unrated
security will generally decrease in a rising interest rate market, and
accordingly so will a Fund's net asset value. If a Fund experiences unexpected
net redemptions in such a market, it may be forced to liquidate a portion of its
portfolio securities without regard to their investment merits. Due to the
limited liquidity of lower-quality and comparable unrated securities (discussed
below), a Fund may be forced to liquidate these securities at a substantial
discount which would result in a lower rate of return to the Fund.
6
<PAGE> 29
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.
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 may be no established
retail secondary market for many of these securities. The Funds anticipate that
such securities could be sold only to a limited number of dealers or
institutional investors. To the extent a secondary trading market does exist, it
is generally not as liquid as the secondary market for higher-rated securities.
The lack of a liquid secondary market may have an adverse impact on the market
price of the security. As a result, a Fund's asset value and ability to dispose
of particular securities, when necessary to meet such Fund's liquidity needs or
in response to a specific economic event, may be impacted. The lack of a liquid
secondary market for certain securities may also make it more difficult for a
Fund to obtain accurate market quotations for purposes of valuing that Fund's
portfolio. Market quotations are generally available on many lower-quality and
comparable unrated issues only from a limited number of dealers and may not
necessarily represent firm bids of such dealers or prices for actual sales.
During periods of thin trading, the spread between bid and asked prices is
likely to increase significantly. In addition, adverse publicity and investor
perceptions, whether or not based on fundamental analysis, may decrease the
values and liquidity of lower-quality and comparable unrated securities,
especially in a thinly traded market.
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 ("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.
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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 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"). The purchase of
mortgage-backed securities from private lenders may entail greater risk than
mortgage-backed securities that are issued or guaranteed by the U.S. government,
its agencies or instrumentalities. Mortgage-backed securities issued by private
lenders maybe 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.
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 enhancement
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-backed 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
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underlying assets. Delinquency or loss in excess of that which is anticipated
could adversely affect the return on an investment in such security.
Private lenders or government-related entities may also create mortgage
loan pools offering pass-through investments where the mortgages underlying
these securities may be alternative mortgage instruments, that is, mortgage
instruments whose principal or interest payments may vary or whose terms to
maturity may be shorter than was previously customary. As new types of
mortgage-related securities are developed and offered to investors, a Fund,
consistent with its investment objective and policies, may consider making
investments in such new types of securities.
The yield characteristics of mortgage-backed securities differ from those
of traditional debt obligations. Among the principal differences are that
interest and principal payments are made more frequently on mortgage-backed
securities, usually monthly, and that principal may be prepaid at any time
because the underlying mortgage loans or other assets generally may be prepaid
at any time. As a result, if a Fund purchases these securities at a premium, a
prepayment rate that is faster than expected will reduce yield to maturity,
while a prepayment rate that is lower than expected will have the opposite
effect of increasing the yield to maturity. Conversely, if a Fund purchases
these securities at a discount, a prepayment rate that is faster than expected
will increase yield to maturity, while a prepayment rate that is slower than
expected will reduce yield to maturity. Accelerated prepayments on securities
purchased by the Fund at a premium also impose a risk of loss of principal
because the premium may not have been fully amortized at the time the principal
is prepaid in full.
Unlike fixed rate mortgage-backed securities, adjustable rate
mortgage-backed securities are collateralized by or represent interest in
mortgage loans with variable rates of interest. These variable rates of interest
reset periodically to align themselves with market rates. A 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
adjustable rate mortgage-backed securities in a Fund would likely decrease.
Also, a Fund's net asset value could vary to the extent that current yields on
adjustable rate mortgage-backed 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 mortgage is based lags behind
changes in market rates. During periods of declining interest rates, income to a
Fund derived from adjustable rate mortgage securities which remain in a mortgage
pool will decrease in contrast to the income on fixed rate mortgage securities,
which will remain constant. Adjustable rate mortgages also have less potential
for appreciation in value as interest rates decline than do fixed rate
investments.
There are a number of important differences among the agencies and
instrumentalities of the U.S. Government that issue mortgage-backed securities
and among the securities that they issue. Mortgage-backed securities issued by
GNMA include GNMA Mortgage Pass-Through Certificates (also known as "Ginnie
Maes") which are guaranteed as to the timely payment of principal and interest
by GNMA and such guarantee is backed by the full faith and credit of the United
States. GNMA certificates also are supported by the authority of GNMA to borrow
funds from the U.S. Treasury to make payments under its guarantee.
Mortgage-backed securities issued by FNMA include FNMA Guaranteed Mortgage
Pass-Through Certificates (also known as "Fannie Maes") which are solely the
obligations of the FNMA and are not backed by or entitled to the full faith and
credit of the
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United States. Fannie Maes are guaranteed as to timely payment of
the principal and interest by FNMA. Mortgage-backed securities issued by the
Federal Home Loan Mortgage Corporation ("FHLMC") include FHLMC Mortgage
Participation Certificates (also known as "Freddie Macs" or "PCs"). The FHLMC is
a corporate instrumentality of the United States, created pursuant to an Act of
Congress, which is owned entirely by Federal Home Loan Banks and do not
constitute a debt or obligation of the United States or by any Federal Home Loan
Bank. Freddie Macs entitle the holder to timely payment of interest, which is
guaranteed by the FHLMC. The FHLMC guarantees either ultimate collection or
timely payment of all principal payments on the underlying mortgage loans. When
the FHLMC does not guarantee timely payment of principal, FHLMC may remit the
amount due on account of its guarantee of ultimate payment of principal at any
time after default on an underlying mortgage, but in no event later than one
year after it becomes payable.
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.
Collateralized Mortgage Obligations and Multiclass Pass-Through
Securities. CMOs are debt obligations collateralized by mortgage loans or
mortgage pass-through securities. Typically, CMOs are collateralized by GNMA,
Fannie Mae or Freddie Mae Certificates, but also may be collateralized by whole
loans or private pass-throughs (such collateral collectively hereinafter
referred to as "Mortgage Assets"). Multiclass pass-through securities are
interests in a trust composed of Mortgage Assets. Unless the context indicates
otherwise, all references herein to CMOs include multiclass pass-through
securities. Payments of principal and 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
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have been paid in full. 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.
A 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 retired 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. Stripped mortgage securities are derivative
multiclass mortgage securities. Stripped mortgage securities may be issued by
agencies or instrumentalities of the U.S. government, or by private originators
of, or investors in, mortgage loans, including savings and loan associations,
mortgage banks, commercial banks, investment banks and special purpose
subsidiaries of the foregoing. Stripped mortgage securities have greater
volatility than other types of mortgage securities. Although stripped mortgage
securities are purchased and sold by institutional investors through several
investment banking firms acting as brokers or dealers, the market for such
securities has not yet been fully developed. Accordingly, stripped mortgage
securities are generally illiquid.
Stripped mortgage securities are structured with two or more classes of
securities that receive different proportions of the interest and principal
distributions on a pool of mortgage assets. A common type of stripped mortgage
security will have at least one class receiving only a small portion of the
interest and a larger portion of the principal from the mortgage assets, while
the other class will receive primarily interest and only a small portion of the
principal. In the most extreme case, one class will receive all of the interest
("IO" or interest-only), while the other class will receive all of the principal
("PO" or principal-only class). The yield to maturity on IOs, POs and other
mortgage-backed securities that are purchased at a substantial premium or
discount generally are extremely sensitive not only to changes in prevailing
interest rates but also to the rate of principal payments (including
prepayments) on the related underlying mortgage assets, and a rapid rate of
principal payments may have a material adverse effect on such securities' yield
to maturity. If the underlying mortgage assets experience greater than
anticipated prepayments of principal, the Fund may fail to fully recoup its
initial investment in these securities even if the securities have received the
highest rating by a nationally recognized statistical rating organization.
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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.
IOettes represent the right to receive interest payments on an underlying pool
of mortgages with similar risks as those associated with IOs. Unlike IOs, the
owner also has the right to receive a very small portion of the principal. 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 the Prospectus and "Additional Information Concerning
Taxes" in the Statement of Additional Information.
A Fund may also purchase stripped mortgage-backed securities for hedging
purposes to protect that Fund against interest rate fluctuations. For example,
since an IO will tend to increase in value as interest rates rise, it may be
utilized to hedge against a decrease in value of other fixed-income securities
in a rising interest rate environment. With respect to IOs, if the underlying
mortgage securities experience greater than anticipated prepayments of
principal, the Fund may fail to recoup fully its initial investment in these
securities even if the securities are rated in the highest rating category by an
NRSRO. Stripped mortgage-backed securities may exhibit greater price volatility
than ordinary debt securities because of the manner in which their principal and
interest are returned to investors. The market value of the class consisting
entirely of principal payments can be extremely volatile in response to changes
in interest rates. The yields on stripped mortgage-backed securities that
receive all or most of the interest are generally higher than prevailing market
yields on other mortgage-backed obligations because their cash flow patterns are
also volatile and there is a greater risk that the initial investment will not
be fully recouped. The market for CMOs and other stripped mortgage-backed
securities may be less liquid if these securities lose their value as a result
of changes in interest rates; in that case, a Fund may have difficulty in
selling such securities.
Money Market Instruments. Money market instruments 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, with remaining maturities of 397 days or less;
-- obligations of sovereign foreign governments, their agencies,
instrumentalities and political subdivisions, with remaining maturities of
397 days or less;
-- asset-backed commercial paper whose own rating or the rating of any
guarantor is in one of the two highest categories of any NRSRO;
-- repurchase agreements;
-- bank obligations;
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-- commercial paper (including asset-backed 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, these obligations will be rated within the top two rating
categories by an NRSRO or if not rated, of comparable quality;
-- extendable commercial notes which are obligations underwritten by
Goldman Sachs, which differ from traditional commercial paper because the
issuer can extend the maturity of the note up to 390 days with the option
to call the note any time during the extension period. Because extension
will occur when the issuer does not have other viable options for lending,
these notes are considered illiquid and the Money Market Fund will be
limited to holding no more than 10% of its net assets in these and any
other illiquid securities.
REPURCHASE AGREEMENTS
In connection with the purchase of a repurchase agreement from member
banks of the Federal Reserve System or certain non-bank dealers by a Fund, the
Fund's custodian, or a subcustodian, will have custody of, and will hold in a
segregated account, securities acquired by the Fund under a repurchase
agreement. Repurchase agreements are contracts under which the buyer of a
security simultaneously commits to resell the security to the seller at an
agreed-upon price and date. Repurchase agreements are considered by the staff of
the Securities and Exchange Commission (the "SEC") to be loans by the Fund.
Repurchase agreements may be entered into with respect to securities of the type
in which it may invest or government securities regardless of their remaining
maturities, and will require that additional securities be deposited with it if
the value of the securities purchased should decrease below resale price.
Repurchase agreements involve certain risks in the event of default or
insolvency by the other party, including possible delays or restrictions upon a
Fund's ability to dispose of the underlying securities, the risk of a possible
decline in the value of the underlying securities during the period in which a
Fund seeks to assert its rights to them, the risk of incurring expenses
associated with asserting those rights and the risk of losing all or part of the
income from the repurchase agreement. A Fund's adviser or 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.
WHEN-ISSUED SECURITIES AND DELAYED-DELIVERY TRANSACTIONS
When securities are purchased on a "when-issued" basis or purchased for
delayed delivery, then payment and delivery occur 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. The greater a
Fund's
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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.
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
A 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 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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SMALL COMPANY AND EMERGING GROWTH STOCKS
Investing in securities of small-sized and emerging growth companies may
involve greater risks than investing in the stocks of larger, more established
companies 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 and emerging growth 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 and emerging growth
companies may have limited product lines, markets or financial resources and may
lack management depth. In addition, small-sized and emerging growth 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 and emerging growth companies than
for larger, more established ones.
SPECIAL SITUATION COMPANIES
"Special situation companies" 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. Therefore, an investment in a Fund that invests a
significant portion of its assets in these securities 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. The
subadvisers of such Funds believe, 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, if it is consummated at all.
FOREIGN SECURITIES
Investing in foreign securities (including through the use of depository
receipts) 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,
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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, higher brokerage costs and
dividend collection fees which could reduce the yield on such securities.
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. From
time to time, foreign securities may be difficult to liquidate rapidly without
adverse price effects.
Investment in Companies in Developing or Emerging Market Countries.
Investments may be made from time to time in companies in developing or emerging
market 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 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.
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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. A Fund may invest in foreign securities by purchasing
depository receipts, including American Depository Receipts ("ADRs"), European
Depository Receipts ("EDRs") and Global Depository Receipts ("GDRs") 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, GDRs, in bearer form, are issued and designed for use
outside the United States and 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. GDRs
are receipts typically issued by non-United States banks and trust companies
that evidence ownership of either foreign or domestic securities. For purposes
of a Fund's investment policies, ADRs, GDRs and EDRs are deemed to have the same
classification as the underlying securities they represent. Thus, an ADR, GDR or
EDR representing ownership of common stock will be treated as common stock.
Certain Funds 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.
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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.
Eurodollar and Yankee Obligations. Eurodollar bank obligations are
dollar-denominated certificates of deposit and time deposits issued outside the
U.S. capital markets by foreign branches of U.S. banks and by foreign banks.
Yankee bank obligations are dollar-denominated obligations issued in the U.S.
capital markets by foreign banks.
Eurodollar and Yankee bank obligations are subject to the same risks that
pertain to domestic issues, notably credit risk, market risk and liquidity risk.
Additionally, Eurodollar (and to a limited extent, Yankee) bank obligations are
subject to certain sovereign risks. One such risk is the possibility that a
sovereign country might prevent capital, in the form of dollars, from flowing
across their borders. Other risks include: adverse political and economic
developments; the extent and quality of government regulation of financial
markets and institutions; the imposition of foreign withholding taxes, and the
expropriation or nationalization of foreign issues. However, Eurodollar and
Yankee bank obligations held in a Fund will undergo the same credit analysis as
domestic issues in which the Fund invests, and will have at least the same
financial strength as the domestic issuers approved for the Fund.
Foreign Sovereign Debt. Certain Funds may invest in sovereign debt
obligations issued by foreign governments. To the extent that a Fund invests in
obligations issued by developing or emerging markets, these investments involve
additional risks. 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
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arrangements have included, among other things, reducing and rescheduling
interest and principal payments by negotiation new or amended credit agreements
or converting outstanding principal and unpaid interest to Brady Bonds, and
obtaining new credit for 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 foreign sovereign debt securities in which a 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.
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. A Fund's adviser or subadviser may believe 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 the adviser or the 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 or "Ba" or "B" by Moody's or, in cases in which a rating by S&P or
Moody's has not been assigned, are generally considered by the Fund's adviser or
subadviser to be of comparable quality.
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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 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. 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 fact 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, investments in
Brady Bonds are considered speculative. A 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.
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 a Fund may invest are likely to be acquired at a discount, which involves
certain considerations discussed below under "Additional Information Concerning
Taxes."
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REAL ESTATE SECURITIES
Although no Fund will invest in real estate directly, a Fund may invest in
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. Hybrid REITs combine the
investment strategies of Equity REITs and Mortgage REITs. REITs are not taxed on
income distributed to shareholders provided they comply with several
requirements of Internal Revenue Code, as amended (the "Code").
CONVERTIBLE SECURITIES
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. Convertible securities have general
characteristics similar to both debt obligations and equity securities. 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, the credit standing of the issuer and
other factors. The market value of convertible securities tends to decline as
interest rates increase and, conversely, tends to increase as interest rates
decline. The conversion value of a convertible security is determined by the
market price of the underlying common stock. 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. If the conversion value is low relative to the investment
value, the price of the convertible security is governed principally by its
investment value. Generally, the conversion value decreases as the convertible
security approaches maturity.
To the extent the market price of the underlying common stock approaches
or exceeds the conversion price, the price of the convertible security will be
increasingly influenced by its conversion value. A convertible security
generally will sell at a premium over its conversion value by the extent to
which investors place value on the right to acquire the underlying common stock
while holding a
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fixed income security. While no securities investments are without risk,
investments in convertible securities generally entail less risk than
investments in common stock of the same issuer.
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.
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.
Convertible securities generally are subordinated to other similar but
non-convertible securities of the same issuer, although convertible bonds, as
corporate debt obligations, generally 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.
Certain Funds may invest in convertible preferred stocks that offer
enhanced yield features, such as Preferred Equity Redemption Cumulative Stocks
("PERCS"), which provide an investor, such as a Fund, with the opportunity to
earn higher dividend income than is available on a company's common stock. PERCS
are preferred stocks that generally feature a mandatory conversion date, as well
as a capital appreciation limit, which is usually expressed in terms of a stated
price. Most PERCS expire three years from the date of issue, at which time they
are convertible into common stock of the issuer. PERCS are generally not
convertible into cash at maturity. Under a typical arrangement, after three
years PERCS convert into one share of the issuer's common stock if the issuer's
common stock is trading at a price below that set by the capital appreciation
limit, and into less than one full share if the issuer's common stock is trading
at a price above that set by the capital appreciation limit. The amount of that
fractional share of common stock is determined by dividing the price set by the
capital appreciation limit by the market price of the issuer's common stock.
PERCS can be called at any time prior to maturity, and hence do not provide call
protection. If called early, however, the issuer must pay a call premium over
the market price to the investor. This call premium declines at a preset rate
daily, up to the maturity date.
A Fund may also invest in other classes of enhanced convertible
securities. These include but are not limited to ACES (Automatically Convertible
Equity Securities), PEPS (Participating Equity Preferred Stock), PRIDES
(Preferred Redeemable Increased Dividend Equity Securities), SAILS (Stock
Appreciation Income Linked Securities), TECONS (Term Convertible Notes), QICS
(Quarterly Income Cumulative Securities), and DECS (Dividend Enhanced
Convertible Securities). ACES, PEPS, PRIDES, SAILS, TECONS, QICS, and DECS all
have the following features: they are issued by the company, the common stock of
which will be received in the event the convertible
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preferred stock is converted; unlike PERCS they do not have a capital
appreciation limit; they seek to provide the investor with high current income
with some prospect of future capital appreciation; they are typically issued
with three or four-year maturities; they typically have some built-in call
protection for the first two to three years; and, upon maturity, they will
necessarily convert into either cash or a specified number of shares of common
stock.
Similarly, there may be enhanced convertible debt obligations issued by
the operating company, whose common stock is to be acquired in the event the
security is converted, or by a different issuer, such as an investment bank.
These securities may be identified by names such as ELKS (Equity Linked
Securities) or similar names. Typically they share most of the salient
characteristics of an enhanced convertible preferred stock but will be ranked as
senior or subordinated debt in the issuer's corporate structure according to the
terms of the debt indenture. There may be additional types of convertible
securities not specifically referred to herein, which may be similar to those
described above in which a Fund may invest, consistent with its goals and
policies.
An investment in an enhanced convertible security or any other security
may involve additional risks to the fund. A Fund may have difficulty disposing
of such securities because there may be a thin trading market for a particular
security at any given time. Reduced liquidity may have an adverse impact on
market price and a Fund's ability to dispose of particular securities, when
necessary, to meet the Fund's liquidity needs or in response to a specific
economic event, such as the deterioration in the credit worthiness of an issuer.
Reduced liquidity in the secondary market for certain securities may also make
it more difficult for the Fund to obtain market quotations based on actual
trades for purposes of valuing the fund's portfolio. A Fund, however, intends to
acquire liquid securities, though there can be no assurances that it will always
be able to do so.
Certain Funds 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 securities 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, a 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.
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
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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.
PREFERRED STOCK
Preferred stocks, like debt obligations, are generally fixed-income
securities. Shareholders of preferred stocks normally have the right to receive
dividends at a fixed rate when and as declared by the issuer's board of
directors, but do not participate in other amounts available for distribution by
the issuing corporation. Dividends on the preferred stock may be cumulative, and
all cumulative dividends usually must be paid prior to common shareholders
receiving any dividends. Because preferred stock dividends must be paid before
common stock dividends, preferred stocks generally entail less risk than common
stocks. Upon liquidation, preferred stocks are entitled to a specified
liquidation preference, which is generally the same as the par or stated value,
and are senior in right of payment to common stock. Preferred stocks are,
however, equity securities in the sense that they do not represent a liability
of the issuer and, therefore, do not offer as great a degree of protection of
capital or assurance of continued income as investments in corporate debt
securities. Preferred stocks are generally subordinated in right of payment to
all debt obligations and creditors of the issuer, and convertible preferred
stocks may be subordinated to other preferred stock of the same issuer.
SHORT SELLING OF SECURITIES
In a short sale of securities, 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, 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.
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.
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. A 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
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(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 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." The Funds do 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
A Fund may not invest more than 15% (10% for the Money Market Fund) 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. Unless subsequently registered for sale, these securities can
only be sold in privately negotiated transactions or pursuant to an exemption
from registration. 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
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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.
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.
The applicable subadviser or the adviser will monitor the liquidity of
restricted securities in the portion of a Fund it manages. In reaching liquidity
decisions, the following factors are considered: (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).
Private Placement Commercial Paper. Commercial paper eligible for resale
under Section 4(2) of the Securities Act is offered only to accredited
investors. Rule 506 of Regulation D in the Securities Act of 1933 lists
investment companies as an accredited investor.
Section 4(2) paper not eligible for resale under Rule 144A under the
Securities Act shall be deemed liquid if (1) the Section 4(2) paper is not
traded flat or in default as to principal and interest; (2) the Section 4(2)
paper is rated in one of the two highest rating categories by at least two
NRSROs, or if only NRSRO rates the security, it is rated in one of the two
highest categories by that NRSRO; and (3) the Adviser believes that, based on
the trading markets for such security, such security can be disposed of within
seven days in the ordinary course of business at approximately the amount at
which the Fund has valued the security.
BORROWING
A Fund may borrow money from banks, limited by each Fund's fundamental
investment restriction (generally, 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; for the Total Return Fund, the Capital Appreciation Fund,
the
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Government Bond Fund and the Money Market Fund, this 5% limit is the only
borrowing permitted. 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
A Fund's adviser or subadviser 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 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, currency or index) or the
level of a reference index.
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 (writer) 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.
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 a Fund's
adviser's or subadviser's ability to predict movements of the overall securities
and currency markets, which requires different skills than predicting changes in
the prices of individual securities. There can be no assurance that any
particular strategy adopted will succeed.
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(2) There might be imperfect correlation, or even no correlation, between
price movements of an instrument and price movements of investments being
hedged. For example, if the value of an instrument used in a short hedge (such
as writing a call option, buying a put option, or selling a futures contract)
increased by less than the decline in value of the hedged investment, the hedge
would not be fully successful. Such a lack of correlation might occur due to
factors unrelated to the value of the investments being hedged, such as
speculative or other pressures on the markets in which these instruments are
traded. The effectiveness of hedges using instruments on indices will depend on
the degree of correlation between price movements in the index and price
movements in the investments being hedged, 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 a Fund's 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, a 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. A Fund 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
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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 a Fund may include European-style
options, which can only be exercised at expiration. This is in contrast to
American-style options which can be exercised at any time prior to the
expiration date of the option.
A Fund may effectively terminate its right or obligation under an option
by entering into a closing transaction. For example, a Fund may terminate its
obligation under a call or put option that it had written by purchasing an
identical call or put option; this is known as a closing purchase transaction.
Conversely, a Fund may terminate a position in a put or call option it had
purchased by writing an identical put or call option; this is known as a closing
sale transaction. Closing transactions permit the Fund to realize the profit or
limit the loss on an option position prior to its exercise or expiration.
A Fund may purchase or write both OTC options and options traded on
foreign and U.S. exchanges. Exchange-traded options are issued by a clearing
organization affiliated with the exchange on which the option is listed that, in
effect, guarantees completion of every exchange-traded option transaction. OTC
options are contracts between the Fund and the counterparty (usually a
securities dealer or a bank) with no clearing organization guarantee. Thus, when
the Fund purchases or writes an OTC option, it relies on the counter party to
make or take delivery of the underlying investment upon exercise of the option.
Failure by the counter party to do so would result in the loss of any premium
paid by the fund as well as the loss of any expected benefit of the transaction.
A Fund's ability to establish and close out positions in exchange-listed
options depends on the existence of a liquid market. A 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 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
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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.
A 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 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. A 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. A 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 a Fund's adviser
or a subadviser believes it is more advantageous to a Fund than is purchasing
the futures contract.
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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 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
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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.
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. A Fund 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
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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. A 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 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 a Fund's adviser's or
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 Internal Revenue Code may limit a Fund's ability to use
swap agreements. The swaps market is largely unregulated.
A Fund will enter swap agreements only with counterparties that a Fund's
adviser or subadviser reasonably believes are capable of performing under the
swap agreements. If there is a default by the other 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. A
Fund 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
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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.
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 the adviser or 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 a Fund's adviser or subadviser believes a liquid secondary market will
exist for a particular option at any specific time.
FORWARD CURRENCY CONTRACTS
A Fund may enter into forward currency contracts. A forward currency
contract involves an obligation to purchase or sell a specific currency at a
future date, which may be any fixed number of
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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 50 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
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generally accruing in connection with the purchase or sale of its portfolio
securities. Position hedging is the sale of forward currency with respect to
portfolio security positions. A Fund may not position hedge to an extent greater
than the aggregate market value (at the time of making such sale) of the hedged
securities.
FOREIGN COMMERCIAL PAPER
A Fund may invest in commercial paper which is indexed to certain specific
foreign currency exchange rates. The terms of such commercial paper provide that
its principal amount is adjusted upwards or downwards (but not below zero) at
maturity to reflect changes in the exchange rate between two currencies while
the obligation is outstanding. A Fund will purchase such commercial paper 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 a 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 Investment Company Act of 1940. 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 INVESTMENT COMPANIES
As permitted by the Investment Company Act of 1940, a Fund may 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. A 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. 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.
BANK OBLIGATIONS
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
36
<PAGE> 59
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. Bank obligations may be issued by domestic banks
(including their Branches located outside the United States), domestic and
foreign branches of foreign banks and savings and loan associations.
FLOATING AND VARIABLE RATE INSTRUMENTS
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, or at specified intervals. 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 may not be 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.
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 to provide for
periodic adjustments in the interest rate. A Fund will limit its purchases of
floating and variable rate obligations to those of the same quality as it is
otherwise allowed to purchase. A Fund's adviser or subadviser will monitor on an
ongoing basis the ability of an issuer of a demand instrument to pay principal
and interest on demand.
A 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.
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<PAGE> 60
ZERO COUPON SECURITIES, STEP-COUPON SECURITIES, PAY-IN-KIND BONDS ("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. 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 a 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, a 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
Loan Participations typically will result in a Fund having a contractual
relationship only with the lender, not with the borrower. A 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, a 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 a Fund may not benefit directly from
any collateral supporting the loan in which it has purchased the Participation.
As a result, a 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, a 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. A Fund will acquire Loan Participations only if the lender
interpositioned between the
38
<PAGE> 61
Fund and the borrower is determined by the applicable subadviser to be
creditworthy. When a 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.
A 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.
In valuing a Loan Participation or Assignment held by a 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.
MORTGAGE DOLLAR ROLLS AND REVERSE REPURCHASE AGREEMENTS
A Fund may engage in reverse repurchase agreements to facilitate portfolio
liquidity, a practice common in the mutual fund industry, or for arbitrage
transactions discussed below. In a reverse repurchase agreement, a Fund would
sell a security and enter into an agreement to repurchase the security at a
specified future date and price. A Fund generally 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. At the time a Fund enters into a reverse repurchase
agreement, it will establish and maintain a segregated account with an approved
custodian containing liquid securities having a value not less than the
repurchase price (including accrued interest). The assets contained in the
segregated account will be marked-to-market daily and additional assets will be
placed in such account on any day in which the assets fall below the repurchase
price (plus accrued interest). A Fund's liquidity and ability to manage its
assets might be affected when it sets aside cash or portfolio securities to
cover such commitments. Reverse repurchase agreements involve the risk that the
market value of the securities retained in lieu of sale may decline below the
price of the securities the Fund has sold but is obligated to repurchase. In the
event the buyer of securities under a reverse repurchase agreement files for
bankruptcy or becomes insolvent, such buyer or its trustee or receiver may
receive an extension of time to determine whether to enforce the 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.
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<PAGE> 62
Mortgage dollar rolls are arrangements 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")
Mortgage dollar rolls and reverse repurchase agreements 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 Fund's adviser
or subadviser believes that such arbitrage transactions do not present the risks
to the Funds that are associated with other types of leverage.
TEMPORARY DEFENSIVE POSITIONS
In response to economic, political or unusual market conditions, each Fund
may invest up to 100% of its assets in cash or money market obligations. In
addition, a Fund may have, from time to time, significant cash positions until
suitable investment opportunities are available.
INVESTMENT RESTRICTIONS FOR THE FUNDS
The following are fundamental investment restrictions for each of the
Funds which cannot be changed without the authorization of the majority of the
outstanding shares of the Fund for which a change is proposed. The vote of the
majority of the outstanding securities means the vote of (A) 67% or more of the
voting securities present at such meeting, if the holders of more than 50% of
the outstanding voting securities are present or represented by proxy or (B) a
majority of the outstanding securities, whichever is less.
INVESTMENT RESTRICTIONS FOR: STRATEGIC VALUE FUND, EQUITY INCOME FUND,
HIGH INCOME BOND FUND, BALANCED FUND, MULTI SECTOR BOND FUND, SMALL CAP VALUE
FUND, SMALL CAP GROWTH FUND, GLOBAL 50 FUND, MID CAP INDEX FUND, GROWTH FOCUS
FUND, NEW ECONOMY FUND, GLOBAL TECHNOLOGY & COMMUNICATIONS FUND, GLOBAL LIFE
SCIENCES FUND, AND INTERNATIONAL EQUITY FUND.
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<PAGE> 63
A Fund:
- - May not, with the exception of the Growth Focus Fund, 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
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
331/3% 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.
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<PAGE> 64
INVESTMENT RESTRICTIONS FOR: STRATEGIC GROWTH FUND, SMALL COMPANY FUND,
AND INCOME FUND
A 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
331/3% 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). A Fund may
also borrow money from other persons to the extent permitted by applicable
law. For purposes of this restriction, short sales, the entry into currency
transactions, options, futures contracts, options on futures contracts,
forward commitment transactions and dollar roll transactions that are not
accounted for as financings (and the segregation of assets in connection
with any of the foregoing) shall not constitute borrowing.
- - May not issue senior securities, except as permitted under the 1940 Act.
- - May not act as an underwriter of another issuer's securities, except to the
extent that the Fund may be deemed an underwriter within the meaning of the
Securities Act in connection with the purchase and sale of portfolio
securities.
- - May not purchase or sell physical commodities unless acquired as a result
of ownership of securities or other instruments, but this shall not prevent
the Fund from purchasing or selling options, futures contracts, or other
derivative instruments, or from investing in securities or other
instruments backed by physical commodities.
- - May not lend any security or make any other loan if, as a result, more than
331/3% 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.
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<PAGE> 65
INVESTMENT RESTRICTIONS FOR: TOTAL RETURN FUND, CAPITAL APPRECIATION FUND,
GOVERNMENT BOND FUND, and MONEY MARKET FUND
A Fund:
- - May not 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.
- - May not 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.
- - May not 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.
- - 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 instrumantalities. 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.
- - 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 issue
securities except as permitted by the Investment Company Act of 1940.
The following are the NON-FUNDAMENTAL operating policies of the Strategic Growth
Fund, Strategic Value Fund, Equity Income Fund, High Income Bond Fund, Balanced
Fund, Multi Sector Bond Fund, Small Cap Value Fund, Small Cap Growth Fund,
Global 50 Fund, Mid Cap Index Fund, Small Company Fund, Income Fund, Growth
Focus Fund, New Economy Fund, Global Technology & Communications Fund, Global
Life Sciences Fund, and International
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Equity Fund, 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 Index 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 Index
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. If any
percentage restriction or requirement described above is satisfied at the
time of investment, a later increase or decrease in such percentage
resulting from a change in net asset value will not constitute of such
restriction or requirement. However, should a change in net asset value or
other external events cause a Fund's investments in illiquid securities
including repurchase agreements with maturities in excess of seven days, to
exceed the limit set forth above for such Fund's investment in illiquid
securities, a Fund will act to cause the aggregate amount such securities
to come within such limit as soon as reasonably practicable. In such event,
however, such Fund would not be required to liquidate any portfolio
securities where a Fund would suffer a loss on the sale of such securities.
- - 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 331/3% of
the Fund's total assets at the time of the borrowing or investment.
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:
- - Make short sales of securities.
- - 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. If any percentage restriction
or requirement described above is satisfied at the time of investment, a
later increase or decrease in such percentage resulting from a change in
net asset value will not constitute of such restriction or requirement.
However, should a change in net asset value or other
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<PAGE> 67
external events cause a Fund's investments in illiquid securities including
repurchase agreements with maturities in excess of seven days, to exceed
the limit set forth above for such Fund's investment in illiquid
securities, a Fund will act to cause the aggregate amount such securities
to come within such limit as soon as reasonably practicable. In such event,
however, such Fund would not be required to liquidate any portfolio
securities where a Fund would suffer a loss on the sale of such securities.
- - 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 thereunder,
or pursuant to any exemption therefrom.
The investment objectives of each of the Funds is not fundamental and may
be changed by the Board of Trustees without shareholder approval.
PORTFOLIO TURNOVER
The portfolio turnover rate for each Fund is calculated by dividing the lesser
of purchases or sales of portfolio securities for the year by the monthly
average value of the portfolio securities, excluding securities whose maturities
at the time of purchase were one year or less. The portfolio turnover rate for
the years ended December 31, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
FUND 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Strategic Growth % 369.83%
- --------------------------------------------------------------------------------
Strategic Value % 68.65%
- --------------------------------------------------------------------------------
Equity Income % 49.12%
- --------------------------------------------------------------------------------
High Income Bond % 24.25%
- --------------------------------------------------------------------------------
Balanced % 137.35%
- --------------------------------------------------------------------------------
Multi Sector Bond % 287.69%
- --------------------------------------------------------------------------------
Small Cap Value % 283.65%
- --------------------------------------------------------------------------------
Small Cap Growth* % N/A
- --------------------------------------------------------------------------------
Global 50 % 59.01%
- --------------------------------------------------------------------------------
Mid Cap Index % 119.37%
- --------------------------------------------------------------------------------
Small Company % 141.27%
- --------------------------------------------------------------------------------
Income** % 157.21%
- --------------------------------------------------------------------------------
Total Return % 17.13%
- --------------------------------------------------------------------------------
Capital Appreciation % 10.67%
- --------------------------------------------------------------------------------
Government Bond % 32.03%
- --------------------------------------------------------------------------------
Growth Focus*** N/A N/A
</TABLE>
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<TABLE>
<S> <C> <C>
- --------------------------------------------------------------------------------
New Economy*** N/A N/A
- --------------------------------------------------------------------------------
Global Technology &
Communications**** N/A N/A
- --------------------------------------------------------------------------------
Global Life Sciences**** N/A N/A
- --------------------------------------------------------------------------------
International Equity**** N/A N/A
</TABLE>
- ------------
* Had no operations prior to May 1,1999.
** Commenced operations on January 20, 1998.
*** Commenced operations on May 1, 2000.
**** Commenced operations on June ____, 2000.
High portfolio turnover rate will generally result in higher brokerage expenses.
INSURANCE LAW RESTRICTIONS
In connection with the Trust's agreement to sell shares to the Accounts,
Villanova Mutual Fund Capital Trust ("VMF") and the insurance companies may
enter into agreements, required by certain state insurance departments, under
which VMF 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
separate 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 1, 2000, separate accounts of Nationwide Life Insurance
Company and Nationwide Life and Annuity Insurance Company had shared voting and
investment power over ____% of the Balanced Fund shares, ____% of the Multi
Sector Bond Fund shares, ____ % of the Small Cap Value Fund shares, ____% of the
Global 50 Fund shares, ____% of the Mid Cap Index Fund shares, ____% of the
Small Cap Growth Fund, ____% of the Strategic Growth Fund shares, ____ % of the
Strategic Value Fund shares, ____% of the Equity Income Fund shares, ____% of
the High Income Bond Fund shares, ____% of the Small Company Fund shares, ____%
of the Total Return Fund shares, ____% of the Government Bond Fund shares, ____%
of the Capital Appreciation Fund shares, and ____% of the Money Market Fund
shares, respectively. As of March 1, 2000, Nationwide Life Insurance Company
owned beneficially ____% of the Balanced Fund shares, ____% of the Multi Sector
Bond Fund shares, ____% of the Small Cap Value Fund shares, ____% of the Global
50 Fund shares, ____% of the Mid Cap Index Fund shares, ____% of the Strategic
Growth Fund shares, ____ % of the Strategic Value Fund shares, ____% of the
Equity Income Fund shares, ____% of the High Income Bond Fund shares, and ____%
of the Income Fund shares. As of March 1, 2000, the following portfolios of
Nationwide Asset Allocation Trust had shared voting and investment power
over shares of the Income Fund: Moderately Aggressive Portfolio, ____%, Moderate
Portfolio, ____%;
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<PAGE> 69
Moderately Conservative Portfolio, ____%; and Conservative
Portfolio, ____%. Nationwide Asset Allocation Trust is a registered investment
company advised by Villanova SA Capital Trust, an affiliate of VMF, and sold to
separate accounts of Nationwide Life Insurance Company.
Nationwide Life Insurance Company and Nationwide Life and Annuity
Insurance Company, One Nationwide Plaza, Columbus, Ohio 43215 are 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. 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.
As of March 1, 2000, 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 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, and directs the officers to perform the daily
functions of the Trust.
The principal occupations of the Trustees and Officers during the last
five years and their affiliations are:
DR. JOHN C. BRYANT, TRUSTEE, Age 63
411 Oak Street - Suite 306
Cincinnati, Ohio 45219
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.
C. BRENT DEVORE, Trustee, Age 58
111 N. West Street, Westerville, Ohio 43081
Dr. DeVore is President of Otterbein College.
SUE DOODY, TRUSTEE, Age 64
169 East Beck Street Columbus, Ohio 43206
Ms. Doody is President of Lindey's Restaurant, Columbus, Ohio. She is an active
member of the Greater Columbus Area Chamber of Commerce Board of Trustees.
ROBERT M. DUNCAN, TRUSTEE, Age 71
1397 Haddon Road Columbus, Ohio 43209
47
<PAGE> 70
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.
JOSEPH J. GASPER, TRUSTEE*, CHAIRMAN, Age 54
One Nationwide Plaza Columbus, Ohio 43215
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 65
4890 Smoketalk Lane Westerville, Ohio 43081
Dr. Kerr is President Emeritus of Kendall College. He was formerly President of
Grant Hospital Development Foundation.
DOUGLAS F. KRIDLER, TRUSTEE, Age 43
55 East State Street, Columbus, Ohio 43215
Mr. Kridler is President of Columbus Association for the Performing Arts.
ARDEN L. SHISLER, TRUSTEE, Age 58
P.O. Box 267, Dalton, Ohio 44618
Mr. Shisler is President and Chief Executive Officer of K&B Transport, Inc., a
trucking firm.
ROBERT J. WOODWARD, JR., TRUSTEE*, Vice-Chairman, Age 56
One Nationwide Plaza Columbus, Ohio 43215
Mr. Woodward is Executive Vice President - Chief Investment Officer for
Nationwide Life and Annuity Insurance Company and Nationwide Life Insurance
Company.
DAVID C. WETMORE, TRUSTEE, Age 50
11495 Sunset Hills Rd - Suite #210, Reston, Virginia 20190
Mr. Wetmore is the Managing Director of The Updata Capital, a venture capital
firm.
JAMES F. LAIRD, JR., TREASURER, Age 42
Three Nationwide Plaza Columbus, Ohio 43215
Mr. Laird is Vice President and General Manager of Nationwide Advisory Services,
Inc., an affiliate of VMF. He was formerly Treasurer of Nationwide Advisory
Services, Inc.
ELIZABETH A. DAVIN, SECRETARY, Age 35
One Nationwide Plaza Columbus, Ohio 43215
Ms. Davin is a member of the Office of General Counsel of the Nationwide
Insurance Enterprise and a partner in Dietrich, Reynolds & Koogler.
- ------------
* A Trustee who is an "interested person" of the Trust as defined in the 1940
Act.
** Bryant, DeVore, Doody, Duncan, Kerr, Kridler, Wetmore and Shisler are also
Trustees of Nationwide Mutual Funds and Nationwide Asset Allocation Trust, which
are registered investment companies in the Nationwide fund complex. Gasper and
Wetmore are also Trustees of Nationwide Asset Allocation Trust. Laird and Davin
are also officers of Nationwide Mutual Funds and Nationwide Asset Allocation
Trust.
48
<PAGE> 71
AFFILIATED PERSONS OF THE TRUST AND THE ADVISER
Mr. Joseph J. Gasper, Trustee and Chairman of the Trust, is also Vice
Chairman of the Board of Directors of VMF. Mr. Robert J. Woodward, Jr., Trustee
and Vice-Chairman of the Trust, is also Executive Vice President - Chief
Investment Officer of VMF.
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, 1999, and the aggregate compensation paid to
each disinterested Trustee during the fiscal year ended December 31, 1999 by all
36 registered investment series to which VMF or its affiliates provide
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, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TOTAL
COMPENSATION FROM
AGGREGATE THE NATIONWIDE
COMPENSATION FUND COMPLEX
DISINTERESTED TRUSTEES FROM THE TRUST INCLUDING THE TRUST
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Dr. John C. Bryant $8,000 $24,000
- ----------------------------------------------------------------------------------------------------------------------
C. Brent DeVore $4,500 $16,000
- ----------------------------------------------------------------------------------------------------------------------
Sue Doody $8,000 $21,000
- ----------------------------------------------------------------------------------------------------------------------
Robert M. Duncan $8,000 $24,000
- ----------------------------------------------------------------------------------------------------------------------
Dr. Thomas J. Kerr, IV $8,000 $24,000
- ----------------------------------------------------------------------------------------------------------------------
Douglas F. Kridler $8,000 $21,000
- ----------------------------------------------------------------------------------------------------------------------
Arden L. Shisler* N/A N/A
- ----------------------------------------------------------------------------------------------------------------------
David C. Wetmore $4,500 $16,000
</TABLE>
- ------------
* Mr. Shisler was elected as a Trustee on February 9, 2000.
PERFORMANCE ADVERTISING
The Funds may use past performance in advertisements, sales literature,
and their prospectuses, including calculations of average annual total return,
30-day yield, and seven-day yield, as described below.
49
<PAGE> 72
CALCULATING YIELD AND TOTAL RETURN
CALCULATING YIELD - THE MONEY MARKET FUND
Any current yield quotations for the Money Market Fund, subject to Rule
482 under the Securities Act of 1933, 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 March 31, 2000, the Fund's
seven-day current yield was ____%. The Fund's effective yield represents an
annualization of the current seven day return with all dividends reinvested, and
for the period ended March 31, 2000, was ____%.
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 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 one, five,
and ten year period ended December 31, 1999, and the period from inception to
December 31, 1999, are shown below.
50
<PAGE> 73
<TABLE>
<CAPTION>
10 YEARS
FUND 1 YEAR 5 YEARS OR LIFE
----- ------ ------- --------
<S> <C> <C> <C>
Strategic Growth Fund* % N/A %
Strategic Value Fund* % N/A %
Equity Income Fund* % N/A %
Multi Sector Bond Fund* % N/A %
High Income Bond Fund* % N/A %
Balanced Fund* % N/A %
Small Cap Value Fund* % N/A %
Global 50 Fund* % N/A %
Mid Cap Index Fund* % N/A %
Small Cap Growth Fund**** N/A N/A %
Small Company Fund** % N/A %
Income Fund*** % N/A %
Total Return Fund % % %
Capital Appreciation Fund % % %
Government Bond Fund % % %
Growth Focus Fund***** N/A N/A N/A
New Economy Fund***** N/A N/A N/A
Global Technology & Communications Fund****** N/A N/A N/A
- -------------------------------------------------------------------------------------------------------------------
Global Life Sciences Fund****** N/A N/A N/A
- -------------------------------------------------------------------------------------------------------------------
International Equity Fund****** N/A N/A N/A
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
* The Strategic Growth, Strategic Value, Equity Income, Multi Sector
Bond, High Income Bond, Balanced, Small Cap Value, Global 50, and Mid
Cap Index Funds commenced operations on October 31, 1997.
** The Small Company Fund commenced operations on October 23, 1995.
*** The Income Fund commenced operations on January 20, 1998.
**** The Small Cap Growth Fund commenced operations on May 1, 1999.
***** The Growth Focus and New Economy Funds commenced operations on May
1, 2000.
****** The Global Technology & Communications, Global Life Sciences, and
International Equity Funds commenced operations on June ____, 2000.
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 last day of the period, and annualizing the results, 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, 1999 were as follows:
<TABLE>
<CAPTION>
FUND 30-DAY YIELD
----- ------------
<S> <C>
High Income Bond Fund %
Balanced Fund %
</TABLE>
51
<PAGE> 74
<TABLE>
<CAPTION>
FUND 30-DAY YIELD
---- ------------
<S> <C>
Multi Sector Bond Fund %
Government Bond Fund %
</TABLE>
CODE OF ETHICS
Federal law requires the Trust, each of its investment advisers and
subadvisers and its principal underwriter to adopt codes of ethics which govern
the personal securities transactions of their respective personnel. Accordingly,
each such entity has adopted a code of ethics pursuant to which their respective
personnel may invest securities for their personal accounts (including
securities that may be purchased or held by the Trust).
INVESTMENT ADVISORY AND OTHER SERVICES
Villanova Mutual Fund Capital Trust ("VMF") oversees the management of
each of the Funds pursuant to an Investment Advisory Agreement with the Trust
(the "Investment Advisory Agreements"). Pursuant to the Investment Advisory
Agreement, VMF either provides portfolio management for the Funds directly or
hires and monitors the subadvisers who are responsible for daily portfolio
management. VMF pays the compensation of the Trustees affiliated with VMF. The
officers of the Trust receive no compensation from the Trust. VMF also pays all
expenses incurred by it in providing service under the Investment Advisory
Agreements, other than the cost of investments (including brokerage commissions
and other transaction costs).
The Investment Advisory Agreement also provides that VMF shall not be
liable for any act or omission in providing advisory services, or for any loss
arising out of any investment, unless VMF has acted with willful misfeasance,
bad faith, or gross negligence in the performance of its duties, or by reason of
VMF's reckless disregard of its obligations and duties under the Agreement.
After an initial two-year period, the Investment Advisory Agreement must be
approved each year by the Trust's board of trustees or by shareholders in order
to continue. The Investment Advisory Agreement terminates automatically if it is
assigned. They may 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.
VMF, a Delaware business trust, is a wholly owned subsidiary of Villanova
Capital, Inc., 97% of the common stock of 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 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.
52
<PAGE> 75
Subject to the supervision of VMF 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 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. After an initial two-year period, each Subadvisory Agreement
must be approved each year by the Trust's board of trustees or by shareholders
in order to continue. 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.
Prior to September 1, 1999, Nationwide Advisory Services, Inc. ("NAS")
served as the investment adviser to the Funds and paid fees to the subadvisers
pursuant to the Funds' Subadvisory Agreements. Effective September 1, 1999, the
investment advisory services previously performed for the Funds (except the
Nationwide Mid Cap Index Fund) by NAS were transferred to Villanova Mutual Fund
Capital Trust ("VMF"), an affiliate of NAS and an indirect subsidiary of
Nationwide Financial Services, Inc. The investment advisory services for the
Nationwide Mid Cap Index Fund was transferred from NAS to VMF effective on or
about September 27, 1999. VMF assumed all rights and responsibilities performed
by NAS, including the supervision and monitoring of each Funds' subadviser(s),
and the Fund's subadviser(s) continued to manage the Fund after the transfer to
VMF. After the transfer, there were no changes in the fees charged for
investment advisory services to each of the Funds.
53
<PAGE> 76
The following is a summary of the investment advisory fees paid and the
subadvisory arrangements for each Fund.
TOTAL RETURN FUND, CAPITAL APPRECIATION FUND, GOVERNMENT BOND FUND AND MONEY
MARKET FUND
Prior to November 1, 1997, NAS received a fee computed and paid monthly at the
annual rate equal to 0.50% of the average daily net assets of each Fund.
As of November 1, 1997 (paid to VMF effective September 1, 1999), the
following are the advisory fees 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 then $2 billion
0.45% on assets of $2 billion and more
but less then $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 then $5 billion
0.34% for assets of $5 billion and more
</TABLE>
For the years ended December 31, 1998 and 1997, NAS received fees in the
following amounts: Total Return Fund, $12,401,821 and $7,903,818, respectively;
Capital Appreciation Fund, $4,402,924 and $1,759,412, respectively; Government
Bond Fund, $3,015,171 and $2,231,930, respectively; and Money Market Fund,
$5,043,088 and $4,969,345, respectively. For the year ended December 31, 1999
NAS/VMF received fees in the following amounts: $__________ for the Total Return
Fund, $__________ for the Capital Appreciation Fund, $__________ for the
Government Bond Fund and $__________ for the Money Market Fund.
54
<PAGE> 77
NEW ECONOMY FUND
VMF receives an annual advisory fee in the amount of 1.03% of the Fund's
average daily net assets. VMF has agreed to waive advisory fees and, if
necessary, reimburse expenses in order to limit total annual Fund operating
expenses to 1.35% until at least December 31, 2000.
GLOBAL TECHNOLOGY & COMMUNICATIONS FUND
VMF receives an annual advisory fee in the amount of 0.98% of the Fund's
average daily net assets. VMF has agreed to waive advisory fees and, if
necessary, reimburse expenses in order to limit total annual Fund operating
expenses to 1.35% until at least December 31, 2000.
GLOBAL LIFE SCIENCES FUND
VMF receives an annual advisory fee in the amount of 0.53% of the Fund's
average daily net assets. VMF has agreed to waive advisory fees and, if
necessary, reimburse expenses in order to limit total annual Fund operating
expenses to 1.00% until at least December 31, 2000.
INTERNATIONAL EQUITY FUND
VMF receives an annual advisory fee in the amount of 0.83% of the Fund's
average daily net assets. VMF has agreed to waive advisory fees and, if
necessary, reimburse expenses in order to limit total annual Fund operating
expenses to 1.30% until at least December 31, 2000.
EQUITY INCOME FUND
Under the terms of the Investment Advisory Agreement, the Equity Income
Fund pays to VMF a fee at the annual rate of 0.80% of the Fund's average daily
net assets. VMF has agreed to waive advisory fees and, if necessary, reimburse
expenses in order to limit total annual Fund operating expenses to 0.95% until
at least December 31, 1999. For the fiscal year ended December 31, 1998, NAS was
paid $46,531, net of waivers in the amount of $16,475. For the fiscal year ended
December 31, 1999, NAS/VMF was paid $__________, net of waivers in the amount of
$__________.
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 VMF 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, NAS paid $842 in fees to
Federated. For the fiscal year ended December 31, 1998, NAS paid Federated
$31,503. For the fiscal year ended December 31, 1999, NAS/VMF paid Federated
$__________.
55
<PAGE> 78
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, Inc. Federated and other subsidiaries of
Federated Investors, Inc. 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.
HIGH INCOME BOND FUND
Under the terms of the Investment Advisory Agreement, the High Income Bond
Fund pays to VMF a fee at the annual rate of .80% of the Fund's average daily
net assets. VMF has agreed to waive advisory fees and, if necessary, reimburse
expenses in order to limit total annual Fund operating expenses to 0.95% until
at least December 31, 1999. For the period October 31, 1997 (commencement of
operations) through December 31, 1997, NAS waived all advisory fees in the
amount of $7,374. For the fiscal year ended December 31, 1998, NAS was paid
$126,140 net of waivers in the amount of $32,820. For the fiscal year ended
December 31, 1999, NAS/VMF was paid $__________, net of waivers in the amount of
$__________.
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 VMF 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, NAS paid $3,687 in fees to Federated. For the fiscal
year ended December 31, 1998, NAS paid Federated $79,480. For the fiscal year
ended December 31, 1998, NAS paid Federated $31,503. For the fiscal year ended
December 31, 1999, NAS/VMF paid Federated $__________.
GLOBAL 50 FUND
Under the terms of the Investment Advisory Agreement, the Global 50 Fund
pays to VMF a fee at the annual rate of 1.00% of the Fund's average daily net
assets. VMF has agreed to waive advisory fees and, if necessary, reimburse
expenses in order to limit total annual Fund operating expenses to 1.20% until
at least December 31, 1999. For the period October 31, 1997 (commencement of
operations) through December 31, 1997, NAS waived all advisory fees in the
amount of $8,799. For the fiscal year ended December 31, 1998, NAS was paid
$101,488 net of waivers of $32,240. For the fiscal year ended December 31, 1999,
NAS/VMF was paid $__________, net of waivers in the amount of $__________.
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 VMF 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, NAS paid $5,279 in fees to, J. P. Morgan. For the fiscal year ended
December 31, 1998, NAS paid J.P. Morgan $80,237. For the fiscal year ended
December 31, 1999, NAS/VMF paid J.P. Morgan $__________.
56
<PAGE> 79
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 December 31, 1999, J.P. Morgan and its affiliates had assets
under management of approximately $__________ billion, including approximately
$__________ billion in global equity portfolios.
MID CAP INDEX FUND
Under the terms of the Investment Advisory Agreement, the Fund pays to VMF
a fee at the annual rate of 0.50% of the Fund's average daily net assets. VMF
has agreed to waive advisory fees and, if necessary, reimburse expenses in order
to limit total annual Fund operating expenses to 0.65% until at least December
31, 1999. Prior to September 27, 1999, advisory fees were paid under a different
fee schedule. For the period October 31, 1997 (commencement of operations)
through December 31, 1997, NAS waived all advisory fees earned under the prior
fee schedule in the amount of $5,371. For the fiscal year ended December 31,
1998, NAS was paid $50,235 net of waivers of $24,305, under the prior fee
schedule. For the fiscal year ended December 31, 1999, NAS/VMF was paid
$__________, net of waivers of $__________, under the combined fee schedules.
VMF has selected The Dreyfus Corporation ("Dreyfus"), as subadviser for
the Mid Cap Index Fund. For the investment management services it provides to
the Fund, Dreyfus receives an annual fee from VMF in an amount equal to
- 0.10% on assets up to $250 million,
- 0.09% on assets of $250 million and more but less than $500 million,
- 0.08% on assets of $500 million and more but less than $750 million,
- 0.07% on assets of $750 million and more but less than $1 billion, and
- 0.05% on assets of $1 billion and more.
These fees are calculated at an annual rate based on the Fund's average
daily net assets. Prior to September 27, 1999, First Pacific Advisors, Inc.,
Pilgrim Baxter & Associates, Ltd and Rice, Hall, Jones & Associates were the
subadvisers for the Fund. For the period October 31, 1997 (commencement of
operations) through December 31, 1997, NAS paid $3,325 in fees to the previous
subadvisers of the Fund under a different fee schedule. For the fiscal year
ended December 31, 1998, NAS paid the previous subadvisers $46,144. For the
fiscal year ended December 31, 1999, NAS/VMF paid the subadvisers $__________
under the combined fee schedules.
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 December
31, 1999, Dreyfus managed or administered approximately $___________ billion in
assets for approximately __________ 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. Through its subsidiaries, including Dreyfus, Mellon managed
57
<PAGE> 80
more than $__________ billion in assets as of December 31, 1999, including
approximately $__________ billion in mutual fund assets. As of December 31,
1999, various subsidiaries of Mellon provided non-investment services, such as
custodial or administration services, for more than $__________ trillion in
assets, including approximately $__________ billion in mutual fund assets.
BALANCED FUND
Under the terms of the Investment Advisory Agreement, the Balanced Fund
pays to VMF a fee at the annual rate of 0.75% of the Fund's average daily net
assets. VMF has agreed to waive advisory fees and, if necessary, reimburse
expenses in order to limit total annual Fund operating expenses to 0.90% until
at least December 31, 1999. For the period October 31, 1997 (commencement of
operations) through December 31, 1997, NAS waived all advisory fees in the
amount of $1,605. For the fiscal year ended December 31, 1998, NAS was paid
$131,136 net of waivers of $12,162. For the fiscal year ended December 31, 1999,
NAS/VMF was paid $__________, net of waivers in the amount of $__________.
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 VMF
in an amount equal to 0.35% on assets up to $100 million, and 0.30% on assets of
$100 million and more. These fees are calculated as an annual rate based upon
the Fund's average daily net assets. Prior to May 1, 2000, Salomon Brothers
Asset Management Inc. ("SBAM") was the Fund's subadviser. For the period October
31, 1997 (commencement of operations) through December 31, 1997, NAS paid $749
in fees to SBAM under a different fee schedule. For the fiscal year ended
December 31, 1998, NAS paid SBAM $66,872. For the fiscal year ended December 31,
1999, NAS/VMF paid SBAM $__________.
MULTI SECTOR BOND FUND
Under the terms of the Investment Advisory Agreement, the Multi Sector
Bond Fund pays to VMF a fee at the annual rate of 0.75% of the Fund's average
daily net assets. VMF has agreed to waive advisory fees and, if necessary,
reimburse expenses in order to limit total annual Fund operating expenses to
0.90% until at least December 31, 1999. For the period October 31, 1997
(commencement of operations) through December 31, 1997, NAS waived all advisory
fees in the amount of $1,724. For the fiscal year ended December 31, 1998, NAS
was paid $132,978 net of waivers of $11,628. For the fiscal year ended December
31, 1999, NAS/VMF was paid $__________, net of waivers in the amount of
$__________.
Miller Anderson & Sherrerd, LLP ("MAS") is the subadviser of the Fund. For
the investment management services it provides to the Fund, MAS receives an
annual fee from VMF in the amount of 0.30% on assets up to $200 million, and
0.25% on assets of $200 million and more. These fees are calculated at an annual
rate based upon the Fund's average daily net assets. Prior to May 1, 2000 SBAM
was the Fund's subadviser. For the period October 31, 1997 (commencement of
operations) through December 31, 1997, NAS paid $805 in fees to SBAM under a
different fee schedule. For the fiscal year ended December 31, 1998, NAS paid
SBAM $67,483. For the fiscal year ended December 31, 1999, NAS/VMF paid SBAM
$__________.
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MAS is wholly owned by subsidiaries of Morgan Stanley Dean Witter & Co.
and is a division of Morgan Stanley Dean Witter Investment Management ("MSDW
Investment Management") and provides investment advisory services to employee
benefit plans, endowment funds, foundations and other institutional investors.
As of December 31, 1999, MSDW Investment Management managed in excess of
$__________ billion in assets.
SMALL CAP VALUE FUND
Under the terms of the Investment Advisory Agreement, the Small Cap Value
Fund pays to VMF a fee at the annual rate of 0.90% of the Fund's average daily
net assets. VMF has agreed to waive advisory fees and, if necessary, reimburse
expenses in order to limit total annual Fund operating expenses to 1.05% until
at least December 31, 1999. For the period October 31, 1997 (commencement of
operations) through December 31, 1997, NAS waived all advisory fees in the
amount of $2,029. For the fiscal year ended December 31, 1998, NAS was paid
$128,764 net of waivers of $57,626. For the fiscal year ended December 31, 1999,
NAS/VMF was paid $__________, net of waivers in the amount of $__________.
The Dreyfus Corporation ("Dreyfus") is the subadviser of the Fund. For the
investment management services it provides to the Small Cap Value Fund, Dreyfus
receives an annual fee from VMF 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. For the period
October 31, 1997 (commencement of operations) through December 31, 1997, NAS
paid $1,127 in fees to the subadviser. For the fiscal year ended December 31,
1998, NAS paid Dreyfus $103,550. For the fiscal year ended December 31, 1999,
NAS/VMF paid Dreyfus $__________.
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 December
31, 1999, Dreyfus managed or administered approximately $__________ billion in
assets for approximately __________ 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. Through its subsidiaries, including Dreyfus, Mellon managed more than
$__________ billion in assets as of December 31, 1999, including approximately
$__________ billion in mutual fund assets. As of December 31, 1999, various
subsidiaries of Mellon provided non-investment services, such as custodial or
administration services, for more than $__________ trillion in assets, including
approximately $__________ billion in mutual fund assets.
SMALL CAP GROWTH FUND
Under the terms of the Investment Advisory Agreement, the Fund pays VMF a
fee at the annual rate of 1.10% of the Fund's average daily net assets. The Fund
commenced operations on or around May 1, 1999 and has not incurred any
investment advisory fees prior to this date. NAS has agreed to waive advisory
fees and, if necessary, to reimburse expenses in order to limit total annual
Fund
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<PAGE> 82
operating expenses to 1.30% until at least December 31, 1999. For the period May
1, 1999 (commencement of operations) through December 31, 1999, NAS/VMF was paid
$__________ in advisory fees.
VMF has selected three subadvisers, each of whom will each manage part of
the Fund's portfolio. Each subadviser receives an annual fee from VMF in an
amount equal to 0.60% on assets managed by such subadviser. For the period May
1, 1999 (commencement of operations) through December 31, 1999, NAS/VMF paid
$__________ to the subadvisers.
The Small Cap Growth Fund's subadvisers are:
Franklin Advisers, Inc. ("Franklin")
Miller Anderson & Sherrerd, LLP ("MAS")
Neuberger Berman, LLC ("Neuberger Berman")
Subject to the supervision of VMF 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 VMF
for investment management.
Franklin is a wholly owned subsidiary of Franklin Resources, Inc., one of
the oldest mutual fund organizations in the U.S. Franklin and its affiliates act
as investment manager to numerous other investment companies and accounts.
Together with its affiliates, Franklin manages over $__________ billion in
assets as of December 31, 1999.
Neuberger Berman and its predecessor firms and affiliates have specialized
in the management of no-load mutual funds since 1950. Neuberger Berman and its
affiliates manage securities accounts that had approximately $__________ billion
of assets as of December 31, 1999. Neuberger Berman is a member 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.
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 VMF a fee at the annual
rate of 0.90% of that Fund's average daily net assets. VMF has agreed to waive
advisory fees and, if necessary, reimburse expenses in order to limit total
annual Fund operating expenses to 1.00% in each Fund until at least December 31,
1999. For the period October 31, 1997 (commencement of operations) through
December 31, 1997, NAS waived all advisory fees for the Strategic Value and
Strategic Growth Fund in the amount of $1,715 and $1,645, respectively. For the
fiscal year ended December 31, 1998, NAS was paid $57,340 for the Strategic
Value Fund and $19,683 for the Strategic Growth Fund net of waivers of $19,318
and $31,214, respectively. For the fiscal year ended December 31, 1999, NAS/VMF
was paid $__________ for the
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<PAGE> 83
Strategic Value Fund and $__________ for the Strategic Growth Fund, net of
waivers of $__________ and $__________, respectively.
VMF 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
subadvise the Strategic Value Fund. For the investment management services
provided to each Fund, Strong receives an annual fee from VMF 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, NAS paid $953
and $914, respectively for the Strategic Value and Strategic Growth Funds, in
fees to the subadviser. For the fiscal year ended December 31, 1998, Strong was
paid $42,588 and $28,276 for the Strategic Value Fund and the Strategic Growth
Fund, respectively. For the fiscal year ended December 31, 1999, Strong was paid
$__________ and $__________ for the Strategic Value Fund and the Strategic
Growth Fund, respectively.
Strong began conducting business in 1974. Since then, its principal
business has been providing continuous investment supervision for individuals
and institutional accounts. Strong also acts as investment advisor for each of
the mutual funds within the Strong Family of Funds. As of December 31, 1999,
Strong had over $__________ 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.
SMALL COMPANY FUND
On September 1, 1999, at the time of the transfer of investment advisory
services from NAS to VMF, the management fee that the Fund pays was split
between investment advisory and fund administration agreements, and the revised
management fee for the Fund is 0.93% on the Fund's first $250 million of average
daily net assets, 0.95% on the next $750 million and 0.96% on assets of more
than $1 billion, based on the Fund's average daily net assets. Prior to
September 1, 1999, the Fund paid NAS a fee at the annual rate of 1.00% of the
Fund's average daily net assets. VMF has agreed to waive advisory fees and, if
necessary, to reimburse expenses in order to limit total annual Fund operating
expenses to 1.25% until at least December 31, 1999. During the fiscal years
ended December 31, 1998, 1997, and 1996, NAS received advisory fees in the
amount of $3,598,194, $2,520,540 and $851,352 respectively. For the fiscal year
ended December 31, 1999, NAS/VMF received advisory fees of $__________ under the
combined fee schedules.
VMF has selected four subadvisers, each of whom will each manage part of
the Fund's portfolio. In addition, VMF will manage a portion of the Fund's
portfolio itself. Each subadviser receives an annual fee from VMF in an amount
equal to 0.60% on assets managed by a subadviser. During the fiscal years ended
December 31, 1998 and 1997, the subadvisers were paid $2,119,688, $1,402,367
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and $483,472 by NAS and for the fiscal year ended December 31, 1999, the
subadvisers were paid $__________ by NAS/VMF.
The Small Company Fund's subadvisers are:
The Dreyfus Company
Neuberger Berman LLC
Strong Capital Management, Inc.
Lazard Asset Management
Subject to the supervision of VMF 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 and VMF 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 VMF
for investment management.
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 Corporation ("Mellon"). As of December
31, 1999, Dreyfus managed or administered approximately $__________ billion in
assets for approximately __________ 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. Through its subsidiaries, including Dreyfus, Mellon managed more than
$__________ billion in assets as of December 31, 1999, including approximately
$141 billion in mutual fund assets. As of December 31, 1999, various
subsidiaries of Mellon provided non-investment services, such as custodial or
administration services, for more than $__________ trillion in assets, including
approximately $__________ billion in mutual fund assets.
NEUBERGER BERMAN L.L.C. Neuberger Berman also serves as a subadviser 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 $__________ billion
of assets as of December 31, 1999. 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. Strong also acts as investment adviser
for each of the mutual funds within the Strong Family of Funds. As of December
31, 1999, Strong had over $__________ billion under management. Strong's
principal
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mailing address is P.O. Box 2936, Milwaukee, Wisconsin 53201. Mr. Richard S.
Strong is the controlling shareholder of Strong.
LAZARD ASSET MANAGEMENT. Effective October 1, 1998, Lazard began serving
as one of the subadvisers to the Fund. Lazard, a division of Lazard Freres & Co.
LLC, a New York limited liability company, manages approximately $__________
billion, as of December 31, 1999, in investments for corporations, endowments,
public and private pension plans and wealthy individuals and is recognized as
one of the premier global investment advisory firms. Lazard has offices in New
York and San Francisco. In addition, Lazard provides asset management services
worldwide through its affiliates in London, Tokyo, Sydney, Frankfurt and Cairo.
Lazard's address is 30 Rockefeller Center, New York, New York 10112.
INCOME FUND
Under the terms of the Investment Advisory Agreement, the Fund pays VMF a
fee at the annual rate of 0.45% of the Fund's average daily net assets. VMF has
voluntarily agreed to waive advisory fees and, if necessary, to reimburse
expenses in order to limit total annual Fund operating expenses to 0.75% of the
Fund's average daily net assets until at least December 31, 1999. The Fund
commenced operations on January 20, 1998. For the period from commencement of
operations to December 31, 1998, NAS received $5,839 in fees, net of waivers and
reimbursements of $8,115. For the fiscal year ended December 31, 1999, NAS/VMF
received $__________ in fees, net of waivers in the amount of $__________.
VMF has selected two subadvisers, each of whom will manage part of the
Fund's portfolio. Each subadviser receives an annual fee from VMF 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. For the
fiscal year ended December 31, 1998, NAS paid $__________ and $__________ in
fees to NCM Capital and Smith Graham, respectively. For the fiscal year ended
December 31, 1999, NAS paid $__________ and $__________ in fees to NCM Capital
and Smith Graham, respectively.
Below is a brief description of each of the subadvisers.
NCM CAPITAL MANAGEMENT GROUP, INC. NCM Capital was founded in 1986 and
serves as one of the Fund's subadvisers. As of December 31, 1999, NCM Capital
had approximately $__________ billion in assets under management. 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,
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Chairman, President and Chief Executive Officer of NCM Capital, owns 72% ;
Justin F. Beckett, Executive Vice President and director of NCM Capital, owns
28%.
SMITH GRAHAM & CO. ASSET MANAGERS, L.P. Smith Graham also services as a
subadviser to the Fund. Its corporate offices are located at 6900 Chase 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 domestic, global and international
money management. As of December 31, 1999, Smith Graham managed approximately
$__________ 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 Robecco Group.
Smith Graham & Co., Inc. is wholly owned by Gerald B. Smith and Jamie G. House.
GROWTH FOCUS FUND
As described in the prospectus, the Growth Focus Fund is subject to base
investment advisory fees that may be adjusted if a Fund out- or under-performs a
stated benchmark. Set forth below is information about the advisory fee
arrangements of the Fund:
<TABLE>
<CAPTION>
FUND BENCHMARK REQUIRED EXCESS BASE ADVISORY HIGHEST POSSIBLE LOWEST POSSIBLE
PERFORMANCE FEE ADVISORY FEE AT ADVISORY FEE AT
EACH BREAK POINT EACH BREAK POINT
<S> <C> <C> <C> <C> <C>
Growth Focus Russell 1000 4.0 0.90% for assets 1.12% 0.68%
Growth up to $500 million, 0.98% 0.62%
0.80% for assets 0.91% 0.59%
of $500 million
and more but less
than $2 billion,
0.75% for assets of
$2 billion and more
</TABLE>
The performance adjustment works as follows: If the Growth Focus Fund
outperforms the Russell 1000 Growth Index by more than 4.0%, the advisory
fees will increase from 0.90% to 1.12% for assets under $500 million. If,
however, the Fund underperforms its benchmark by 4.0%, the advisory fees
would go down to 0.68%. These performance-based fees will only be charged
once a Fund has been in operation for at least one year, will be implemented
incrementally over the first three years of the Fund's operations and will
comply with all applicable Securities and Exchange Commission ("SEC") rules.
VMF has agreed to waive advisory fees and, if necessary, reimburse
expenses in order to limit total annual Fund operating expenses to 0.35% until
at least December 31, 2000.
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<PAGE> 87
Turner Investment Partners, Inc. ("Turner") is the subadviser of the Fund.
For the subadvisory services it provides to the Fund, Turner receives a base
subadvisory fee that may be adjusted if a Fund out- or under-performs a stated
benchmark. Set forth below is information about the subadvisory fee arrangements
of the Fund:
<TABLE>
<CAPTION>
FUND BENCHMARK REQUIRED EXCESS BASE ADVISORY HIGHEST POSSIBLE LOWEST POSSIBLE
PERFORMANCE FEE SUBADVISORY FEE AT SUBADVISORY FEE AT
EACH BREAK POINT EACH BREAK POINT
<S> <C> <C> <C> <C> <C>
Growth Focus Russell 1000 4.0 0.55% for assets 0.77% 0.33%
Growth up to $500 million, 0.67% 0.27%
0.45% for assets 0.57% 0.24%
of $500 million
and more but less
than $2 billion,
0.40% for assets of
$2 billion and more
</TABLE>
These performance-based fees will be paid from the investment advisory
fees received by VMF and will be subject to the same conditions.
Turner was founded in 1990 and is located at 1235 Westlakes Drive, Berwyn,
Pennsylvania 19312. It is a registered investment adviser under the Investment
Advisers Act of 1940. Turner serves as investment adviser to other investment
companies, as well as separate investment portfolios.
FUND ADMINISTRATION SERVICES
TOTAL RETURN FUND, CAPITAL APPRECIATION FUND, GOVERNMENT BOND FUND, MONEY MARKET
FUND
Effective November 1, 1997, NAS entered into an agreement to provide
various administration and accounting services for these Funds. For these
services, NAS received 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 years ended
December 31, 1998 and 1997, NAS received fund administration fees in the
following amounts: Total Return Fund $947,890 and $135,272, Capital Appreciation
Fund $366,788 and $37,284, Government Bond Fund $301,517 and $39,441 and Money
Market Fund $608,781 and $89,708, respectively.
Effective September 1, 1999, the fund administration services previously
performed for the Funds by Nationwide Advisory Services, Inc. ("NAS") were
transferred to Villanova SA Capital Trust ("VSA"), an affiliate of NAS and an
indirect subsidiary of Nationwide Financial Services, Inc. In addition, BISYS
Fund Services Ohio, Inc. will perform certain fund administration services
pursuant to a Sub-Administration Agreement also effective September 1, 1999.
After these changes are implemented, there will be no change in the fees charged
for fund administration services for each of the Funds.
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<PAGE> 88
ALL OTHER FUNDS
Under the terms of a Fund Administration Agreement, VSA provides various
administration 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 VSA 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.
Effective September 1, 1999, the fund administration services previously
performed for the Funds by Nationwide Advisory Services, Inc. ("NAS") were
transferred to Villanova SA Capital Trust ("VSA"), an affiliate of NAS and an
indirect subsidiary of Nationwide Financial Services, Inc. Effective with this
change, the Small Company Fund was added to the Fund Administration Agreement
and began paying for these services. In addition, BISYS Fund Services Ohio, Inc.
will perform certain fund administration services pursuant to a
Sub-Administration Agreement also effective September 1, 1999. After these
changes are implemented, there will be no change in the fees charged for fund
administration services for each of the Funds.
Prior to September 1, 1999, Nationwide Advisory Services, Inc. provided
fund administration services to the Funds. For the period from commencement of
operations to December 31, 1997 and the years ended December 31, 1999 and 1998,
NAS received and/or waived all fund administration fees as follows:
<TABLE>
<CAPTION>
1997
1999 1999 1998 1998 ADMINISTRATION FEES
FUND RECEIVED WAIVED RECEIVED WAIVED WAIVED
------ ---------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Strategic Growth Fund $3,959 $ --- $128
Strategic Value Fund $5,962 $ --- $134
Equity Income Fund $5,513 $ --- $147
High Income Bond Fund $13,909 $ --- $645
Balanced Fund $13,374 $ --- $150
Multi Sector Bond Fund $13,497 $ --- $161
Small Cap Value Fund $14,497 $ --- $158
Small Cap Growth Fund** N/A N/A N/A
Global 50 Fund $9,361 $ --- $616
Mid Cap Index Fund $4,969 $ --- $358
Income Fund* $2,171 $ --- N/A
Growth Focus Fund*** N/A N/A N/A N/A N/A
New Economy Fund*** N/A N/A N/A N/A N/A
Global Technology &
Communications Fund**** N/A N/A N/A N/A N/A
Global Life Sciences Fund**** N/A N/A N/A N/A N/A
International Equity Fund**** N/A N/A N/A N/A N/A
</TABLE>
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<PAGE> 89
- ------------
* The Income Fund commenced operations on January 20, 1998.
** The Small Cap Growth Fund commenced operations on May 1, 1999.
*** The Growth Focus and New Economy Funds commenced operations on May 1,
2000.
**** The Global Technology & Communications, Global Life Sciences, and
International Equity Funds commenced operations on June ____, 2000.
ADMINISTRATIVE SERVICE PLAN
Under the terms of an Administrative Services Plan, a Fund is permitted to
enter Servicing Agreements with servicing organizations who agree to provide
certain administrative support services for the Funds. Such administrative
support services include but are not limited to the following: establishing and
maintaining shareholder accounts, processing purchase and redemption
transactions, arranging for banks wires, performing shareholder sub-accounting,
answering inquiries regarding the Funds, providing periodic statements showing
the account balance for beneficial owners or for Plan participants or contract
holders of insurance company separate accounts, transmitting proxy statements,
periodic reports, updated prospectuses and other communications to shareholders
and, with respect to meetings of shareholders, collecting, tabulating, and
forwarding to the Trust executed proxies and obtaining such other information
and performing such other services as may reasonably be required.
As authorized by the Administrative Services Plan, the Trust has entered
into a Servicing Agreement effective July 1, 1999 pursuant to which Nationwide
Financial Services, Inc. has agreed to provide certain administrative support
services to the Funds held beneficially by its customers. In consideration for
providing administrative support services, Nationwide Financial Services, Inc.
and other entities with which the Trust may enter into Servicing Agreements
(which may include NAS) will receive a fee, computed at the annual rate of up to
0.25% of the average daily net assets of the shares of the Funds held by
customers of Nationwide Financial Services, Inc. or such other entity.
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 Bank of New
York for foreign custody of the Funds' assets.
The Custodian performs no managerial or policy making functions for the Funds.
LEGAL COUNSEL
Stradley, Ronon, Stevens and Young LLP, 2600 Commerce Square,
Philadelphia, PA 19103, serves as the Trust's legal counsel.
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers, LLP, 100 E. Broad Street, Columbus, Ohio 43215
serves as independent accountants for the Trust.
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TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Nationwide Investors Services, Inc. (NIS), Three Nationwide Plaza,
Columbus, Ohio 43215 is the Transfer Agent and Dividend Disbursing Agent for the
Funds. NIS is an affiliate of VMF. For these services, NIS is paid a fee by each
Fund at the annual rate of 0.01% of that Fund's average daily net assets.
Management believes the charges for the services performed are comparable to
fees charged by other companies performing similar services.
BROKERAGE ALLOCATIONS
VMF (or a subadviser) is responsible for decisions to buy and sell
securities and other investments for the Funds and 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., prompt and reliable execution at the most
favorable prices and in the most effective manner possible taking into account
all considerations discussed below. VMF or a subadviser 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
VMF or a subadviser. In placing orders with such broker-dealers, VMF or a
subadviser will, where possible, take into account the comparative usefulness of
such information. Such information is useful to VMF or a subadviser even though
its dollar value may be indeterminable, it does not directly benefit a Fund and
its receipt or availability generally does not reduce VMF'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 the variable life insurance policies or
variable annuity 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 VMF or a subadviser
and their affiliates. Although such concurrent authorizations potentially could
be either advantageous or disadvantageous to a Fund, they are effected for a
Fund
68
<PAGE> 91
only when VMF or a subadviser believes that to do so is in the best interest of
the Fund. When such concurrent authorizations occur, the executions will be
allocated in an equitable manner.
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. The determination of what may constitute
best execution in a securities transaction by a broker involves a number of
considerations, including the overall direct net economic result to the Fund
(involving both price paid or received and any commissions and other costs
paid), the efficiency with which the transaction is effected, the ability to
effect the transaction at all when a large block is involved, the availability
of the broker to stand ready to execute possibly difficult transactions in the
future, and the financial strength and stability of the broker. These
considerations are judgmental and are weighed by VMF or subadviser in
determining the overall reasonableness of securities executions and commissions
paid. 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.
VMF and 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
VMF. The fees to each of the subadvisers pursuant to its subadvisory agreement
with VMF 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.
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<PAGE> 92
The following tables list 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
following periods:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1999
- ---------------------------------------------------------------------------------------------------------------------
TRANSACTIONS RELATED TO
-------------------
BROKERAGE SERVICES
-----------------
FUND COMMISSION $ AMOUNT COMMISSION
----- ----------- --------- -----------
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Strategic Growth Fund $ $ -- $ --
- ---------------------------------------------------------------------------------------------------------------------
Strategic Value Fund -- --
- ---------------------------------------------------------------------------------------------------------------------
Equity Income Fund
- ---------------------------------------------------------------------------------------------------------------------
High Income Bond Fund -- --
- ---------------------------------------------------------------------------------------------------------------------
Balanced Fund
- ---------------------------------------------------------------------------------------------------------------------
Multi Sector Bond Fund -- -- --
- ---------------------------------------------------------------------------------------------------------------------
Small Cap Value Fund -- --
- ---------------------------------------------------------------------------------------------------------------------
Global 50 Fund -- --
- ---------------------------------------------------------------------------------------------------------------------
Mid Cap Index Fund -- --
- ---------------------------------------------------------------------------------------------------------------------
Small Cap Growth Fund * -- -- --
- ---------------------------------------------------------------------------------------------------------------------
Small Company Fund
- ---------------------------------------------------------------------------------------------------------------------
Income Fund -- -- --
- ---------------------------------------------------------------------------------------------------------------------
Total Return Fund -- --
- ---------------------------------------------------------------------------------------------------------------------
Capital Appreciation Fund -- --
- ---------------------------------------------------------------------------------------------------------------------
Government Bond Fund -- -- --
- ---------------------------------------------------------------------------------------------------------------------
Growth Focus Fund** N/A N/A N/A
- ---------------------------------------------------------------------------------------------------------------------
New Economy Fund** N/A N/A N/A
- ---------------------------------------------------------------------------------------------------------------------
Global Technology & Communications Fund*** N/A N/A N/A
- ---------------------------------------------------------------------------------------------------------------------
Global Life Sciences Fund*** N/A N/A N/A
- ---------------------------------------------------------------------------------------------------------------------
International Equity Fund*** N/A N/A N/A
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
* The Small Cap Growth Fund commenced operations on May 1, 1999.
** The Growth Focus and New Economy Funds commenced operations on May 1,
2000.
*** The Global Technology & Communications, Global Life Sciences, and
International Equity Funds commenced operations on June ____, 2000.
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<PAGE> 93
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1998
- --------------------------------------------------------------------------------------------------------------------
TRANSACTIONS RELATED TO
-------------------
BROKERAGE SERVICES
-----------------
- --------------------------------------------------------------------------------------------------------------------
FUND COMMISSION $ AMOUNT COMMISSION
----- ----------- --------- -----------
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Strategic Growth Fund $44,342 $ -- $ --
- --------------------------------------------------------------------------------------------------------------------
Strategic Value Fund 40,906 -- --
- --------------------------------------------------------------------------------------------------------------------
Equity Income Fund 16,519 7,066,374 6,448
- --------------------------------------------------------------------------------------------------------------------
High Income Bond Fund 72 -- --
- --------------------------------------------------------------------------------------------------------------------
Balanced Fund 20,024 641,284 1,224
- --------------------------------------------------------------------------------------------------------------------
Multi Sector Bond Fund -- -- --
- --------------------------------------------------------------------------------------------------------------------
Small Cap Value Fund 249,877 -- --
- --------------------------------------------------------------------------------------------------------------------
Global 50 Fund 37,313 -- --
- --------------------------------------------------------------------------------------------------------------------
Mid Cap Index Fund 23,405 -- --
- --------------------------------------------------------------------------------------------------------------------
Small Company Fund 1,252,284 3,155,796 13,596
- --------------------------------------------------------------------------------------------------------------------
Income Fund -- -- --
- --------------------------------------------------------------------------------------------------------------------
Total Return Fund 881,930 -- --
- --------------------------------------------------------------------------------------------------------------------
Capital Appreciation Fund 699,978 -- --
- --------------------------------------------------------------------------------------------------------------------
Government Bond Fund -- -- --
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
71
<PAGE> 94
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1997
- --------------------------------------------------------------------------------------------------------------------
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 50 Fund 8,058 --0-- --0--
- --------------------------------------------------------------------------------------------------------------------
Mid Cap Index Fund 3,479 509,403 828
- --------------------------------------------------------------------------------------------------------------------
Small Company Fund 887,672 -- --
- --------------------------------------------------------------------------------------------------------------------
Total Return Fund 924,959 -- --
- --------------------------------------------------------------------------------------------------------------------
Capital Appreciation Fund 327,691 -- --
- --------------------------------------------------------------------------------------------------------------------
Government Bond Fund --0-- -- --
- --------------------------------------------------------------------------------------------------------------------
Money Market Fund --0-- -- --
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
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.
Certain of the Funds contemplate that, consistent with the policy of
obtaining best results, brokerage transactions may 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
72
<PAGE> 95
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.
The following table lists the amount of brokerage commissions paid to
affiliated brokers:
<TABLE>
<CAPTION>
COMMISSIONS
- ---------------------------------------------------------------------------------------------------------------
FUND BROKER 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balanced Fund Salomon Smith Barney $2,010
- ---------------------------------------------------------------------------------------------------------------
Small Company Fund Lazard Freres $ 542
- ---------------------------------------------------------------------------------------------------------------
Small Company Fund Neuberger & Berman $31,801 $35,069
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
During the year ended December 31, 1999, commissions paid by the Balanced
Fund to Saloman Smith Barney represented ____% of total commissions paid by the
Fund or ____% of the aggregate dollar amount of transactions involving the
payment of commissions. During the year ended December 31, 1999, commissions
paid by the Small Company Fund to Lazard Freres and Neuberger & Berman
represented less than 0.___% and ____%, respectively, of total commissions paid
by the Fund or 0.___% and ____%, respectively, of the aggregate dollar amount of
transactions involving the payment of commissions.
73
<PAGE> 96
As of December 31, 1999, the following Funds held investments in their
regular broker/dealers as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
SHARES/ \
FUND SECURITY PRINCIPAL VALUE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Capital Appreciation Fund Merrill Lynch $
- ---------------------------------------------------------------------------------------------------------------------
Money Market Fund Bear Stearns Co. $ $
Goldman Sachs Group $ $
Merrill Lynch & Co. $ $
Morgan Stanley Group $ $
Salomon Smith Barney $
- ---------------------------------------------------------------------------------------------------------------------
Income Fund Lehman Brothers Holdings $ $
- ---------------------------------------------------------------------------------------------------------------------
Equity Income Fund Merrill Lynch STRYPES $
Morgan Stanley Dean Witter & Co. $
- ---------------------------------------------------------------------------------------------------------------------
Balanced Fund Morgan Stanley Dean Witter & Co. $
$
Merrill Lynch & Co. $
- ---------------------------------------------------------------------------------------------------------------------
Multi Sector Bond Fund Merrill Lynch & Co. $ $
Donaldson, Lufkin, Jenrette $ $
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
PURCHASES, REDEMPTIONS AND PRICING OF SHARES
An insurance company purchases shares of the Funds at their net asset
value using purchase payments received on variable annuity contracts and
variable life insurance policies issued by separate accounts. These separate
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.
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<PAGE> 97
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 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 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. U.S.
Government securities are valued at the quoted bid price as provided from an
independent pricing organization. Money market obligations with remaining
maturities of 10 days or less purchase by a non-money market fund are valued at
amortized cost in accordance with provisions contained in Rule 2a-7 of the 1940
Act. 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 VSA or its designee, are valued at fair value in accordance with
procedures authorized 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 under The Investment Company Act of 1940.
A separate account redeems shares to make benefit or surrender payments
under the terms of its variable annuity contracts or variable life insurance
policies. 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
75
<PAGE> 98
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 16
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:
(1) designate series of the Trust; or
(2) change the name of the Trust; or
(3) apply 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 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
76
<PAGE> 99
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
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
77
<PAGE> 100
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.
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.
78
<PAGE> 101
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 Accountants and Financial Statements of the
Funds for the period ended December 31, 1999 are incorporated by reference to
the Trust's Annual Report. The Financial Statements of the Funds for the period
ended June 30, 1999 (unaudited) are incorporated by reference to the Trust's
Semi-Annual Report. Copies of the Annual Report and Semi-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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<PAGE> 102
APPENDIX A
BOND RATINGS
STANDARD & POOR'S DEBT RATINGS
A Standard & Poor's corporate or municipal debt rating is a current assessment
of the creditworthiness of an obligor with respect to a specific obligation.
This assessment may take into consideration obligors such as guarantors,
insurers, or lessees.
The debt rating is not a recommendation to purchase, sell, or hold a security,
inasmuch as it does not comment as to market price or suitability for a
particular investor. The ratings are based on current information furnished by
the issuer or obtained by Standard & Poor's from other sources it considers
reliable. Standard & Poor's does not perform an audit in connection with any
rating and may, on occasion, rely on unaudited financial information. The
ratings may be changed, suspended, or withdrawn as a result of changes in, or
unavailability of, such information, or for other circumstances.
The ratings are based, in varying degrees, on the following considerations:
1. Likelihood of default - capacity and willingness of the obligor as
to the timely payment of interest and repayment of principal in accordance
with the terms of the obligation.
2. Nature of and provisions of the obligation.
3. Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization, or other arrangement under the
laws of bankruptcy and other laws affecting creditors' rights.
INVESTMENT GRADE
AAA - Debt rated 'AAA' has the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely strong.
AA - Debt rated 'AA' has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A - Debt rated 'A' has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
BBB - Debt rated 'BBB' is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
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<PAGE> 103
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.
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.
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<PAGE> 104
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 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.
82
<PAGE> 105
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.
<TABLE>
<S> <C>
AAA Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable
events.
AA Bonds considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated 'AAA'. Because bonds rated in
the 'AAA' and 'AA' categories are not significantly vulnerable to
foreseeable future developments, short-term debt of the issuers is
generally rated 'F-1+'.
A Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher ratings.
BBB Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the
ratings of these bonds will fall below investment grade is higher than for
bonds with higher ratings.
</TABLE>
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.
83
<PAGE> 106
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.
<TABLE>
<S> <C>
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.
</TABLE>
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.
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<PAGE> 107
<TABLE>
<CAPTION>
RATING
SCALE DEFINITION
- ------ -----------
<S> <C>
AAA Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+ High credit quality. Protection factors are strong. Risk is modest, but
AA may vary slightly from time to time because of economic conditions.
AA-
A+ Protection factors are average but adequate. However, risk factors are
A 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 due.
BB Present or prospective financial protection factors fluctuate according
BB- 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 be
B 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.
DD Defaulted debt obligations. Issuer failed to meet scheduled principal
and/or interest payments.
DP Preferred stock with dividend arrearages.
</TABLE>
SHORT-TERM RATINGS
STANDARD & POOR'S COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt considered short-term in the relevant
market.
85
<PAGE> 108
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:
<TABLE>
<S> <C>
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.
</TABLE>
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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<PAGE> 109
Note rating symbols and definitions are as follows:
<TABLE>
<S> <C>
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.
</TABLE>
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
<TABLE>
<S> <C>
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.
</TABLE>
87
<PAGE> 110
<TABLE>
<S> <C>
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.
</TABLE>
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.
88
<PAGE> 111
DUFF & PHELPS SHORT-TERM DEBT RATINGS
Duff & Phelps' short-term ratings are consistent with the rating criteria
utilized by money market participants. The ratings apply to all obligations with
maturities under one year, including commercial paper, the uninsured portion of
certificates of deposit, unsecured bank loans, master notes, bankers
acceptances, irrevocable letters of credit, and current maturities of long-term
debt. Asset-backed commercial paper is also rated according to this scale.
Emphasis is placed on liquidity which is defined as not only cash from
operations, but also access to alternative sources of funds including trade
credit, bank lines, and the capital markets. An important consideration is the
level of an obligor's reliance on short-term funds on an ongoing basis.
<TABLE>
<CAPTION>
RATING
SCALE DEFINITION
- -------- ------------
<S> <C>
HIGH GRADE
----------
D-1+ Highest certainty of timely payment. short-term liquidity,
including internal operating factors and/or access to alternative
sources of funds, is outstanding, and safety is just below
risk-free U.S. Treasury short-term obligations.
D-1 Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection factors.
Risk factors are minor.
D-1- High certainty of timely payment. Liquidity factors are strong
and supported by good fundamental protection factors. Risk
factors are very small.
GOOD GRADE
-----------
D-2 Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets
is good. Risk factors are small.
SATISFACTORY GRADE
----------------
D-3 Satisfactory liquidity and other protection factors qualify issue
as to investment grade. Risk factors are larger and subject to
more variation. Nevertheless, timely payment is expected.
NON-INVESTMENT GRADE
--------------------
D-4 Speculative investment characteristics. Liquidity is not
sufficient to insure against disruption in debt service.
Operating factors and market access may be subject to a high
degree of variation.
</TABLE>
89
<PAGE> 112
<TABLE>
<S> <C>
DEFAULT
-------
D-5 Issuer failed to meet scheduled principal and/or interest payments.
</TABLE>
THOMSON'S SHORT-TERM RATINGS
The Thomson Short-Term Ratings apply, unless otherwise noted, to specific debt
instruments of the rated entities with a maturity of one year or less. Thomson
short-term ratings are intended to assess the likelihood of an untimely or
incomplete payments of principal or interest.
TBW-1 the highest category, indicates a very high likelihood that principal and
interest will be paid on a timely basis.
TBW-2 the second highest category, while the degree of safety regarding timely
repayment of principal and interest is strong, the relative degree of safety is
not as high as for issues rated "TBW-1".
TBW-3 the lowest investment-grade category; indicates that while the obligation
is more susceptible to adverse developments (both internal and external) than
those with higher ratings, the capacity to service principal and interest in a
timely fashion is considered adequate.
TBW-4 the lowest rating category; this rating is regarded as non-investment
grade and therefore speculative.
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<PAGE> 113
PART C
OTHER INFORMATION
ITEM 23. EXHIBITS
(a) (1) Amended Declaration of Trust - previously filed with
Post-Effective Amendment and hereby incorporated by
reference.
(b) Bylaws - previously filed with Post-Effective Amendment
and hereby incorporated by reference.
(c) Not applicable.
(d) (1) Investment Advisory Agreement for the funds
previously filed with Post-Effective Amendment to
the Registration Statement, and herein incorporated
by reference.
(a) Amendment to Investment Advisory Agreement
(filed herewith)
(2) Subadvisory Agreements for the Small Company Fund.
(a) Subadvisory Agreement with The Dreyfus
Corporation. - previously filed with Post-
Effective Amendment to the Registration
Statement, and herein incorporated by reference.
(b) Subadvisory Agreement with Neuberger Berman LLC
- previously filed with Post- Effective
Amendment to the Registration Statement, and
herein incorporated by reference.
(c) Subadvisory Agreement with Strong Capital
Management, Inc. - previously filed with
Post-Effective Amendment to the Registration
Statement, and herein incorporated by reference.
(d) Subadvisory Agreement with Lazard Asset
Management - previously filed with Post-Effective
Amendment to the Registration Statement, and
herein incorporated by reference.
(3) Subadvisory Agreements for the Income Fund.
(a) Subadvisory Agreement with NCM Capital Management
Group, Inc. previously filed with Post-Effective
Amendment to the Registration Statement, and
herein incorporated by reference.
(b) Subadvisory Agreement with Smith Graham & Co.
Asset Managers, L.P. - previously filed with
Post-Effective Amendment to the Registration
Statement, and herein incorporated by reference.
(4) Subadvisory Agreements for the Balanced Fund,
Strategic Growth Fund, Strategic Value Fund, Equity
Income Fund, High Income Bond Fund, Small Cap Value
Fund, Global Equity Fund, Mid Cap Index Fund,
Nationwide Select Advisers Small Cap Growth Fund.
(a) Subadvisory Agreement with Strong Capital
Management, Inc. for the Strategic Growth Fund
and Strategic Value Fund previously filed with
Post-Effective Amendment to the Registration
Statement, and herein incorporated by reference.
C-1
<PAGE> 114
(b) Subadvisory Agreement with Federated Investment
Counseling for the Equity Income Fund and High
Income Bond Fund previously filed with
Post-Effective Amendment to the Registration
Statement, and herein incorporated by reference.
(c) Subadvisory Agreement with The Dreyfus
Corporation for the Small Cap Value Fund
previously filed with Post-Effective Amendment to
the Registration Statement, and herein
incorporated by reference.
(d) Subadvisory Agreement with J.P. Morgan Investment
Management Inc. for the Global Equity Fund
previously filed with Post-Effective Amendment to
the Registration Statement, and herein
incorporated by reference.
(e) Subadvisory Agreement with The Dreyfus
Corporation for the Mid Cap Index Fund previously
filed with Post-Effective Amendment to the
Registration Statement, and herein incorporated
by reference.
(f) Subadvisory Agreements with Franklin Advisers,
Inc., Miller Anderson & Sherrerd and Neuberger
Berman, LLC for the Nationwide Select Advisers
Small Cap Growth Fund previously filed with
Post-Effective Amendment to the Registration
Statement, and herein incorporated by reference.
(g) Proposed Subadvisory Agreement with Turner
Investment Partners, Inc. for the Growth Focus
Fund (filed herewith)
(h) Proposed Subadvisory Agreement with J.P. Morgan
Investment Management Inc. for the Balanced Fund
(filed herewith)
(i) Proposed Subadvisory Agreement with Miller
Anderson and Sherrered for the Multi Sector Bond
Fund (filed herewith)
(e) Not Applicable
(f) Not applicable.
(g) Custody Agreement - previously filed with Registration
Statement and Post-Effective Amendment, and herein
incorporated by reference.
(h) (1) Fund Administration Agreement for the Funds
previously filed with Post-Effective Amendment to
the Registration Statement and herein incorporated
by reference.
(a) Amendment to Fund Administration Agreement
(filed herewith)
(2) Transfer and Dividend Disbursing Agent Agreement
-previously filed with the Trust's Registration
Statement herein incorporated by reference.
(a) Amendment to Transfer and Dividend Disbursing
Agent Agreement (filed herewith)
(3) Administrative Services Plan & Form of Servicing
Agreement previously filed with Post-Effective
Amendment to the Registration Statement, and herein
incorporated by reference.
(i) Opinion and consent of counsel - previously filed with
Post-Effective Amendment to the Registration Statement,
and herein incorporated by reference.
(j) Consent of PricewaterhouseCoopers- Independent Accountants
previously filed with Post-Effective Amendment to the
Registration Statement, and herein incorporated by
reference.
(k) Not applicable.
(l) Not applicable.
(m) Not applicable.
(n) Not applicable.
(o) Not Applicable.
(p) (1) Code of Ethics for Nationwide Family of Funds
(filed herewith)
(2) Code of Ethics for Villanova Mutual Fund Capital
Trust and Villanova SA Capital Trust (filed
herewith)
(3) Code of Ethics for Nationwide Advisory Services,
Inc. (filed herewith)
(q) Power of Attorney dated February 9, 2000 - previously
filed with Post-Effective Amendment No. 32 to the
Registration Statement filed on February 16, 2000, and
herein incorporated by reference.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL
WITH REGISTRANT
No person is presently controlled by or under common control with
Registrant.
ITEM 25. 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 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
C-2
<PAGE> 115
(a) Villanova Mutual Fund Capital Trust, ("VMF"), the investment
adviser of the Trust, also serves as investment adviser to the
Nationwide Separate Account Trust.
The Directors of Villanova Capital, Inc., VMF's managing
unitholder and the officers of VMF are as follows:
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
National Deferred Compensation, Inc.
Nationwide Investment Services
Corporation
DIRECTOR AND VICE CHAIRMAN
ALLIED Group Merchant Banking Corporation
ALLIED Life Brokerage Agency, Inc.
ALLIED Life Financial Corporation
ALLIED Life Insurance Company
Nationwide Financial Institution
Distributors Agency, Inc.
Nationwide Global Funds
Nationwide Global Holdings, Inc.
Nationwide Retirement Solutions, Inc.
Neckura Life Insurance Company
NFS Distributors, Inc.
Pension Associates, Inc.
Villanova Capital, Inc.
VICE CHAIRMAN
Villanova Mutual Fund Capital Trust
Villanova SA Capital Trust
Villanova Value Investors, LLC
DIRECTOR AND PRESIDENT
Employers Life Insurance Company of Wausau
Nationwide Advisory Services, Inc.
Nationwide Investor Services, Inc.
Nationwide Financial Services (Bermuda)
Ltd.
Wausau Preferred Health Insurance Company
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.
Leben Direkt Insurance Company
C-3
<PAGE> 116
Morley Financial Services, Inc.
Nationwide Indemnity Company
Neckura Holding Company
NGH Luxembourg, S.A.
PanEurolife
TRUSTEE AND CHAIRMAN
Nationwide Asset Allocation Trust
Nationwide Separate Account Trust
TRUSTEE AND PRESIDENT
Nationwide Insurance Golf Charities, Inc.
BOARD OF MANAGERS
Nationwide Services Company, LLC.
Dennis W. Click VICE PRESIDENT AND 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 Financial Services, Inc.
Nationwide Services Company, LLC.
Nationwide Properties, Ltd.
Nationwide Realty Investors, Ltd.
Nationwide Financial Institution
Distributors Agency, Inc.
Nationwide International Underwriters
AID Finance Services, Inc.
ALLIED General Agency Company
ALLIED Group, Inc.
ALLIED Group Insurance Marketing Company
ALLIED Group Mortgage Company
ALLIED Life Brokerage Agency, Inc.
ALLIED Life Financial Corporation
ALLIED Life Insurance Company
ALLIED Property and Casualty Insurance
Company
AMCO Insurance Company
American Marine Underwriters, Inc.
Cal-Ag Insurance Services, Inc.
CalFarm Insurance Agency
CalFarm Insurance Company
Colonial County Mutual Insurance Company
Colonial Insurance Company of Wisconsin
Depositors Insurance Company
Midwest Printing Services, Ltd.
Premier Agency, Inc.
Western Heritage Insurance Company
Gates McDonald & Company
GatesMcDonald Health Plus Inc.
Gates, McDonald & Company of Nevada
Gates, McDonald & Company of New York, Inc.
National Casualty Company
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National Deferred Compensation, Inc.
Nationwide Global Holdings, Inc.
Nationwide Cash Management Company
Nationwide Indemnity Company
Nationwide Community Urban Redevelopment
Corporation
Nevada Independent Companies-Construction
Nevada Independent Companies-Health and
Nonprofit
Nevada Independent Companies-Hospitality
and Entertainment
Nevada Independent Companies-Manufacturing,
Transportation and Distribution
NFS Distributors, Inc.
Farmland Mutual Insurance Company
Lone Star General Agency, Inc.
Nationwide Agribusiness Insurance Company
Employers Life Insurance Company of Wausau
Nationwide Advisory Services, Inc.
Nationwide Investors Services, Inc.
Nationwide Corporation
Nationwide Insurance Enterprise Foundation
Nationwide Investment Services Corporation
Scottsdale Indemnity Company
Scottsdale Insurance Company
Scottsdale Surplus Lines 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.
Nationwide Retirement Solutions, Inc.
Nationwide Retirement Solutions, Inc. of
Alabama
Nationwide Retirement Solutions, Inc. of
Arizona
Nationwide Retirement Solutions, Inc. of
Arkansas
Nationwide Retirement Solutions, Inc. of
Montana
Nationwide Retirement Solutions, Inc. of
Nevada
Nationwide Retirement Solutions, Inc. of
New Mexico
Nationwide Retirement Solutions, Inc. of
Ohio
Nationwide Retirement Solutions, Inc. of
Oklahoma
Nationwide Retirement Solutions, Inc. of
South Dakota
Nationwide Retirement Solutions, Inc. of
Wyoming
Nationwide Agency, Inc.
Nationwide Health Plans, Inc.
Nationwide Management Systems, Inc.
MRM Investments, Inc.
National Premium and Benefit Administration
Company
Nationwide Insurance Company of America
Nationwide Insurance Company of Florida
Morley Financial Services, Inc.
Pension Associates, Inc.
Villanova Capital, Inc.
Villanova Mutual Fund Capital Trust
Villanova SA Capital Trust
Villanova Value Investors, LLC
Wausau Preferred Health Insurance Company
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ASSISTANT SECRETARY
Nationwide Financial Services (Bermuda)
Ltd.
VICE PRESIDENT AND ASSISTANT SECRETARY
ALLIED Group Merchant Banking Corporation
VICE PRESIDENT AND CLERK
Healthcare First, Inc.
Nationwide Retirement Solutions Insurance
Agency, Inc.
Paul J. Hondros DIRECTOR
Nationwide Advisory Services, Inc.
Nationwide Investors Services, Inc.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Villanova Capital, Inc.
Villanova Mutual Fund Capital Trust
Villanova SA Capital Trust
Dimon R. McFerson CHAIRMAN AND CHIEF EXECUTIVE OFFICER-
NATIONWIDE INSURANCE ENTERPRISE AND
DIRECTOR
ALLIED Group, Inc.
ALLIED Life Financial Corporation
Farmland Mutual Insurance Company
GatesMcDonald Health Plus, Inc.
Nationwide Agribusiness Insurance Company
National Casualty Company
Nationwide Financial Services, Inc.
Scottsdale Indemnity Company
Scottsdale Insurance Company
Scottsdale Surplus Lines Insurance Company
CHAIRMAN AND CHIEF EXECUTIVE OFFICER 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
National Deferred Compensation, Inc.
Nationwide Cash Management Company
Nationwide Global Holdings, Inc.
Nationwide Indemnity Company
Nationwide Insurance Company of America
Nationwide Investment Services Corporation
CHAIRMAN AND CHIEF EXECUTIVE OFFICER,
PRESIDENT AND DIRECTOR
Nationwide Corporation
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CHAIRMAN OF THE BOARD, CHAIRMAN AND CHIEF
EXECUTIVE OFFICER AND DIRECTOR
American Marine Underwriters, Inc.
Employers Life Insurance Company of Wausau
Nationwide Advisory Services, Inc.
Nationwide Financial Institution
Distributors Agency, Inc
Nationwide International Underwriters
Nationwide Investor Services, Inc.
Nationwide Retirement Solutions, Inc.
NFS Distributors, Inc.
Pension Associates, Inc.
Wausau Preferred Health Insurance Company
CHAIRMAN OF THE BOARD, CHAIRMAN AND CHIEF
EXECUTIVE OFFICER-NATIONWIDE INSURANCE
ENTERPRISE AND DIRECTOR
AID Finance Services, Inc.
ALLIED General Agency Company
ALLIED Group Insurance Marketing Company
ALLIED Group Merchant Banking Corporation
ALLIED Group Mortgage Company
ALLIED Life Brokerage Agency, Inc.
ALLIED Life Insurance Company
ALLIED Property and Casualty Insurance
Company
AMCO Insurance Company
Depositors Insurance Company
Midwest Printing Services, Ltd.
Premier Agency, Inc.
Western Heritage Insurance Company
Gates, McDonald and Company
Nationwide Retirement Solutions, Inc.
Nationwide Insurance Enterprise Services,
Ltd.
Villanova Capital, Inc.
TRUSTEE AND CHAIRMAN
Financial Horizons Investment Trust
Nationwide Investing Foundation
Nationwide Investing Foundation II
Nationwide Mutual Funds
CHAIRMAN OF THE BOARD
Nationwide Insurance Golf Charities, Inc.
CHAIRMAN OF THE BOARD AND DIRECTOR
Cal-Ag Insurance Services, Inc.
CalFarm Insurance Agency
CalFarm Insurance Company
Lone Star General Agency, Inc.
Nationwide Community Urban Redevelopment
Corporation
Colonial County Mutual Insurance Company
DIRECTOR
Gates, McDonald & Company of Nevada
Gates, McDonald & Company of New York
Healthcare First, Inc.
MRM Investments, Inc.
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Morley Financial Services, Inc.
Nationwide Agency, Inc.
Nationwide Health Plans, Inc.
Nationwide Management Systems, Inc.
Nevada Independent Companies-Construction
Nevada Independent Companies-Health and
Nonprofit
Nevada Independent Companies-Hospitality
and Entertainment
Nevada Independent Companies-Manufacturing,
Transportation and Distribution
PanEurolife
CHAIRMAN OF THE BOARD, CHAIRMAN AND CHIEF
EXECUTIVE OFFICER AND TRUSTEE
Nationwide Insurance Enterprise Foundation
MEMBER-BOARD OF MANAGERS, CHAIRMAN OF THE
BOARD, CHAIRMAN AND CHIEF EXECUTIVE OFFICER
Nationwide Properties, Ltd.
Nationwide Realty Investors, Ltd.
Nationwide Services Company, LLC.
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
Nationwide Insurance Company of Florida
CHAIRMAN AND CHIEF EXECUTIVE OFFICER-
NATIONWIDE INSURANCE ENTERPRISE
Villanova Mutual Fund Capital Trust
Villanova SA Capital Trust
CHAIRMAN
Villanova Value Investors, LLC
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
ALLIED Group. Inc.
ALLIED Life Financial Corporation
CalFarm Insurance Company
Employers Life Insurance Company of Wausau
National Casualty Company
National Premium and Benefit Administration
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.
Nationwide Retirement Solutions, Inc.
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Colonial County Mutual Insurance Company
Pension Associates, Inc.
Nationwide Retirement Solutions, Inc.
Scottsdale Indemnity Company
Scottsdale Insurance Company
Scottsdale Surplus Lines Insurance Company
Villanova Mutual Fund Capital Trust
Villanova SA Capital Trust
Wausau Preferred Health Insurance Company
DIRECTOR AND CHAIRMAN OF THE BOARD
Neckura Holding Company
Neckura Insurance Company
Neckura Life Insurance Company
EXECUTIVE VICE PRESIDENT-CHIEF FINANCIAL
OFFICER AND DIRECTOR
AID Finance Services, Inc.
ALLIED General Agency Company
ALLIED Group Insurance Marketing Company
ALLIED Group Merchant Banking Corporation
ALLIED Group Mortgage Company
ALLIED Life Brokerage Agency, Inc.
ALLIED Life Insurance Company
ALLIED Property and Casualty Insurance
Company
AMCO Insurance Company
American Marine Underwriters, Inc.
Cal-Ag Insurance Services, Inc.
CalFarm Insurance Agency
Depositors Insurance Company
Midwest Printing Services, Ltd.
Premier Agency, Inc.
Western Heritage Insurance Company
Colonial Insurance Company of Wisconsin
Nationwide Cash Management Company
Nationwide Community Urban Redevelopment
Corporation
National Deferred Compensation, Inc.
Nationwide Global Holdings, Inc.
Nationwide Services Company, LLC.
NFS Distributors, Inc.
MRM Investments, Inc.
Nationwide Advisory Services, Inc.
Nationwide Indemnity Company
Nationwide Insurance Company of America
Nationwide Insurance Company of Florida
Nationwide International Underwriters
Villanova Capital, Inc.
DIRECTOR AND VICE CHAIRMAN
Leben Direkt Insurance Company
Neckura General Insurance Company
Auto Direkt Insurance Company
DIRECTOR
Gates, McDonald & Company
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GatesMcDonald Health Plus Inc.
Healthcare First, Inc.
Morley Financial Services, Inc.
NGH Luxembourg, S.A.
PanEurolife
BOARD OF MANAGERS, EXECUTIVE VICE
PRESIDENT-CHIEF FINANCIAL OFFICER
Nationwide Insurance Enterprise Services,
Ltd.
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
Nationwide Financial Services, Inc.
SENIOR VICE PRESIDENT - LIFE COMPANY
OPERATIONS AND DIRECTOR
Nationwide Financial Services (Bermuda)
Ltd.
CHAIRMAN OF THE BOARD AND DIRECTOR
Nationwide Trust Company, FSB
SENIOR VICE PRESIDENT AND DIRECTOR
Employers Life Insurance Company of Wausau
Pension Associates, Inc.
Wausau Preferred Health Insurance Company
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 ADVISORY SERVICES, INC.
Nationwide Financial Institution
Distributors Agency, Inc.
Nationwide Global Funds
Nationwide Investment Services Corporation
Nationwide Retirement Solutions, Inc.
Nationwide Retirement Solutions Insurance
Agency, Inc.
Nationwide Retirement Solutions, Inc. of
Alabama
Nationwide Retirement Solutions, Inc. of
Arizona
Nationwide Retirement Solutions, Inc. of
Arkansas
Nationwide Retirement Solutions, Inc. of
Montana
Nationwide Retirement Solutions, Inc. of
Nevada
Nationwide Retirement Solutions, Inc. of
New Mexico
Nationwide Retirement Solutions, Inc. of
Ohio
Nationwide Retirement Solutions, Inc. of
Oklahoma
Nationwide Retirement Solutions, Inc. of
South Dakota
Nationwide Retirement Solutions, Inc. of
Wyoming
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Villanova Capital, Inc.
Robert J. Woodward, Jr. EXECUTIVE VICE PRESIDENT-CHIEF INVESTMENT
OFFICER
Nationwide Mutual Insurance Company
Nationwide Mutual Fire Insurance Company
Nationwide General Insurance Company
Nationwide Property and Casualty Insurance
Company
Nationwide Life Insurance Company
Nationwide Life and Annuity Insurance
Company
AID Finance Services, Inc.
ALLIED General Agency Company
ALLIED Group, Inc.
ALLIED Group Insurance Marketing Company
ALLIED Group Merchant Banking Corporation
ALLIED Life Brokerage Agency, Inc.
ALLIED Life Financial Corporation
ALLIED Life Insurance Company
ALLIED Property and Casualty Insurance
Company
AMCO Insurance Company
Cal-Ag Insurance Services, Inc.
CalFarm Insurance Agency
CalFarm Insurance Company
Depositors Insurance Company
Midwest Printing Services, Ltd.
Premier Agency, Inc.
Western Heritage 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 Financial Services (Bermuda)
Ltd.
Nationwide Agribusiness Insurance Company
Nationwide Insurance Company of America
Nationwide Insurance Company of Florida
Nationwide Corporation
Nationwide Insurance Enterprise Foundation
Nationwide Insurance Enterprise Services,
Ltd.
Nationwide Investment Services Corporation
Nationwide Retirement Solutions, Inc.
NFS Distributors, Inc.
Pension Associates, Inc.
Nationwide Retirement Solutions, Inc.
Scottsdale Indemnity Company
Scottsdale Insurance Company
Scottsdale Surplus Lines Insurance Company
Villanova Mutual Fund Capital Trust
Villanova SA Capital Trust
Wausau Preferred Health Insurance Company
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DIRECTOR
Healthcare First, Inc.
Morley Financial Services, Inc.
Nationwide Global Holdings, Inc.
Nationwide Investors Services, Inc.
MEMBER-BOARD OF MANAGERS AND VICE CHAIRMAN
Nationwide Properties, Ltd.
Nationwide Realty Investors, Ltd.
MEMBER-BOARD OF MANAGERS AND EXECUTIVE VICE
PRESIDENT-CHIEF INVESTMENT OFFICER
Nationwide Services Company, LLC.
DIRECTOR AND PRESIDENT
MRM Investments, Inc.
Nationwide Cash Management Company
Nationwide Community Urban Redevelopment
Corporation
DIRECTOR AND EXECUTIVE VICE PRESIDENT-CHIEF
INVESTMENT OFFICER
Gates, McDonald & Company
GatesMcDonald Health Plus, Inc.
National Deferred Compensation, Inc.
Nationwide Indemnity Company
Nationwide Advisory Services, Inc.
Villanova Capital, Inc.
DIRECTOR, VICE CHAIRMAN AND EXECUTIVE VICE
PRESIDENT-CHIEF INVESTMENT OFFICER
ALLIED Group Mortgage Company
TRUSTEE AND VICE CHAIRMAN
Nationwide Asset Allocation Trust
Nationwide Separate Account Trust
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Except as otherwise noted, the principal business address of any company with
which any person specified above is connected in the capacity of director,
officer, employee, partner or trustee is One Nationwide Plaza, Columbus, Ohio
43215, except for the following companies:
Farmland Mutual Insurance Company
Nationwide Agribusiness Insurance Company
1963 Bell Avenue
Des Moines, Iowa 50315-1000
Colonial Insurance Company of Wisconsin
One Nationwide Plaza
Columbus, Ohio 43215
Scottsdale Insurance Company
8877 North Gainey Center Drive
P.O. Box 4110
Scottsdale, Arizona 85261-4110
National Casualty Company
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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 Holding Company
Neckura Insurance Company
Neckura Life Insurance Company
John E. Fisher Str. 1
61440 Oberursel/Ts.
Germany
Nationwide Retirement Solutions, Inc.
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
(1) The Dreyfus Corporation
The Dreyfus Corporation ("Dreyfus") acts as subadvisor to the Small
Company Fund, the Small Cap Value Fund and the Mid Cap Index Fund and
as adviser or subadviser to a number of other registered investment
companies. The list required by this Item 26 of officers and
directors of Dreyfus, together with information as to their other
business, profession, vocation or employment of a substantial nature
during the past two years, is incorporated by reference to Schedule A
and D of Form ADV filed by Dreyfus (SEC File No. 801-8147).
(2) Neuberger Berman, LLC
Neuberger Berman, LLC ("Neuberger Berman") acts as subadviser to the
Small Company Fund and the Small Cap Growth Fund of the Registrant
and investment adviser or subadviser to a number of other registered
investment companies. The list required by this Item 26 of officers
and directors of Neuberger Berman, together with information as to
their other business, profession, vocation or employment of a
substantial nature during the past two years, is incorporated by
reference to Schedules A and D of Form ADV filed by Neuberger Berman
(SEC File No. 801-3908).
(3) Strong Capital Management, Inc.
Strong Capital Management, Inc. ("Strong"), acts as subadviser to the
Small Company Fund, the Strategic Growth Fund and the Strategic Value
Fund and investment adviser or subadviser to a number of other
registered investment companies. The list required by this Item 26 of
officers and directors of Strong, together with information as to
their other business, profession, vocation or employment of a
substantial
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<PAGE> 127
nature during the past two years, is incorporated by reference to
Schedules A and D of Form ADV filed by Strong (SEC File No.
801-10724).
(4) Credit Suisse Asset Management, LLC
Credit Suisse Asset Management, LLC ("Credit Suisse") acts as
subadviser to the Small Company Fund and investment adviser to a
number of other registered investment companies. Credit Suisse
renders investment advice to a wide variety of individual and
institutional investors. The list required by this Item 26 of
officers and directors of Credit Suisse, 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 Credit Suisse
(SEC File No. 801-37170).
(5) Lazard Asset Management
Lazard Asset Management ("Lazard") acts as subadviser to the Small
Company Fund and investment adviser to a number of other registered
investment companies. Lazard renders investment advice to a wide
variety of individual and institutional investors. The list required
by this Item 26 of officers and directors of Lazard, 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
Lazard (SEC File No. 801-6568).
(6) 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. The list required by Item 26 of
Officers and directors of NCM, 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 NCM (SEC File No. 801-28196).
(7) 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 list required by Item 26 of Officers
and directors of Smith Graham 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 Smith Graham (SEC File No.
801-36485).
(8) Schafer Capital Management , Inc.
Schafer Capital Management, Inc., acts as subadviser to the Strategic
Value Fund and 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.
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(9) Federated Investment Counseling
Federated Investment Counseling, the Subadviser to Equity Income Fund
and High Income Bond 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 list
required by Item 26 of Officers and directors of Federated Investment
Counseling, 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 Federated Investment Counseling (SEC File No.
801-34611).
(10) Salomon Brothers Asset Management, Inc.
Salomon Brothers Asset Management, Inc. acts as subadviser to the
Balanced Fund and the Multi Sector Bond Fund until May 1, 2000. The
list required by this Item 26 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.)
(11) J.P. Morgan Investment Management, Inc. ("JPMIM"), a registered
investment adviser, and a wholly owned subsidiary of J. P. Morgan &
Co. Incorporated, is subadviser to the Global 50 Fund. Beginning May
1, 2000, JPMIM will also be subadviser to the Balanced Fund. JPMIM
manages employee benefit plans for corporations and unions. JPMIM
also provides investment management services for a broad spectrum of
other institutional investors, including foundations, endowments,
sovereign governments, and insurance companies.
To the knowledge of the Registrant, none of the directors or
executive officers of JPMIM is or has been in the past two fiscal
years engaged in any other business or profession, vocation or
employment of a substantial nature, except that certain officers and
directors of JPMIM also hold various positions with, and engage in
business for, J.P. Morgan & Co. Incorporated or Morgan Guaranty Trust
Company of New York, a New York trust company which is also a wholly
owned subsidiary of J.P. Morgan & Co. Incorporated.
(12) Franklin Advisers, Inc. is subadviser to the Small Cap Growth Fund.
The list required by this Item 26 of the officers and directors of
Franklin Advisers, Inc.("Franklin"), 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 Schedule A and D
of Form ADV filed by Franklin pursuant to the Investment Advisers Act
of 1940 (SEC File No. 801-26292).
(13) Miller, Anderson & Sherrerd, LLP is subadviser to the Small Cap
Growth Fund and beginning May 1, 2000 will be subadviser to the Multi
Sector Bond Fund. The list required by this Item 26 of the officers
and directors of Miller, Anderson & Sherred, LLP ("MAS"), 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
Schedule A and D of Form ADV filed by MAS pursuant to the Investment
Advisers Act of 1940 (SEC File No. 801-10437).
(14) Turner Investment Partners, Inc. ("Turner") is subadviser to the
Growth Focus Fund. The list required by this Item 26 of the officers
and directors of Turner, 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 Schedule A & D of Form ADV filed by
Turner pursuant to the Investment Advisers Act of 1940 (SEC File No.
801-36220).
ITEM 27. PRINCIPAL UNDERWRITERS
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
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ITEM 28. LOCATION OF ACCOUNTS AND RECORDS
James F. Laird, Jr.
Nationwide Advisory Services, Inc.
Three Nationwide Plaza
Columbus, OH 43215
ITEM 29. UNDERTAKINGS
(a) Not applicable.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Post-Effective
Amendment No. 34 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 22nd day of March, 2000.
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. 34 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE
FOLLOWING PERSONS IN THE CAPACITIES INDICATED ON THE TWENTY-SECOND DAY OF MARCH,
2000.
Signature & Title
- -----------------
Principal Executive Officer
JOSEPH J. GASPER*
- -----------------
Joseph J. Gasper, Trustee and Chairman
ROBERT J. WOODWARD, JR.*
- ------------------------
Robert J. Woodward, Jr., Trustee and Vice Chairman
Principal Accounting and Financial Officer
JAMES F. LAIRD, JR.
- -------------------
James F. Laird, Jr., Treasurer
JOHN C. BRYANT*
- ---------------
John C. Bryant, Trustee
C. BRENT DEVORE*
- ----------------
C. Brent DeVore, 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
ARDEN L SHISLER*
- ----------------
Arden L. Shisler, Trustee
DAVID C. WETMORE*
- -----------------
David C. Wetmore, Trustee
*By: JAMES F. LAIRD, JR.
-------------------
James F. Laird, Jr., Attorney-In-Fact
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<PAGE> 131
EXHIBIT LIST
<TABLE>
<CAPTION>
Exhibit Letter Name of Exhibit
- -------------- ---------------
<S> <C>
(d)(1)(a) Amendment to Investment Advisory Agreement
(d)(4)(g) Proposed Subadvisory Agreement with Turner Investment
Partners, Inc. for the Growth Focus Fund
(d)(4)(h) Proposed Subadvisory Agreement with J.P. Morgan Investment
Management Inc. for the Balanced Fund
(d)(4)(i) Proposed Subadvisory Agreement with Miller Anderson and
Sherrered for the Multi Sector Bond Fund
(h)(1)(a) Amendment to Fund Administration Agreement
(h)(2)(a) Amendment to Transfer and Dividend Disbursing Agent Agreement
(p)(1) Code of Ethics for Nationwide Family of Funds
(p)(2) Code of Ethics for Villanova Mutual Fund Capital Trust and
Villanova SA Capital Trust
(p)(3) Code of Ethics for Nationwide Advisory Services, Inc.
</TABLE>
<PAGE> 1
Exhibit (d)(1)(a)
AMENDED EXHIBIT A
NATIONWIDE SEPARATE ACCOUNT TRUST
Investment Advisory Agreement
(Effective May __, 2000)
<TABLE>
<CAPTION>
Funds of the Trust Advisory Fees
- ------------------ -------------
<S> <C> <C>
Total Return Fund 0.60% on assets up to $1 billion
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
Capital Appreciation Fund 0.60% on assets up to $1 billion
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
0.24% for assets of $5 billion and more
- -------------------------------------------------------------------------------------------------
Nationwide Balanced Fund 0.75% of the Fund's average daily net assets
Nationwide Equity Income Fund 0.80% of the Fund's average daily net assets
Nationwide Global 50 Fund 1.00% of the Fund's average daily net assets
(formerly Nationwide Global Equity Fund)
Nationwide High Income Bond Fund 0.80% of the Fund's average daily net assets
Nationwide Multi Sector Bond Fund 0.75% of the Fund's average daily net assets
</TABLE>
<PAGE> 2
AMENDED EXHIBIT A
NATIONWIDE SEPARATE ACCOUNT TRUST
Investment Advisory Agreement
Page Two
(Effective May __, 2000)
<TABLE>
<CAPTION>
Funds of the Trust Advisory Fees
- ------------------ -------------
<S> <C>
Nationwide Mid Cap Index Fund 0.50% of the Fund's average daily net assets
Nationwide Small Cap Growth Fund 1.10% of the Fund's average daily net assets
(formerly Nationwide Select Advisers
Small Cap Growth Fund)
Nationwide Small Cap Value Fund 0.90% of the Fund's average daily net assets
Nationwide Strategic Growth Fund 0.90% of the Fund's average daily net assets
Nationwide Strategic Value Fund 0.90% of the Fund's average daily net assets
Nationwide Income Fund 0.45% of the Fund's average daily net assets
Nationwide Small Company Fund 0.93% on assets up to $250 million
0.95% on the next $750 million
0.96% on assets of $1 billion and more
Nationwide New Economy Fund 1.03% of the Fund's average daily net assets
Nationwide International Equity Fund 0.83% of the Fund's average daily net assets
(effective June __, 2000)
Nationwide Global Technology and 0.98% of the Fund's average daily net assets
Communications Fund
(effective June ___, 2000)
Nationwide Global Life Sciences Fund 0.53% of the Fund's average daily net assets
(effective June __, 2000)
Nationwide Growth Focus Fund 0.90% on assets up to $500 million
0.80% on the next $1.5 billion in assets
0.75% on assets of $2 billion and more
</TABLE>
Performance Fee for the Nationwide Growth Focus Fund
- ----------------------------------------------------
This base advisory fee listed above is adjusted each quarter, beginning one year
after commencement of operations, depending on the Nationwide Growth Focus
Fund's investment performance for the 36 months* preceding the end of that
month, relative to the investment performance of the Fund's benchmark, the
Russell 1000 Growth Index. The base fee is either increased or decreased by the
<PAGE> 3
following amounts at each breakpoint, based on whether the Fund has out- or
under-performed the Russell 1000 Growth Index by more or less than 4%:
For assets up to $500 million +/- 22 basis points
Next $1.5 billion in assets +/- 18 basis points
Assets of $2 billion and more +/- 16 basis points
The investment performance of the Nationwide Growth Focus Fund will be the sum
of: (1) the change in the Fund's value during such period; (2) the value of the
Fund's cash distributions (from net income and realized net gains) having an
ex-dividend date during such calculation period; and (3) the value of any
capital gains taxes paid or accrued during such calculation period for
undistributed realized long-term capital gains from the Fund. For this purpose,
the value of distributions per share of realized capital gains, of dividends per
share paid from investment income and of capital gains taxes per share
reinvested in the Fund at the Fund's value in effect at the close of business on
the record date for the payment of such distributions and dividends and the date
on which provision is made for such taxes, after giving effect to such
distribution, dividends and taxes.
Russell 1000 Growth Index Performance:
The performance of the Russell 1000 Growth Index for a calculation period,
expressed as a percentage of the Russell 1000 Growth Index, at the beginning of
such period will be the sum of: (1) the change in the level of the Russell 1000
Growth Index during such period; and (2) the value, as calculated consistent
with the Russell 1000 Growth Index, of cash distributions having an ex-dividend
date during such period made by those companies whose securities comprise the
Russell 1000 Growth Index. For this purpose, cash distributions on the
securities that comprise the Russell 1000 Growth Index will be treated as if
they were reinvested in the Russell 1000 Growth Index at least as frequently as
the end of each calendar quarter following payment of the dividend.
* After the first twelve months of operations of the Fund, the performance fee
will be phased in on a progressive basis over the next 24 months. The
performance fee will be calculated on a progressive basis by multiplying the
applicable fee by a fraction, the numerator of which is the number of months
since commencement of operations and the denominator of which is 36 (the total
phase in period). Beginning thirty six months after commencement of operations,
the performance fee will be applied completely.
ADVISER
VILLANOVA MUTUAL FUND CAPITAL TRUST
By:
-----------------------------------
Name:
Title:
TRUST
NATIONWIDE SEPARATE ACCOUNT TRUST
By:
-----------------------------------
Name:
Title:
<PAGE> 1
Exhibit (d)(4)(g)
SUBADVISORY AGREEMENT
---------------------
THIS AGREEMENT is made and entered into on this 1st day of May, 2000
among NATIONWIDE SEPARATE ACCOUNT TRUST, a Massachusetts business trust (the
"Trust"), VILLANOVA MUTUAL FUND CAPITAL TRUST (the "Adviser"), a Delaware
business trust registered under the Investment Advisers Act of 1940 (the
"Advisers Act"), TURNER INVESTMENT PARTNERS, INC., a _________ 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") as subsequently
amended, 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 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 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 and to monitor on a continuous
basis the performance of the Subadviser Assets. 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 a Fund, its funds available,
or to become available, for investment and generally as to the
conditions of the Fund's or the 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, 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 a copy of the minutes of the meetings of the Board of
Trustees of the Trust to the extent they may affect a Fund or the
duties of the Subadviser, and with the copies of any financial
statements or reports made by a Fund to its 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 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 Subadviser Assets 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
2
<PAGE> 3
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 or in the Trust's registration statement on Form N-1A.
(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, the Trust or a
Fund 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 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 a 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 the best interests of a 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
3
<PAGE> 4
caused a Fund to pay a broker that provides brokerage and research
services (within the meaning of Section 28(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
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 a 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 or 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 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 at least an annual basis, the Subadviser will comply
with the reporting requirements of Rule 17j-1, which may include either
(i) certifying 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) identifying 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
4
<PAGE> 5
(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 Subadviser Assets 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 Subadviser Assets 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
Subadviser Assets.
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 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, 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
5
<PAGE> 6
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 a Fund's custodians and sub-custodians, administrators and
sub-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 Fund for sale in the various states; freight and other charges
in connection with the shipment of the Fund's 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 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 a 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 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 ________ 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
6
<PAGE> 7
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 National Futures
Association or is not required to file such exemption;
(c) The Adviser is a 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 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
managing unitholder, 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;
7
<PAGE> 8
(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, 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 a Fund or any of a
Fund's shareholders, in connection with the matters to which this
Agreement relates. In the absence of wilful misfeasance, bad
8
<PAGE> 9
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
Subadviser Assets; 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, the Trust and each Fund, and their respective Affiliates and
Controlling Persons for any liability and expenses, including
reasonable attorneys' fees, which the Adviser, the Trust and a Fund 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, the Trust and
each Fund, 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, the Trust and each Fund 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, 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 May 1, 2002 with respect to any Fund covered by the
Agreement initially and for an initial two-year period for any Fund
subsequently added to the Agreement, and thereafter shall continue
automatically for successive annual periods with respect to each such
Fund, 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
9
<PAGE> 10
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 in references concerning the
identity of and services provided by the Subadviser to a 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 Fund (as required by the 1940 Act) and b) the vote of a
majority of those Trustees of the Trust who are not "interested
10
<PAGE> 11
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:
Turner Investment Partners, Inc.
1235 Westlakes Drive, Suite 350
Berwyn, PA 19312
Attention:
Facsimile:
(b) If to the Adviser:
Villanova Mutual Fund Capital Trust
Attention:
Facsimile:
(c) If to the Trust:
Nationwide Separate Account Trust
Attention:
Facsimile:
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.
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<PAGE> 12
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> 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
VILLANOVA MUTUAL FUND CAPITAL TRUST
By:__________________________________
Name:
Title:
SUBADVISER
TURNER INVESTMENT PARTNERS, INC.
By:__________________________________
Name:
Title:
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<PAGE> 14
EXHIBIT A
SUBADVISORY AGREEMENT
BETWEEN NATIONWIDE SEPARATE ACCOUNT TRUST, VILLANOVA MUTUAL
FUND CAPITAL TRUST AND TURNER INVESTMENT PARTNERS, INC.
EFFECTIVE MAY 1, 2000
Funds of the Trust Base Advisory Fees
- ------------------ ------------------
Nationwide Growth Focus Fund 0.55% on Subadviser Assets
up to $500 million
0.45% for Subadviser Assets
of $500 million and more but less than
$2 billion
0.40% on Subadviser Assets
up to $2 billion and more
Performance Fee
- ---------------
This base advisory fee is adjusted each quarter, beginning one year after
commencement of operations, depending on the Nationwide Growth Focus Fund's
investment performance for the 36 months* preceding the end of that month,
relative to the investment performance of the Fund's benchmark, the Russell 1000
Growth Index. The base fee is either increased or decreased by the following
amounts at each breakpoint, based on whether the Subadviser has out- or
under-performed the Russell 1000 Growth Index by more or less than 4%:
For assets up to $500 million +/- 22 basis points
Assets of $500 million and more
But less than $2 billion +/- 18 basis points
Assets of $2 billion and more +/- 16 basis points
The investment performance of the Nationwide Growth Focus Fund will be the sum
of: (1) the change in the Fund's value during such period; (2) the value of the
Fund's cash distributions (from net income and realized net gains) having an
ex-dividend date during such calculation period; and (3) the value of any
capital gains taxes paid or accrued during such calculation period for
undistributed realized long-term capital gains from the Fund. For this purpose,
the value of distributions per share of realized capital gains, of dividends per
share paid from investment income and of capital gains taxes per share
reinvested in the Fund at the Fund's value in effect at the close of business on
the record date for the payment of such distributions and dividends and the date
on which provision is made for such taxes, after giving effect to such
distribution, dividends and taxes.
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<PAGE> 15
Russell 1000 Growth Index Performance:
The performance of the Russell 1000 Growth Index for a calculation period,
expressed as a percentage of the Russell 1000 Growth Index, at the beginning of
such period will be the sum of: (1) the change in the level of the Russell 1000
Growth Index during such period; and (2) the value, as calculated consistent
with the Russell 1000 Growth Index, of cash distributions having an ex-dividend
date during such period made by those companies whose securities comprise the
Russell 1000 Growth Index. For this purpose, cash distributions on the
securities that comprise the Russell 1000 Growth Index will be treated as if
they were reinvested in the Russell 1000 Growth Index at least as frequently as
the end of each calendar quarter following payment of the dividend.
* After the first twelve months of operations of the Fund, the performance fee
will be phased in on a progressive basis over the next 24 months. The
performance fee will be calculated on a progressive basis by multiplying the
applicable fee by a fraction, the numerator of which is the number of months
since commencement of operations and the denominator of which is 36 (the total
phase in period). Beginning thirty six months after commencement of operations,
the performance fee will be applied completely.
15
<PAGE> 1
Exhibit (d)(4)(h)
SUBADVISORY AGREEMENT
---------------------
THIS AGREEMENT is made and entered into on this 1st day of May, 2000
among NATIONWIDE SEPARATE ACCOUNT TRUST, a Massachusetts business trust (the
"Trust"), VILLANOVA MUTUAL FUND CAPITAL TRUST (the "Adviser"), a Delaware
business trust 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") as subsequently
amended, 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 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.
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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 and to monitor on a continuous
basis the performance of the Subadviser Assets. 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 a Fund, its funds available,
or to become available, for investment and generally as to the
conditions of the Fund's or the 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, 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 a copy of the minutes of the meetings of the Board of
Trustees of the Trust to the extent they may affect a Fund or the
duties of the Subadviser, and with the copies of any financial
statements or reports made by a Fund to its 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 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 Subadviser Assets 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
2
<PAGE> 3
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 or in the
Trust's registration statement on Form N-1A.
(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, the Trust or a
Fund 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 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 a 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 the best interests of a 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
3
<PAGE> 4
caused a Fund to pay a broker that provides brokerage and research
services (within the meaning of Section 28(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
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 a 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 or 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 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 at least an annual basis, the Subadviser will comply
with the reporting requirements of Rule 17j-1, which may include either
(i) certifying 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) identifying 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
4
<PAGE> 5
(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 Subadviser Assets 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 Subadviser Assets 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
Subadviser Assets.
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 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, 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
5
<PAGE> 6
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 a Fund's custodians and sub-custodians, administrators and
sub-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 Fund for sale in the various states; freight and other charges
in connection with the shipment of the Fund's 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 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 a 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 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.
The Subadviser agrees that during any period in which the Subadviser
serves as a subadviser to any other registered investment company and provides
the same or substantially similar services to such investment company at a lower
rate, the Subadviser shall charge the Adviser and a Fund no more than the lowest
rate then 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");
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<PAGE> 7
(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;
(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 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 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
managing unitholder, 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;
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<PAGE> 8
(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, 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
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<PAGE> 9
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 a Fund or any of a Fund's shareholders, in
connection with the matters to which this Agreement relates.
(b) Indemnification. The Subadviser shall indemnify the
Adviser, the Trust and each Fund, and their respective Affiliates and
Controlling Persons for any liability and expenses, including
reasonable attorneys' fees, which the Adviser, the Trust and a Fund 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, the Trust and
each Fund, 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, the Trust and each Fund 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, 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 May 1, 2002 with respect to any Fund covered by the
Agreement initially and for an initial two-year period for any Fund
subsequently added to the Agreement, and thereafter shall continue
automatically for successive annual periods with respect to each such
Fund, 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
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<PAGE> 10
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 in references concerning the
identity of and services provided by the Subadviser to a 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 Fund (as required by the 1940 Act) and b) the vote of a
majority of those Trustees of the Trust who are not "interested
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<PAGE> 11
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
(b) If to the Adviser:
Villanova Mutual Fund Capital Trust
Attention:
Facsimile:
(c) If to the Trust:
Nationwide Separate Account Trust
Attention:
Facsimile:
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.
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<PAGE> 12
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.
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.
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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
VILLANOVA MUTUAL FUND CAPITAL TRUST
By:__________________________________
Name:
Title:
SUBADVISER
J. P. MORGAN INVESTMENT
MANAGEMENT INC.
By:__________________________________
Name:
Title:
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<PAGE> 14
EXHIBIT A
SUBADVISORY AGREEMENT
BETWEEN NATIONWIDE SEPARATE ACCOUNT TRUST, VILLANOVA MUTUAL
FUND CAPITAL TRUST AND J.P. MORGAN INVESTMENT MANAGEMENT, INC.
EFFECTIVE MAY 1, 2000
Funds of the Trust Advisory Fees
- ------------------ -------------
Nationwide Balanced Fund 0.35% on Subadviser Assets
up to $100 million
0.30% for Subadviser Assets
of $100 million and more
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<PAGE> 1
Exhibit (d)(4)(i)
SUBADVISORY AGREEMENT
---------------------
THIS AGREEMENT is made and entered into on this 1st day of May, 2000
among NATIONWIDE SEPARATE ACCOUNT TRUST, a Massachusetts business trust (the
"Trust"), VILLANOVA MUTUAL FUND CAPITAL TRUST (the "Adviser"), a Delaware
business trust registered under the Investment Advisers Act of 1940 (the
"Advisers Act"), and Miller Anderson & Sherrerd, LLP., a Pennsylvania Limited
Liability Partnership (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") as subsequently
amended, 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 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.
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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 and to monitor on a continuous
basis the performance of the Subadviser Assets. 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 a Fund, its funds available,
or to become available, for investment and generally as to the
conditions of a Fund's or the 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, 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 a copy of the minutes of the meetings of the Board of
Trustees of the Trust to the extent they may affect a Fund or the
duties of the Subadviser, and with the copies of any financial
statements or reports made by a Fund to its 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 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 Subadviser Assets 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
2
<PAGE> 3
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 or in the Trust's registration statement on
Form N-1A.
(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, the Trust or a
Fund 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 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 a 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 the best interests of a 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
3
<PAGE> 4
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 28(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
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 a 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 or 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 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 at least an annual basis, the Subadviser will comply
with the reporting requirements of Rule 17j-1, which may include either
(i) certifying 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) identifying 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
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<PAGE> 5
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 Subadviser Assets 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 Subadviser Assets 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
Subadviser Assets.
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 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, the Fund's or Adviser's expenses, which shall
include, but not be limited to, organizational and offering expenses (which
5
<PAGE> 6
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 a Fund's custodians and sub-custodians, administrators and
sub-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 Fund for sale in the various states; freight and other charges
in connection with the shipment of the Fund's 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 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 a 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 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.
The Subadviser agrees that during any period in which the Subadviser
serves as a subadviser to any other registered investment company and provides
the same or substantially similar services to such investment company at a lower
rate, the Subadviser shall charge the Adviser and a Fund no more than the lowest
rate then 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"), or is not required to file
such an exemption;
6
<PAGE> 7
(c) The Subadviser is a limited liability partnership duly
organized and properly registered and operating under the laws of the
Commonwealth of Pennsylvania 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 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 National Futures
Association or is not required to file such exemption;
(c) The Adviser is a 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 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
managing unitholder, 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;
7
<PAGE> 8
(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, 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
8
<PAGE> 9
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, any other subadviser to a Fund, the Trust or a Fund or any of
a Fund's shareholders, in connection with the matters to which this
Agreement relates. Except as set forth in (c) below, the absence of
willful 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 Subadviser Assets; 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, the Trust and each Fund, and their respective Affiliates and
Controlling Persons for any liability and expenses, including
reasonable attorneys' fees, which the Adviser, the Trust and a Fund and
their respective Affiliates and Controlling Persons may sustain as a
result of the Subadviser's willful 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, the Trust and
each Fund, 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, the Trust and each Fund 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 willfull 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.
(c) The Subadviser shall not be liable to the Adviser for (i)
any acts of the Adviser or any other subadviser to a Fund with respect
to the portion of the assets of that Fund not managed by Subadviser or
(ii) acts of the Subadviser which result from acts of the Adviser,
including, but not limited to, a failure of the Adviser to provide
accurate and current information with respect to any records maintained
by Adviser or any other subadviser to a
9
<PAGE> 10
Fund, which records are not also maintained by or otherwise available
to the Subadviser upon reasonable request. The Adviser agrees that
Subadviser shall manage the Subadviser Assets as if they were a
separate operating Fund as set forth in Section 2(b) of this Agreement.
The Adviser shall indemnify the Subadviser, its Affiliates and
Controlling Persons from any liability arising from the conduct of the
Adviser and any other subadviser with respect to the portion of the
Fund's assets not allocated to the Subadviser.
11. Duration and Termination.
(a) Duration. Unless sooner terminated, this Agreement shall
continue until May 1, 2002 with respect to any Fund covered by the
Agreement initially and for an initial two-year period for any Fund
subsequently added to the Agreement, and thereafter shall continue
automatically for successive annual periods with respect to each such
Fund, 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
10
<PAGE> 11
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 Adviser and Subadviser.
(a) 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 a 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.
(b) Neither the Subadviser nor any Affiliate or agent of it
shall make reference to or use the name of Adviser or any of its
Affiliates, or any of their clients, except references concerning the
identity of and services provided by the Adviser to a Fund or to the
Subadviser, 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 Subadviser
hereby agrees to make all reasonable efforts to cause a 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:
11
<PAGE> 12
(a) If to the Subadviser:
Miller Anderson & Sherrerd, LLP
One Towerbridge
West Conshohocken, PA 19428
Attention: Richard Jackson
Facsimile: (610) 940-5282
(b) If to the Adviser:
Villanova Mutual Fund Capital Trust
Attention:
Facsimile:
(c) If to the Trust:
Nationwide Separate Account Trust
Attention:
Facsimile:
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.
12
<PAGE> 13
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.
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
VILLANOVA MUTUAL FUND CAPITAL TRUST
By:__________________________________
Name:
Title:
SUBADVISER
MILLER ANDERSON & SHERRERD, LLP
By:__________________________________
Name:
Title:
13
<PAGE> 14
EXHIBIT A
SUBADVISORY AGREEMENT
BETWEEN NATIONWIDE SEPARATE ACCOUNT TRUST, VILLANOVA MUTUAL
FUND CAPITAL TRUST AND MILLER ANDERSON & SHERRERD, LLP
EFFECTIVE MAY 1, 2000
Funds of the Trust Advisory Fees
- ------------------ -------------
Nationwide Multi Sector Fund 0.30% on Subadviser Assets
up to $200 million
0.25% for Subadviser Assets
of $200 million and more
14
<PAGE> 1
Exhibit (h)(1)(a)
AMENDED EXHIBIT A
NATIONWIDE SEPARATE ACCOUNT TRUST
Fund Administration Agreement
(Effective May 1, 2000)
<TABLE>
<CAPTION>
Funds of the Trust Fund Administration Fees
- ------------------ ------------------------
<S> <C>
Total Return Fund For each Fund,
Capital Appreciation Fund 0.05% of each Fund's average daily
Government Bond Fund net assets up to $1 billion
Money Market Fund 0.04% on assets of $1 billion and more
Nationwide Balanced Fund For each Fund,
Nationwide Equity Income Fund 0.07% on assets up to $250 million
Nationwide Global Equity Fund 0.05% on the next $750 million
(effective 5/1/2000, Nationwide Global 50 Fund) 0.04% on assets of $1 billion and more
Nationwide High Income Bond Fund
Nationwide Multi Sector Bond Fund
Nationwide Small Cap Value Fund
Nationwide Mid Cap Index Fund
Nationwide Select Advisers Small Cap Growth Fund*
(effective 5/1/2000, Nationwide Small Cap Growth Fund)
Nationwide Strategic Growth Fund
Nationwide Strategic Value Fund
Nationwide Income Fund
Nationwide Small Company Fund
Nationwide Growth Focus Fund*
Nationwide New Economy Fund*
Nationwide International Equity Fund*
Nationwide Global Technology and Communications Fund*
Nationwide Global Life Sciences Fund*
</TABLE>
*Each of these funds is subject to an annual minimum fee of $75,000.
VILLANOVA MUTUAL FUND CAPITAL TRUST
By: ____________________________________
Name:
Title:
NATIONWIDE SEPARATE ACCOUNT TRUST
By: __________________________________
Name:
Title:
<PAGE> 1
Exhibit (h)(2)(a)
AMENDMENT TO TRANSFER AND DIVIDEND DISBURSING AGENT AGREEMENT
BETWEEN
NATIONWIDE SEPARATE ACCOUNT TRUST
AND
NATIONWIDE INVESTORS SERVICES, INC.
This amendment, made this 1st day of May, 2000, by and between NATIONWIDE
SEPARATE ACCOUNT TRUST (formerly Nationwide Separate Account Money Market
Trust), a Massachusetts business trust, hereinafter called the "Trust," and
NATIONWIDE INVESTORS SERVICES, INC. (formerly Heritage Financial Services,
Inc.), an Ohio corporation, hereinafter called the "Agent."
WITNESSETH:
- -----------
WHEREAS, the Trust and the Agent have entered into a Transfer and Dividend
Disbursing Agent Agreement on November 1, 1981, which has been previously
amended; and
WHEREAS, the parties desire to amend such Agreement to change the fees paid to
Agent;
NOW, THEREFORE, in consideration of the mutual covenants and promises herein
contained, it is agreed as follows:
1. Exhibit A, Schedule of Fees, is hereby amended in the form attached hereto
effective May 1, 2000.
2. All other provisions of the Agreement shall remain in full force and
effect.
IN WITNESS WHEREOF, the parties have caused this Amendment to be signed by their
respective officers thereunto duly authorized and their respective seals to be
hereunto affixed as of the day and year first above written.
NATIONWIDE SEPARATE ACCOUNT TRUST
------------------------------------------
Name: James F. Laird
Title: Treasurer
NATIONWIDE INVESTOR SERVICES, INC.
------------------------------------------
Name:
Title:
<PAGE> 2
EXHIBIT A
---------
SCHEDULE OF FEES
----------------
Effective May 1, 2000
For the services specified in the Agreement, the Trust shall pay the Agent a
fee, computed daily and payable monthly, calculated at an annual rate of 0.01%
of each of the following Fund's average daily net assets:
Total Return Fund
Capital Appreciation Fund
Government Bond Fund
Money Market Fund
Nationwide Small Company Fund
Nationwide Balanced Fund
Nationwide Equity Income Fund
Nationwide Global 50 Fund (formerly Nationwide Global Equity Fund)
Nationwide High Income Bond Fund
Nationwide Multi Sector Bond Fund
Nationwide Small Cap Value Fund
Nationwide Mid Cap Fund (formerly Nationwide Select Advisers Mid Cap
Fund)
Nationwide Small Cap Growth Fund (formerly Nationwide Select Advisers Small Cap
Growth Fund)
Nationwide Strategic Growth Fund
Nationwide Strategic Value Fund
Nationwide Income Fund
Nationwide Growth Focus Fund
Nationwide New Economy Fund
Nationwide Global Technology and Communications Fund (effective June ___, 2000)
Nationwide International Equity Fund (effective June ___, 2000)
Nationwide Global Life Sciences Fund (effective June ___, 2000)
The fee listed is payable on or before the 10th day of each succeeding month.
In addition, the Trust shall pay the Agent reimbursement for the out-of-pocket
expenses, including postage, telephone, forms, supplies and counsel.
Special extraordinary projects shall be performed by the Agent at rates to be
determined and agreed upon by the parties, based on time and effort involved.
<PAGE> 1
Exhibit (p)(1)
NATIONWIDE MUTUAL FUNDS
NATIONWIDE SEPARATE ACCOUNT TRUST
NATIONWIDE ASSET ALLOCATION TRUST
CODE OF ETHICS
The Board of Trustees (each, a "Board" and collectively, the "Boards")
of each of Nationwide Separate Account Trust, Nationwide Asset Allocation Trust
and Nationwide Mutual Funds (each, a "Trust" and collectively, the "Trusts")
have adopted this Code of Ethics, in accordance with Rule 17j-1 (the "Rule")
under the Investment Company Act of 1940, as amended (the "Act"). The Rule makes
it unlawful for certain employees of the Trusts, in connection with the purchase
or sale by such persons of securities held or to be acquired by the Trusts:
(1) to employ any device, scheme or artifice to defraud a Trust;
(2) to make to a Trust any untrue statement of a material fact or omit
to state to a Trust a material fact necessary in order to make the statements
made, in light of the circumstances under which they are made, not misleading;
(3) to engage in any act, practice or course of business which operates
or would operate as a fraud or deceit upon a Trust; or
(4) to engage in a manipulative practice with respect to a Trust.
While affirming its confidence in the integrity and good faith of all
of its officers and trustees, each Trust recognizes that certain personnel have
or may have knowledge of present or future portfolio transactions and, in
certain instances, the power to influence portfolio transactions made by the
Trust. Furthermore, if such individuals engage in personal Covered Securities
transactions, these individuals could be in a position where their personal
interests may conflict with the interests of the Trusts. Accordingly, this Code
is designed to prevent conduct that could create an actual or potential conflict
of interest with the Trusts.
A. DEFINITIONS
(1) "Access Person" means any trustee, officer or Advisory Person
(defined immediately below) of the Trust.
(2) "Advisory Person" means (a) any employee of the Trust (or of any
company in a control relationship to the Trust) who, in connection with his or
her regular functions or duties, makes, participates in, or obtains information
regarding the purchase or sale of Covered Securities by the Trust, or whose
functions relate to the making of any recommendations with respect to such
purchases or sales; and (b) any natural person in a control relationship to the
Trust who obtains information concerning recommendations made to the Trust with
regard to the purchase or sale of Covered Securities by the Trust.
<PAGE> 2
(3) "Beneficial ownership" shall be interpreted in the same manner as
it would be in determining whether a person is considered a "beneficial owner"
as defined in Rule 16a-1(a)(2) under the Securities Exchange Act of 1934, as
amended, which generally speaking, encompasses those situations where the
beneficial owner has the right to enjoy some economic benefit from the ownership
of the Covered Security. A person is normally regarded as the beneficial owner
of Covered Securities held in the name of his or her spouse or minor children
living in his or her household.
(4) "Control" shall have the same meaning as set forth in Section
2(a)(9) of the Act.
(5) "Covered Security" shall have the meaning set forth in Section
2(a)(36) of the Act, except that it shall not include direct obligations of the
United States government, bankers' acceptances, bank certificates of deposit,
commercial paper, high quality short-term debt instruments (including repurchase
agreements) and shares of registered open-end investment companies.
(6) "Disinterested Trustee" means a trustee of a Trust who is not an
"interested person" of the Trust within the meaning of Section 2(a)(19) of the
Act.
(7) "Investment Personnel" means (a) any Portfolio Managers who are
employees of the Trust as well as any other person such as a securities analyst
and/or trader who is an employee of the Trust (or of any company in a control
relationship to the Trust) who, in connection with his or her regular functions
or duties, makes or participates in the making of recommendations regarding the
Trust's purchase or sale of securities (including providing information and
advice to Portfolio Managers or helping with the execution of a Portfolio
Managers' decisions) or (b) any natural person who controls a Trust and who
obtains information concerning recommendations to a Trust regarding the purchase
or sale of securities by a Trust.
(8) "Portfolio Managers" means those individuals who, in connection
with his or her regular duties, are entrusted with the direct responsibility and
authority to make investment decisions affecting a Trust.
(9) "Purchase or sale of a Covered Security" includes, among other
things, the writing of an option to purchase or sell a Covered Security.
(10) "Security held or to be acquired" by the Trust means any Covered
Security which, within the most recent 15 days, (a) is or has been held by a
Trust; (b) is being or has been considered by a Trust or its investment adviser
for purchase by the Trust; and (c) any option to purchase or sell, and any
Covered Security which is convertible into or exchangeable for a Covered
Security described in subparts (a) and (b) of this definition.
B. STATEMENT OF GENERAL PRINCIPLES
It is the duty of all trustees and officers to place the interests of
each Trust and its shareholders, first at all times. Consistent with that duty,
all Access Persons and Investment Personnel of each Trust must (1) conduct all
personal Covered Securities transactions in a manner that is consistent with
this Code of Ethics; (2) avoid any actual or potential conflict of personal
interest with the interests of a Trust and its shareholders; and (3) adhere to
the
2
<PAGE> 3
fundamental standard that they should not take inappropriate advantage of their
positions of trust and responsibility.
THIS CODE OF ETHICS APPLIES TO TRANSACTIONS IN COVERED SECURITIES FOR
THE PERSONAL ACCOUNTS OF ALL TRUSTEES, OFFICERS AND ADVISORY PERSONS OF THE
TRUSTS AND ANY OTHER ACCOUNTS IN WHICH THEY HAVE ANY BENEFICIAL OWNERSHIP. IT
IMPOSES CERTAIN INVESTMENT RESTRICTIONS AND PROHIBITIONS AND REQUIRES THE
REPORTS SET FORTH BELOW. IF TRUSTEES AND OFFICERS OF A TRUST BECOME AWARE OF
MATERIAL NON-PUBLIC INFORMATION, OR IF A TRUST IS ACTIVE IN A GIVEN COVERED
SECURITY, SOME PERSONNEL MAY FIND THEMSELVES "FROZEN" IN A POSITION. NO TRUST
WILL BEAR ANY LOSSES IN PERSONAL ACCOUNTS RESULTING FROM THE IMPLEMENTATION OF
ANY PORTION OF THE CODE OF ETHICS.
This Code of Ethics does not apply to any Access Person or Investment
Personnel employed by any investment adviser, sub-adviser or principal
underwriter of the Trust. Those individuals are covered by the Codes of Ethics
which have been adopted by those entities in accordance with the provisions of
the Rule.
C. GENERAL PROHIBITIONS
(1) All trustees and officers of the Trusts shall keep all information
pertaining to the Trusts' portfolio transactions confidential. No person with
access to Covered Securities holdings, recommendations or pending transactions
should disclose this information to any person, unless such disclosure is made
in connection with his or her regular functions or duties. Special care should
be taken to avoid discussing confidential information in circumstances which
would disclose this information to anyone who would not have access to such
information in the normal course of events.
(2) No Access Person shall utilize information concerning prospective
or actual portfolio transactions in any manner which might prove detrimental to
the interests of a Trust.
(3) No Access Person shall use his or her position for his or her
personal benefit or attempt to cause a Trust to purchase, sell or hold a
particular Covered Security when that action may reasonably be expected to
create a personal benefit for the Access Person.
(4) No Access Person shall engage in any act, practice or course of
conduct, which would violate the provisions of the Rule set forth above.
D. PERSONAL TRADING RESTRICTIONS
(1) PRE-CLEARANCE
Access Persons are required to pre-clear personal Covered Securities
transactions (excluding those exempted under Section D(8)) with the designated
compliance personnel. Requests for pre-clearance must be made in writing on the
Pre-clearance Request Form provided by the compliance officer. Transactions
should not be placed for execution until pre-clearance approval has been
received. Pre-clearance approval is good only for the day received; therefore,
orders should be placed as market or day limit orders. If for any reason the
trade is not executed on the day on which pre-clearance approval is received,
the Access Person must submit a new
3
<PAGE> 4
request and receive approval prior to placing any subsequent order. For purposes
of this requirement, any Disinterested Trustee who does not know that the Trust,
during a 15 day period before or after the proposed trade in a Covered Security
by the Disinterested Trustee, purchased or sold, or considered purchasing or
selling, such Covered Security has no obligation to pre-clear or report the
trade.
(2) INITIAL PUBLIC OFFERINGS ("IPOS")
Investment Personnel are prohibited from acquiring any Covered Security
in an IPO. Investment Personnel may, however, request and receive approval to
participate in a conversion offering (as described in NASD's Freeriding and
Withholding Interpretations ("NASD Rules")). In approving any such request, the
onus for substantiating and documenting compliance with the NASD Rules rests on
the individual seeking approval. Also, notwithstanding proof of compliance with
the NASD Rules, approval may be withheld if the reviewing compliance personnel
believes that an actual or potential conflict of interest exists with respect to
a Trust.
(3) PRIVATE PLACEMENTS
Investment Personnel must obtain prior approval from the appropriate
compliance officer before acquiring Covered Securities in a private placement.
In determining whether to grant such prior approval, the appropriate officer
shall determine (among other factors) whether the investment opportunity should
be reserved for a Trust and its shareholders, and whether the opportunity is
being offered to the individual by virtue of his or her position with a Trust.
Any Investment Personnel who has been authorized to acquire Covered Securities
in a private placement, must disclose that investment when he or she is involved
in any subsequent consideration of an investment by a Trust in that issuer. In
such circumstances, Investment Personnel with no personal interest in the
particular issuer shall independently review a Trust's decision to purchase that
issuer's Covered Securities.
(4) 60 DAY HOLDING PERIOD
Investment Personnel shall not profit from the purchase and sale, or
sale and purchase, of the same (or equivalent) Covered Securities within sixty
(60) calendar days. Trades made in violation of this policy should be unwound,
if possible. In the event such trades cannot be unwound, any profits realized on
such short-term trades shall be subject to disgorgement to a Trust.
(5) BLACKOUT PERIOD
(a) SAME DAY
Access Persons are prohibited from executing any personal
Covered Securities transaction on a day on when a Trust has a pending
buy or sell order in that same Covered Security. This prohibition shall
be lifted once the Trust executes or withdraws its order for the
Covered Security in question. However, trustees who are not officers of
a Trust's investment adviser or any of its affiliates and who, on the
day they execute a personal Covered Securities transaction have no
knowledge of what a Trust is trading on that day, are not subject to
this Same Day Blackout Period.
4
<PAGE> 5
(b) SEVEN DAY
All Portfolio Managers are prohibited from executing any
personal Covered Securities transactions within seven (7) calendar days
before or after the day any series of a Trust managed by such person
trades in that Covered Security.
(c) Trades made in violation of these blackout periods should
be unwound, if possible. Otherwise, any profits realized on such
short-term trades shall be subject to disgorgement to a Trust.
(6) GIFTS
No Investment Personnel shall seek or accept anything of more than de
minimis value, either directly or indirectly, from broker-dealers or other
persons, which to the actual knowledge of the Investment Personnel, do business
or might do business with a Trust. For purposes of this provision, the following
gifts will not be considered to be in violation of this section: (a) an
occasional meal; (b) an occasional ticket to a sporting event, the theater or
comparable entertainment; and (c) other gifts of nominal cost.
(7) EXEMPTED TRANSACTIONS
The prohibitions of Section (D)(4)-(5) of this Code of Ethics shall not
apply to:
(a) purchases or sales effected in any account over which the
Access Person or Investment Personnel has no direct or indirect
influence or control;
(b) purchases or sales which are nonvolitional(1) on the part
of the Access Person, Investment Personnel or a Trust;
(c) purchases which are part of an automatic dividend
reinvestment plan; or
(d) purchases effected upon the exercise of rights issued by
an issuer pro-rata to all holders of a class of its Covered Securities,
to the extent such rights were acquired from such issuer, and sales of
such rights so acquired.
(8) Access Persons are generally required to obtain pre-clearance
before executing any trade. However, in certain instances an Access Person is
relieved from obtaining pre-clearance, but must report the transaction. In other
instances, the Access Person is relieved of both of the duty to obtain
pre-clearance and to report the transaction.
(a) Access Persons do not have to pre-clear the following
transactions, but must report them:
- -------------------------
(1) Nonvolitional purchases or sales include those transactions which do not
involve a willing act or conscious decision on the part of the trustee or
officer. For example, shares received or disposed of by Access Persons or
Investment Personnel in a merger, recapitalization or similar transaction are
considered nonvolitional.
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<PAGE> 6
(i) Stocks when the total purchase/sale of the
particular issuer is 500 shares or fewer in a calendar
quarter.
(ii) Option contracts on stock when the total
purchase/sale of the contract is 500 shares or fewer of a
particular issuer in any calendar quarter.
(iii) Corporate debt Covered Securities(2) rated in
the highest grades by any Nationally Rated Statistical Rating
Organization if the purchase/sale is $25,000.00 or less per
issue in any calendar quarter.
(iv) Municipal bonds if the purchase/sale is
$25,000.00 or less per issue in any calendar quarter.
*PROVISION (8)(a) AND ITS SUB-PARTS DO NOT RELIEVE
ACCESS PERSONS OF THEIR DUTY TO REPORT THE TRANSACTIONS
DESCRIBED THEREIN. FURTHERMORE, THIS PROVISION DOES NOT APPLY
TO TRANSACTIONS COVERED UNDER SECTIONS D(2) AND D(3).
For purposes of this requirement, any Disinterested
Trustee who does not know that the Trust, during a 15 day
period before or after the proposed trade in a Covered
Security by the Disinterested Trustee, purchased or sold, or
considered purchasing or selling, such Covered Security has no
obligation to pre-clear or report the trade.
(b) The following transactions are exempt from the
prohibitions contained in this Code of Ethics, do not require prior
clearance and do not have to be reported (securities which do not
qualify as Covered Securities under this Code of Ethics are also exempt
from these reporting requirements):
(i) Variable annuities.
(ii) Oil, gas or other mineral leases.
(iii) Commodities, commodity contracts or futures
contracts.
(9) Investment Personnel are prohibited from serving on the boards of
directors of publicly traded companies, absent prior authorization by the
appropriate compliance officer. Such authorization should be based upon a
determination that the board service would be consistent with the interests of
the Trust and its shareholders. Where service on a board of directors is
authorized, Investment Personnel serving as directors should be isolated from
those making investment decisions regarding the company through "Chinese Wall"
procedures.
- -----------------------------
(2) Corporate debt Covered Securities which are rated in the highest grades have
an extremely strong capacity to pay principal and interest. The following
Corporate debt Covered Securities are considered to have the highest ratings:
(a) bonds rated AA or higher by Standard & Poor's Corporation; (b) bonds rated
Aa or higher by Moody's Investors Service, Inc.; and (c) bonds rated A or higher
by Fitch or Duff.
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<PAGE> 7
E. REPORTING, DISCLOSURE AND CERTIFICATION REQUIREMENTS
(1) INITIAL HOLDINGS REPORTS
All Access Persons (excluding any Disinterested Trustee who would be
required to make a report solely by reason of being a trustee) shall disclose
all personal Covered Securities holdings to the appropriate compliance officer.
The Initial Report shall be made on the form attached as Exhibit A and shall
contain the following information:
(a) the title, number of shares and principal amount of each
Covered Security in which the Access Person had any direct or indirect
beneficial ownership when the person became an Access Person;
(b) the name of any broker, dealer or bank with whom the
Access Person maintained an account in which any Covered Securities
were held for the direct or indirect benefit of the Access Person as of
the date the person became an Access Person; and
(c) the date that the report is submitted by the Access
Person.
All Access Persons currently employed by a Trust shall submit an
Initial Report to the appropriate compliance officer within ten days of the date
of this Code of Ethics. All other Initial Reports shall be made no later than 10
days after the person becomes an Access Person.
(2) QUARTERLY REPORTS
(a) All Access Persons shall report to the appropriate
compliance officer, the information described below in Sub-paragraph
(2)(c) of this Section with respect to transactions in any Covered
Security in which such person has, or by reason of such transaction
acquires, any direct or indirect beneficial ownership in the Covered
Security.
(b) Each Disinterested Trustee who would be required to make a
report solely by reason of being a trustee, need only submit a
Quarterly Report if such trustee knew or, in the ordinary course of
fulfilling his or her official duties as a trustee, should have known
that during the 15-day period immediately before or after the trustee's
transaction in a Covered Security, that the Trust purchased or sold the
Covered Security, or the Trust or its investment adviser considered
purchasing or selling the Covered Security.
(c) Reports required to be made under this Paragraph (2) shall
be made not later than 10 days after the end of the calendar quarter in
which the transaction to which the report relates was effected. All
Access Persons shall be required to submit a report for all periods,
including those periods in which no Covered Securities transactions
were effected. A report shall be made on the form attached hereto as
Exhibit B or on any other form containing the following information:
(i) the date of the transaction, the title of the
Covered Security, the interest rate and maturity date (if
applicable), the number of shares, and the principal amount of
each Covered Security involved;
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<PAGE> 8
(ii) the nature of the transaction (i.e., purchase,
sale or any other type of acquisition or disposition);
(iii) the price at which the transaction was
effected;
(iv) the name of the broker, dealer or bank with or
through whom the transaction was effected; and
(v) the date the report is submitted.
(d) Any such report may contain a statement that the report
shall not be construed as an admission by the person making such report
that he or she has any direct or indirect beneficial ownership in the
Covered Security to which the report relates.
(e) All Access Persons shall direct their brokers to supply
duplicate copies of all monthly brokerage statements (excluding
confirmations) for all Covered Securities accounts maintained by the
Access Person to the appropriate compliance officer, on a timely basis.
In addition, with respect to any account established by the Access
Person in which any Covered Securities were held during the quarter for
the direct or indirect benefit of the Access Person, the Access Person
shall report the following information:
(i) the name of the broker, dealer or bank with whom
the Access Person established the account;
(ii) the date the account was established; and
(iii) the date the report is submitted.
(3) ANNUAL HOLDINGS REPORTS
All Access Persons (excluding any Disinterested Trustee who would be
required to make a report solely by reason of being a trustee) shall disclose
all personal Covered Securities holdings on an annual basis on the Form attached
as Exhibit C within 30 days after the end of the calendar year. All Annual
Reports shall provide information on personal Covered Securities holdings that
is current as of a date no more than 30 days before the Annual Report is
submitted. Such Annual Reports shall contain the following information:
(a) the title, number of shares and principal amount of each
Covered Security in which the Access Person had any direct or indirect
beneficial ownership;
(b) the name of any broker, dealer or bank with whom the
Access Person maintains an account in which any Covered Securities are
held for the direct or indirect benefit of the Access Person; and
(c) the date that the report is submitted by the Access
Person.
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<PAGE> 9
(4) CERTIFICATION OF COMPLIANCE WITH CODE OF ETHICS
All Access Persons shall certify annually that:
(a) they have read and understand the Code of Ethics and
recognize that they are subject to its provisions;
(b) they have complied with the requirements of the Code of
Ethics; and
(c) they have reported all personal Covered Securities
transactions required to be reported pursuant to the requirements of
the Code of Ethics.
(5) PERSONAL BROKERAGE ACCOUNTS
No trustee or officer of a Trust, other than a Disinterested Trustee,
shall open a personal brokerage account directly or indirectly without obtaining
prior authorization from the appropriate compliance officer. In addition, all
trustees and officers of a Trust, other than a Disinterested Trustee, shall
provide compliance personnel with a listing of all brokerage accounts in which
the trustees or officers have a direct or indirect interest upon commencing
employment and on an annual basis thereafter. These reports may be made using
Exhibits A or C, as applicable.
(6) REVIEW OF REPORTS AND NOTIFICATION
Each Trust will appoint compliance personnel to review all brokerage
account statements and Quarterly, Initial and Annual Reports to detect conflicts
of interest and abusive practices. In addition, the appropriate compliance
officer shall notify each Access Person that he or she is subject to the
reporting requirements provided under this Code of Ethics and shall deliver a
copy of this Code of Ethics to each person upon request.
F. REPORTING OF VIOLATIONS TO THE BOARD
Any person, including the compliance officer, shall promptly report all
violations and apparent violations of this Code of Ethics and the reporting
requirements thereunder to the Board of the appropriate Trust.
G. BOARD APPROVAL
Upon its adoption, the compliance officer shall submit a copy of the
Code of Ethics to the Board for approval no later than September 1, 2000. The
compliance officer is further required to obtain board approval for any material
changes to this Code within six (6) months of any such change.
H. ANNUAL REPORTING TO THE BOARD
Each Trust (or a Trust's investment adviser on behalf of the Trust) and
its principal underwriter shall prepare a written annual report relating to its
Code of Ethics to the Board of the Trust. Such annual report shall:
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<PAGE> 10
(1) summarize existing procedures concerning personal investing and any
changes in the procedures made during the past year;
(2) identify any material violations requiring significant remedial
action during the past year;
(3) identify any recommended changes in the existing restrictions or
procedures based upon experience under its Code of Ethics, evolving industry
practices or developments in applicable laws or regulations; and
(4) certify that the Trust or the principal underwriter, as applicable,
has adopted procedures reasonably necessary to prevent Access Persons from
violating its Code of Ethics.
I. ANNUAL REPORTING OF INVESTMENT ADVISERS TO THE BOARD
Any investment adviser or sub-adviser to the Trust shall also prepare a
written annual report, such as the annual report described in Section H of this
Code of Ethics, relating to its particular Code of Ethics to the Board.
J. SANCTIONS
Upon discovering a violation of this Code, a Board may impose such
sanctions as it deems appropriate, including, among other things, issuing a
letter of censure or suspension or terminating the employment of the violator or
referring the matter to the appropriate regulatory or governmental authority.
K. RETENTION OF RECORDS
Each of the Trusts shall, at its principal place of business, maintain
records in the manner and to the extent set out below and must make these
records available to the U.S. Securities and Exchange Commission ("SEC") or any
representative of the SEC at any time and from time to time for reasonable
periodic, special or other examination:
(1) A copy of this Code of Ethics, or any Code of Ethics which within
the past five (5) years has been in effect, shall be preserved in an easily
accessible place;
(2) A record of any violation of this Code of Ethics, and of any action
taken as a result of such violation, shall be preserved in an easily accessible
place for a period of not less than five (5) years following the end of the
fiscal year in which the violation occurs;
(3) A copy of each report made by an Access Person pursuant to this
Code of Ethics shall be preserved for a period of not less than five (5) years
from the end of the fiscal year in which it is made, the first two years in an
easily accessible place;
(4) A list of all persons who are, or within the past five (5) years
have been, required to make reports pursuant to this Code of Ethics shall be
maintained in an easily accessible place;
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<PAGE> 11
(5) A record of any decision, and the reasons supporting the decision,
to approve the acquisition by Investment Personnel of Covered Securities, in a
private placement, as described in Section D(3) of this Code of Ethics, for at
least five (5) years after the end of the fiscal year in which the approval is
granted.
(6) A copy of each annual report required under Section H for at least
five (5) years after the end of the fiscal year in which it is made, the first
two in an accessible place.
Date: March 2, 2000
11
<PAGE> 12
EXHIBIT A
NATIONWIDE MUTUAL FUNDS
NATIONWIDE SEPARATE ACCOUNT TRUST
NATIONWIDE ASSET ALLOCATION TRUST
CODE OF ETHICS
INITIAL REPORT
To the Compliance Officer of the Trust:
1. I hereby acknowledge receipt of a copy of the Code of Ethics for the
Trust.
2. I have read and understand the Code and recognize that I am subject
thereto in the capacity of an "Access Person."
3. Except as noted below, I hereby certify that I have no knowledge of
the existence of any personal conflict of interest relationship which may
involve the Trust, such as any economic relationship between my transactions and
Covered Securities held or to be acquired by the Trust or any of its series.
4. As of the date below I had a direct or indirect beneficial ownership
in the following Covered Securities:
<TABLE>
<CAPTION>
Dollar Amount Type of Interest
Title of Security Number of Shares of Transaction (Direct or Indirect)
----------------- ---------------- -------------- --------------------
<S> <C> <C> <C>
</TABLE>
5. I hereby represent that I maintain account(s) as of the
date this report is submitted in which Covered Securities are held for my direct
or indirect benefit with the brokers, dealers or banks listed below.
12
<PAGE> 13
Name of Broker, Bank or Dealer with Whom
Account Maintained Date Established
------------------ ----------------
Name:
---------------------------
Title:
-------------------------
Date Report Submitted:
------------------
13
<PAGE> 14
EXHIBIT B
NATIONWIDE MUTUAL FUNDS
NATIONWIDE SEPARATE ACCOUNT TRUST
NATIONWIDE ASSET ALLOCATION TRUST
CODE OF ETHICS
Quarterly Securities Transactions Report
For the Calendar Quarter Ended: _________
To the Compliance Officer of the Trust:
During the quarter referred to above, the following transactions were
effected in Covered Securities of which I had, or by reason of such transaction
acquired, direct or indirect beneficial ownership, and which are required to be
reported pursuant to the Code of Ethics adopted by the Trust.
<TABLE>
<CAPTION>
=================================================================================================================================
INTEREST RATE DOLLAR NATURE OF BROKER/
TITLE OF DATE OF NO. OF AND MATURITY AMOUNT OF TRANSACTION PRICE DEALER
SECURITY TRANSACTION SHARES DATE (if TRANSACTION (Purchase, Sale, OR BANK THROUGH
applicable) Other) WHOM EFFECTED
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
=================================================================================================================================
</TABLE>
This report (i) excludes transactions with respect to which I had no
direct or indirect influence or control, (ii) other transactions not required to
be reported, and (iii) is not an admission that I have or had any direct or
indirect beneficial ownership in the Covered Securities listed above.
I hereby represent that I established the brokerage accounts listed
below, in which Covered Securities were held during the quarter referenced above
for my indirect or direct benefit. I further understand that in compliance with
the Code I must have copies of my monthly brokerage statements sent to the
compliance officer.
14
<PAGE> 15
Name of Broker, Dealer or Bank with Whom
Account Established Date Established
------------------- ----------------
Except as noted in this report, I hereby certify that I have no
knowledge of the existence of any personal conflict of interest relationship
which may involve the Trust, such as the existence of any economic relationship
between my transactions and Covered Securities held or to be acquired by the
Trust or any of its series.
Name:
----------------------------------
Title:
--------------------------------
Date Report Submitted:
-----------------
15
<PAGE> 16
EXHIBIT C
NATIONWIDE MUTUAL FUNDS
NATIONWIDE SEPARATE ACCOUNT TRUST
NATIONWIDE ASSET ALLOCATION TRUST
CODE OF ETHICS
ANNUAL REPORT
To the Compliance Officer of the Trust:
1. I have read and understand the Code and recognize that I am subject
thereto in the capacity of an "Access Person."
2. I hereby certify that, during the year ended December 31, 200__, I
have complied with the requirements of the Code and I have reported all Covered
Securities transactions required to be reported pursuant to the Code.
3. Except as noted below, I hereby certify that I have no knowledge of
the existence of any personal conflict of interest relationship which may
involve the Trust, such as any economic relationship between my transactions and
Covered Securities held or to be acquired by the Trust or any of its series.
4. As of December 31, 200__, I had a direct or indirect beneficial
ownership in the following Covered Securities:
<TABLE>
<CAPTION>
Principal Amount Type of Interest Broker/Dealer or Bank
Title of Security Number of Shares of Securities Sold (Direct or Indirect) Through Whom Effected
----------------- ---------------- ------------------ -------------------- ---------------------
<S> <C> <C> <C> <C>
</TABLE>
5. I hereby represent that I maintain the account(s) listed below in
which Covered Securities are held for my direct or indirect benefit with the
brokers, dealers or banks listed below.
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<PAGE> 17
Name of Broker, Bank or Dealer with Whom
Account Maintained Date Established
------------------ ----------------
Name:
-----------------------------------
Title:
----------------------------------
Date Report Submitted:
------------------
17
<PAGE> 1
Exhibit (p)(2)
VILLANOVA
CODE OF ETHICS
The Board of Directors (each, a "Board," and collectively, the
"Boards") of the Managing Unitholder of Villanova Mutual Fund Capital Trust,
Villanova SA Capital Trust, Villanova Value Investors LLC, Morely Capital
Management, Inc. and Union Bond & Trust Company (each, an "Adviser" and
collectively, "Villanova") have adopted this Code of Ethics, in accordance with
Rule 17j-1 (the "Rule") under the Investment Company Act of 1940, as amended,
(the "Act"). The Rule makes it unlawful for certain employees of Villanova, in
connection with the purchase or sale by such persons of securities held or to be
acquired by any Client (defined below):
(1) to employ any device, scheme or artifice to defraud a Client;
(2) to make to a Client any untrue statement of a material fact or omit
to state to a Client a material fact necessary in order to make the statements
made, in light of the circumstances under which they are made, not misleading;
(3) to engage in any act, practice or course of business which operates
or would operate as a fraud or deceit upon a Client; or
(4) to engage in a manipulative practice with respect to a Client.
While affirming its confidence in the integrity and good faith of all
of its employees, officers and directors, Villanova recognizes that certain
personnel have or may have knowledge of present or future portfolio transactions
and, in certain instances, the power to influence portfolio transactions made by
its Clients. Furthermore, if such individuals engage in personal Covered
Securities transactions, these individuals could be in a position where their
personal interests may conflict with the interests of Clients. Accordingly, this
Code is designed to prevent conduct that could create an actual or potential
conflict of interest with any Villanova Client.
A. DEFINITIONS
(1) "Access Person" means any director (excluding any director who is
not also an officer of Villanova or its affiliates), officer, or Advisory Person
(defined immediately below) of an Adviser.
(2) "Advisory Person" means (a) any employee of an Adviser (or of any
company in a control relationship to an Adviser) who, in connection with his or
her regular functions or duties, normally makes, participates in, or obtains
information regarding the purchase or sale of a Covered Security by a Client, or
whose functions relate to the making of any recommendations with respect to such
purchases or sales; and (b) any natural person in a control relationship to an
Adviser who obtains current information concerning recommendations made to a
Client with regard to the purchase or sale of Covered Securities by the Client.
<PAGE> 2
(3) "Beneficial ownership" shall be interpreted in the same manner as
it would be in determining whether a person is considered a "beneficial owner"
as defined in Rule 16a-1(a)(2) under the Securities Exchange Act of 1934, as
amended, which generally speaking, encompasses those situations where the
beneficial owner has the right to enjoy some economic benefit from the ownership
of the Covered Security. A person is normally regarded as the beneficial owner
of Covered Securities held in the name of his or her spouse or minor children
living in his or her household.
(4) "Client" means (a) any investment company registered under the Act
or any series of a registered investment company for whom an Adviser(s) acts as
investment adviser or sub-adviser or (b) any separately managed investment
account which is advised by an Adviser (or Advisers).
(5) "Control" shall have the same meaning as set forth in Section
2(a)(9) of the Act.
(6) "Covered Security" shall have the meaning set forth in Section
2(a)(36) of the Act, except that it shall not include direct obligations of the
United States government, bankers' acceptances, bank certificates of deposit,
commercial paper, high quality short-term debt instruments (including repurchase
agreements) and shares of registered open-end investment companies.
(7) "Investment Personnel" means (a) any Portfolio Manager who are
employees of an Adviser as well as any other person such as a securities analyst
and/or trader of an Adviser (or of any company in a control relationship to the
Adviser) who, in connection with his or her regular functions or duties, makes
or participates in the making of recommendations regarding a Client's purchase
or sale of securities (including providing information and advice to Portfolio
Managers or helping with the execution of a Portfolio Managers' decisions) or
(b) any natural person who controls an Adviser and who obtains information
concerning recommendations to a Client regarding the purchase or sale of Covered
Securities by a Client.
(8) "Portfolio Managers" means those individuals who, in connection
with his or her regular duties, are entrusted with the direct responsibility and
authority to make investment decisions affecting any Client.
(9) "Purchase or sale of a Covered Security" includes, among other
things, the writing of an option to purchase or sell a Covered Security.
(10) "Security held or to be acquired" by a Client means any Covered
Security which, within the most recent 15 days, (a) is or has been held by a
Client; (b) is being or has been considered for purchase by a Client; and (c)
any option to purchase or sell, and any Covered Security which is convertible
into or exchangeable for a Covered Security described in subparts (a) and (b) of
this definition.
B. STATEMENT OF GENERAL PRINCIPLES
2
<PAGE> 3
It is the duty of all directors, officers and employees to place the
interests of Villanova's Clients, first at all times. Consistent with that duty,
all Access Persons and Investment Personnel of Villanova must (1) conduct all
personal Covered Securities transactions in a manner that is consistent with
this Code of Ethics; (2) avoid any actual or potential conflict of personal
interest with the interests of Villanova's Clients; and (3) adhere to the
fundamental standard that they should not take inappropriate advantage of their
positions of trust and responsibility.
THIS CODE OF ETHICS APPLIES TO TRANSACTIONS IN COVERED SECURITIES FOR
PERSONAL ACCOUNTS OF ALL VILLANOVA DIRECTORS, OFFICERS AND ADVISORY PERSONS OF
VILLANOVA AND ANY OTHER ACCOUNTS IN WHICH THEY HAVE ANY BENEFICIAL OWNERSHIP. IT
IMPOSES CERTAIN INVESTMENT RESTRICTIONS AND PROHIBITIONS AND REQUIRES THE
REPORTS SET FORTH BELOW. IF DIRECTORS, OFFICERS OR EMPLOYEES OF BECOMES AWARE OF
MATERIAL NON-PUBLIC INFORMATION, OR IF A CLIENT IS ACTIVE IN A GIVEN COVERED
SECURITY, SOME PERSONNEL MAY FIND THEMSELVES "FROZEN" IN A POSITION. VILLANOVA
WILL NOT BEAR ANY LOSSES IN PERSONAL ACCOUNTS RESULTING FROM THE IMPLEMENTATION
OF ANY PORTION OF THE CODE OF ETHICS.
C. GENERAL PROHIBITIONS
(1) All directors, officers and employees of Villanova shall keep all
information pertaining to Clients' portfolio transactions confidential. No
person with access to Covered Securities holdings, recommendations or pending
transactions should disclose this information to any person, unless such
disclosure is made in connection with his or her regular functions or duties.
Special care should be taken to avoid discussing confidential information in
circumstances which would disclose this information to anyone who would not have
access to such information in the normal course of events.
(2) No Access Person shall utilize information concerning prospective
or actual portfolio transactions in any manner which might prove detrimental to
the interests of a Client.
(3) No Access Person shall use his or her position for his or her
personal benefit or attempt to cause a Client to purchase, sell or hold a
particular Covered Security when that action may reasonably be expected to
create a personal benefit for the Access Person.
(4) No Access Person shall engage in any act, practice or course of
conduct, which would violate the provisions of the Rule set forth above.
D. PERSONAL TRADING RESTRICTIONS
(1) PRE-CLEARANCE
Access Persons are required to pre-clear personal Covered Securities
transactions (excluding those exempted under Section D(8) below) with the
designated compliance personnel. Requests for pre-clearance must be made in
writing on the Pre-clearance Request Form provided by the compliance officer.
Transactions should not be placed for execution until pre-clearance approval has
been received. Pre-clearance approval is good only for the day received;
therefore, orders should be placed as market or day limit orders. If for any
reason the trade is not executed
3
<PAGE> 4
on the day on which pre-clearance approval is received, the Access Person must
submit a new request and receive approval prior to placing any subsequent order.
(2) INITIAL PUBLIC OFFERINGS ("IPOS")
Investment Personnel are prohibited from acquiring any Covered Security
in an IPO. Investment Personnel may, however, request and receive approval to
participate in a conversion offering (as described in NASD's Freeriding and
Withholding Interpretation ("NASD Rules")). In approving any such request, the
onus for substantiating and documenting compliance with the provisions of the
NASD Rules rests on the individual seeking approval. Also, notwithstanding proof
of compliance with the NASD Rules, approval may be withheld if the reviewing
compliance personnel believes that an actual or potential conflict of interest
exists with respect to any Client.
(3) PRIVATE PLACEMENTS
Investment Personnel must obtain approval from the appropriate
compliance officer before acquiring Covered Securities in a private placement.
In determining whether to grant such prior approval, the appropriate officer
shall determine (among other factors) whether the investment opportunity should
be reserved for a Client(s), and whether the opportunity is being offered to the
individual by virtue of his or her position with an Adviser. Investment
Personnel who have been authorized to acquire Covered Securities in a private
placement, must disclose that investment whenever he or she is involved in any
subsequent consideration of an investment by a Client in that issuer. In such
circumstances, Investment Personnel with no personal interest in the particular
issuer shall independently review the Client's decision to purchase that
issuer's Covered Securities.
(4) 60 DAY HOLDING PERIOD
Investment Personnel shall not profit from the purchase and sale, or
sale and purchase, of the same (or equivalent) Covered Securities within sixty
(60) calendar days. Trades made in violation of this policy should be unwound,
if possible. In the event such trades cannot be unwound, any profits realized on
such short-term trades shall be subject to disgorgement to the appropriate
Client account or the account of the appropriate Adviser.
(5) BLACKOUT PERIOD
(a) SAME DAY
Access Persons are prohibited from executing any personal
Covered Securities transaction on a day when a Client has a pending buy
or sell order in that same Covered Security. This prohibition shall be
lifted once the Client executes or withdraws its order for the Covered
Security in question. However, directors of Villanova who are not
officers of an Adviser or any of its affiliates and who, on the day
they execute a personal Covered Securities transaction, have no
knowledge of what a Client is trading on that day, are not subject to
the Same Day Blackout Period.
4
<PAGE> 5
(b) SEVEN DAY
All Portfolio Managers are prohibited from executing any
personal Covered Securities transactions within seven (7) calendar days
before or after the day any Client advised by such person trades in
that Covered Security.
(c) Trades made in violation of these blackout periods should
be unwound, if possible. Otherwise, any profits realized on such
short-term trades shall be subject to disgorgement to the appropriate
Client account or the account of the appropriate Adviser.
(6) GIFTS
No Investment Personnel shall seek or accept anything of more than de
minimis value, either directly or indirectly, from broker-dealers or other
persons, which to the actual knowledge of the Investment Personnel, do business
or might do business with a Client or Villanova. For purposes of this provision,
the following gifts will not be considered to be in violation of this section:
(a) an occasional meal; (b) an occasional ticket to a sporting event, the
theater or comparable entertainment; and (c) other gifts of nominal cost.
(7) EXEMPTED TRANSACTIONS
The prohibitions of Section (D)(4)-(5) of this Code of Ethics shall not
apply to:
(a) purchases or sales effected in any account over which the
Access Person or Investment Personnel has no direct or indirect
influence or control;
(b) purchases or sales which are nonvolitional(1) on the part
of the Access Person, Investment Personnel or a Client;
(c) purchases which are part of an automatic dividend
reinvestment plan; or
(d) purchases effected upon the exercise of rights issued by
an issuer pro-rata to all holders of a class of its Covered Securities,
to the extent such rights were acquired from such issuer, and sales of
such rights so acquired.
(8) Access Persons are generally required to obtain pre-clearance
before executing any trade. However, in certain instances an Access Person is
relieved from obtaining pre-clearance, but must report the transaction. In other
instances, the Access Person is relieved of both of the duty to obtain
pre-clearance and to report the transaction.
- ----------------------------
(1) Nonvolitional purchases or sales include those transactions which do not
involve a willing act or conscious decision on the part of the director, officer
or employee. For example, shares received or disposed of by Access Persons or
Investment Personnel in a merger, recapitalization or similar transaction are
considered nonvolitional.
5
<PAGE> 6
(a) Access Persons do not have to pre-clear the following
transactions, but must report them:
(i) Stocks when the total purchase/sale of the
particular issuer is 500 shares or fewer in a calendar
quarter.
(ii) Option contracts on stock when the total
purchase/sale of the contract is 500 shares or fewer of a
particular issuer in any calendar quarter.
(iii) Corporate debt Covered Securities(2) rated in
the highest grades by any Nationally Rated Statistical Rating
Organization if the purchase/sale is $25,000.00 or less per
issue in any calendar quarter.
(iv) Municipal bonds if the purchase/sale is
$25,000.00 or less per issue in any calendar quarter.
*PROVISION (8)(a) AND ITS SUB-PARTS DO NOT RELIEVE
ACCESS PERSONS OF THEIR DUTY TO REPORT THE TRANSACTIONS
DESCRIBED THEREIN. FURTHERMORE, THIS PROVISION DOES NOT APPLY
TO TRANSACTIONS COVERED UNDER SECTIONS D(2) AND D(3).
(b) The following transactions are exempt from the
prohibitions contained in this Code of Ethics, do not require prior
clearance and do not have to be reported (securities which do not
qualify as Covered Securities under this Code of Ethics are also exempt
from these reporting requirements):
(i) Variable annuities.
(ii) Oil, gas or other mineral leases.
(iii) Commodities, commodity contracts or futures
contracts.
(9) Investment Personnel are prohibited from serving on the boards of
directors of publicly traded companies, absent prior authorization by the
appropriate compliance officer. Such authorization should be based upon a
determination that the board service would be consistent with the interests of
Clients advised by the employee. Where service on a board of directors is
authorized, Investment Personnel serving as directors should be isolated from
those making investment decisions regarding the company through "Chinese Wall"
procedures.
- --------------------------
(2) Corporate debt Covered Securities which are rated in the highest grades have
an extremely strong capacity to pay principal and interest. The following
Corporate debt Covered Securities are considered to have the highest ratings:
(a) bonds rated AA or higher by Standard & Poor's Corporation; (b) bonds rated
Aa or higher by Moody's Investors Service, Inc.; and (c) bonds rated A or higher
by Fitch or Duff.
6
<PAGE> 7
E. REPORTING, DISCLOSURE AND CERTIFICATION REQUIREMENTS
(1) INITIAL HOLDINGS REPORTS
All Access Persons shall disclose all personal Covered Securities
holdings to the appropriate compliance officer. The Initial Report shall be made
on the form attached as Exhibit A and shall contain the following information:
(a) the title, number of shares and principal amount of each
Covered Security in which the Access Person had any direct or indirect
beneficial ownership when the person became an Access Person;
(b) the name of any broker, dealer or bank with whom the
Access Person maintained an account in which any Covered Securities
were held for the direct or indirect benefit of the Access Person as of
the date the person became an Access Person; and
(c) the date that the report is submitted by the Access
Person.
All Access Persons currently employed by Villanova shall submit an
Initial Report to the appropriate compliance officer within ten days of the date
of this Code of Ethics. All other Initial Reports shall be made no later than 10
days after the person becomes an Access Person.
(2) QUARTERLY REPORTS
(a) All Access Persons shall report to the appropriate
compliance officer, the information described in Sub-paragraph (2)(c)
of this Section with respect to transactions in any Covered Security in
which such person has, or by reason of such transaction acquires, any
direct or indirect beneficial ownership in the Covered Security.
(b) Reports required to be made under this Paragraph (2) shall
be made not later than 10 days after the end of the calendar quarter in
which the transaction to which the report relates was effected. All
Access Persons shall be required to submit a report for all periods,
including those periods in which no Covered Securities transactions
were effected. A report shall be made on the form attached hereto as
Exhibit B or on any other form containing the following information:
(i) the date of the transaction, the title of the
Covered Security, the interest rate and maturity date (if
applicable), the number of shares, and the principal amount of
each Covered Security involved;
(ii) the nature of the transaction (i.e., purchase,
sale or any other type of acquisition or disposition);
(iii) the price at which the transaction was
effected;
7
<PAGE> 8
(iv) the name of the broker, dealer or bank with or
through whom the transaction was effected; and
(v) the date the report is submitted.
(c) Any such report may contain a statement that the report
shall not be construed as an admission by the person making such report
that he or she has any direct or indirect beneficial ownership in the
Covered Security to which the report relates.
(b) All Access Persons shall direct their brokers to supply
duplicate copies of all monthly brokerage statements (excluding
confirmations) for all Covered Securities accounts maintained by the
Access Person to the appropriate compliance officer, on a timely basis.
In addition, with respect to any account established by the Access
Person in which any Covered Securities were held during the quarter for
the direct or indirect benefit of the Access Person, the Access Person
shall report the following information:
(i) the name of the broker, dealer or bank with whom
the Access Person established the account;
(ii) the date the account was established; and
(iii) the date the report is submitted.
(3) ANNUAL HOLDINGS REPORTS
All Access Persons shall disclose all personal Covered Securities
holdings on an annual basis on the Form attached as Exhibit C within 30 days
after the end of the calendar year. All Annual Reports shall provide information
on personal Covered Securities holdings that is current as of a date no more
than 30 days before the Annual Report is submitted. Such Annual Reports shall
contain the following information:
(a) the title, number of shares and principal amount of each
Covered Security in which the Access Person had any direct or indirect
beneficial ownership;
(b) the name of any broker, dealer or bank with whom the
Access Person maintains an account in which any Covered Securities are
held for the direct or indirect benefit of the Access Person; and
(c) the date that the report is submitted by the Access
Person.
(4) CERTIFICATION OF COMPLIANCE WITH CODE OF ETHICS
All Access Persons shall certify annually that:
(a) they have read and understand the Code of Ethics and
recognize that they are subject to its provisions;
8
<PAGE> 9
(b) they have complied with the requirements of the Code of
Ethics; and
(c) they have reported all personal Covered Securities
transactions required to be reported pursuant to the requirements of
the Code of Ethics.
(5) PERSONAL BROKERAGE ACCOUNTS
No director, officer or employee shall open a personal brokerage
account directly or indirectly without obtaining prior authorization from the
appropriate compliance officer. In addition, all directors, officers and
employees shall provide compliance personnel with a listing of all brokerage
accounts in which the directors, officers or employee have a direct or indirect
interest upon commencing employment and on an annual basis thereafter. These
reports may be made using Exhibits A or C, as applicable.
(6) REVIEW OF REPORTS AND NOTIFICATION
Villanova will appoint compliance personnel to review all brokerage
account statements and Quarterly, Initial and Annual Reports to detect conflicts
of interest and abusive practices. In addition, the appropriate compliance
officer shall notify each Access Person that he or she is subject to the
reporting requirements provided under this Code of Ethics and shall deliver a
copy of this Code of Ethics to each person upon request.
F. REPORTING OF VIOLATIONS TO THE BOARDS
Any person, including the compliance officer, shall promptly report all
violations and apparent violations of this Code of Ethics and the reporting
requirements thereunder to the appropriate Board.
G. BOARD APPROVAL
(1) Upon its adoption, the compliance officer shall submit a copy of
the Code of Ethics to the board of each investment company Client for which an
Adviser serves as investment adviser or sub-adviser for approval no later than
September 1, 2000.
(2) Each Adviser is further required to obtain approval from each
investment company Client for any material changes to this Code of Ethics within
six (6) months of any such change.
H. ANNUAL REPORTING OF VILLANOVA TO INVESTMENT COMPANY CLIENTS
Each Adviser shall prepare a written annual report relating to its Code
of Ethics to the board of each investment company Client for which it acts as
investment adviser or sub-adviser. Such annual report shall:
(1) summarize existing procedures concerning personal investing and any
changes in the procedures made during the past year;
9
<PAGE> 10
(2) identify any material violations requiring significant remedial
action during the past year;
(3) identify any recommended changes in the existing restrictions or
procedures based upon experience under its Code of Ethics, evolving industry
practices or developments in applicable laws or regulations; and
(4) certify that the Adviser has adopted procedures reasonably
necessary to prevent Access Persons from violating its Code of Ethics.
I. SANCTIONS
Upon discovering a violation of this Code, the Boards may impose such
sanctions as they deem appropriate, including, among other things, issuing a
letter of censure or suspension or terminating the employment of the violator or
referring the matter to the appropriate regulatory or governmental authority.
J. RETENTION OF RECORDS
Each Adviser must, at its principal place of business, maintain records
in the manner and to the extent set out below and must make these records
available to the U.S. Securities and Exchange Commission ("SEC") or any
representative of the SEC at any time and from time to time for reasonable
periodic, special or other examination:
(1) A copy of this Code of Ethics, or any Code of Ethics which within
the past five (5) years has been in effect, shall be preserved in an easily
accessible place;
(2) A record of any violation of this Code of Ethics, and of any action
taken as a result of such violation, shall be preserved in an easily accessible
place for a period of not less than five (5) years following the end of the
fiscal year in which the violation occurs;
(3) A copy of each report made by an Access Person pursuant to this
Code of Ethics shall be preserved for a period of not less than five (5) years
from the end of the fiscal year in which it is made, the first two years in an
easily accessible place;
(4) A list of all persons who are, or within the past five (5) years
have been, required to make reports pursuant to this Code of Ethics shall be
maintained in an easily accessible place;
(5) A record of any decision, and the reasons supporting the decision,
to approve the acquisition by Investment Personnel of Covered Securities in a
private placement, as described in Section D(3) of this Code of Ethics, for at
least five years after the end of the fiscal year in which the approval is
granted; and
(6) A copy of each annual report required under Section H for at least
five (5) years after the end of the fiscal year in which it is made, the first
two in an accessible place.
Date: March 23, 2000
10
<PAGE> 11
EXHIBIT A
VILLANOVA
CODE OF ETHICS
INITIAL REPORT
To the Compliance Officer of Villanova:
1. I hereby acknowledge receipt of a copy of the Code of Ethics for
Villanova.
2. I have read and understand the Code and recognize that I am subject
thereto in the capacity of an "Access Person."
3. Except as noted below, I hereby certify that I have no knowledge of
the existence of any personal conflict of interest relationship which may
involve any Client, such as any economic relationship between my transactions
and Covered Securities held or to be acquired by any such Client.
4. As of the date below I had a direct or indirect beneficial ownership
in the following securities:
<TABLE>
<CAPTION>
Title of Security Number of Shares Dollar Amount Type of Interest
----------------- ---------------- of Transaction (Direct or Indirect)
-------------- --------------------
<S> <C> <C> <C>
</TABLE>
11
<PAGE> 12
5. I hereby represent that I maintain account(s) as of the date this
report is submitted in which Covered Securities are held for my direct or
indirect benefit with the brokers, dealers or banks listed below.
Name of Broker, Bank or Dealer with Whom
Account Maintained Date Established
------------------ ----------------
Name:
-------------------------------
Title:
------------------------------
Date Report Submitted:
--------------
12
<PAGE> 13
EXHIBIT B
VILLANOVA
CODE OF ETHICS
Quarterly Securities Transactions Report
For the Calendar Quarter Ended: _________
To the Compliance Officer of Villanova:
During the quarter referred to above, the following transactions were
effected in Covered Securities of which I had, or by reason of such transaction
acquired, direct or indirect beneficial ownership, and which are required to be
reported pursuant to the Code of Ethics adopted by Villanova.
<TABLE>
<CAPTION>
==================================================================================================================================
DATE OF NO. OF INTEREST RATE AND DOLLAR NATURE OF PRICE
TITLE OF TRANSACTION SHARES MATURITY DATE (if AMOUNT OF TRANSACTION BROKER/
SECURITY applicable) TRANSACTION (Purchase, Sale, DEALER
Other) OR BANK THROUGH
WHOM EFFECTED
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
==================================================================================================================================
</TABLE>
This report (i) excludes transactions with respect to which I had no
direct or indirect influence or control, (ii) other transactions not required to
be reported, and (iii) is not an admission that I have or had any direct or
indirect beneficial ownership in the Covered Securities listed above.
I hereby represent that I established the brokerage accounts listed
below, in which Covered Securities were held during the quarter referenced above
for my indirect or direct benefit. I further understand that in compliance with
the Code I must have copies of my monthly brokerage statements sent to the
compliance officer.
13
<PAGE> 14
Name of Broker, Dealer or Bank with Whom Date Established
Account Established ----------------
-------------------
Except as noted in this report, I hereby certify that I have no
knowledge of the existence of any personal conflict of interest relationship
which may involve any Client, such as the existence of any economic relationship
between my transactions and Covered Securities held or to be acquired by any
Client.
Name:
--------------------------
Title:
-------------------------
Date Report Submitted:
---------
14
<PAGE> 15
EXHIBIT C
VILLANOVA
CODE OF ETHICS
ANNUAL REPORT
To the Compliance Officer of Villanova:
1. I have read and understand the Code and recognize that I am subject
thereto in the capacity of an "Access Person."
2. I hereby certify that, during the year ended December 31, 200__, I
have complied with the requirements of the Code and I have reported all Covered
Securities transactions required to be reported pursuant to the Code.
3. Except as noted below, I hereby certify that I have no knowledge of
the existence of any personal conflict of interest relationship which may
involve a Client, such as any economic relationship between my transactions and
Covered Securities held or to be acquired by a Client.
4. As of December 31, 200__, I had a direct or indirect beneficial
ownership in the following Covered Securities:
<TABLE>
<CAPTION>
Principal Amount Type of Interest Broker/dealer or Bank
Title of Security Number of Shares of Securities Sold (Direct or Indirect) Through Whom Effected
----------------- ---------------- ------------------- -------------------- ---------------------
<S> <C> <C> <C> <C>
</TABLE>
15
<PAGE> 16
5. I hereby represent that I maintain the account(s) listed below in
which Covered Securities are held for my direct or indirect benefit with the
brokers, dealers or banks listed below.
Name of Broker, Bank or Dealer with Whom Date Established
Account Maintained ----------------
------------------
Name:
-----------------------------
Title:
----------------------------
Date Report Submitted:
-----------
16
<PAGE> 1
Exhibit (p)(3)
NATIONWIDE ADVISORY SERVICES, INC.
CODE OF ETHICS
The Board of Directors (the "Board") of Nationwide Advisory Services,
Inc. (the "Adviser" or "NAS") has adopted this Code of Ethics, in accordance
with Rule 17j-1 (the "Rule") under the Investment Company Act of 1940, as
amended, (the "Act"). The Rule makes it unlawful for certain employees of NAS,
in connection with the purchase or sale by such persons of securities held or to
be acquired by any Client (defined below):
(1) to employ any device, scheme or artifice to defraud a Client;
(2) to make to a Client any untrue statement of a material fact or omit
to state to a Client a material fact necessary in order to make the statements
made, in light of the circumstances under which they are made, not misleading;
(3) to engage in any act, practice or course of business which operates
or would operate as a fraud or deceit upon a Client; or
(4) to engage in a manipulative practice with respect to a Client.
While affirming its confidence in the integrity and good faith of all
of its employees, officers and directors, NAS recognizes that certain personnel
have or may have knowledge of present or future portfolio transactions and, in
certain instances, the power to influence portfolio transactions made by
Clients. Furthermore, if such individuals engage in personal Covered Securities
transactions, these individuals could be in a position where their personal
interests may conflict with the interests of Clients. Accordingly, this Code is
designed to prevent conduct that could create an actual or potential conflict of
interest with any NAS Client.
A. DEFINITIONS
(1) "Access Person" means any director (excluding any director who is
not also an officer of NAS or its affiliates), officer, or Advisory Person of
NAS (defined immediately below). With regard to investment company Clients for
whom NAS acts only as principal underwriter, the term "Access Person" shall
include any director or officer who, in the ordinary course of business, makes,
participates in or obtains information regarding the purchase or sale of Covered
Securities by the investment company Client, or whose regular functions or
duties relate to the making of any recommendation to an investment company
Client regarding the purchase or sale of Covered Securities.
(2) "Advisory Person" means (a) any employee of NAS (or of any company
in a control relationship to NAS) who, in connection with his or her regular
functions or duties, makes, participates in, or obtains information regarding
the purchase or sale of Covered Securities by a Client, or whose functions
relate to the making of any recommendations with respect to such purchases or
sales; and (b) any natural person in a control relationship to NAS
<PAGE> 2
who obtains information concerning recommendations made to a Client with regard
to the purchase or sale of Covered Securities by the Client.
(3) "Beneficial ownership" shall be interpreted in the same manner as
it would be in determining whether a person is considered a "beneficial owner"
as defined in Rule 16a-1(a)(2) under the Securities Exchange Act of 1934, as
amended, which generally speaking, encompasses those situations where the
beneficial owner has the right to enjoy some economic benefit from the ownership
of the Covered Security. A person is normally regarded as the beneficial owner
of Covered Securities held in the name of his or her spouse or minor children
living in his or her household.
(4) "Client" means (a) any investment company registered under the Act
or any series of a registered investment company for whom NAS acts as investment
adviser, sub-adviser or principal underwriter or (b) any separately managed
investment account which is advised by NAS.
(5) "Control" shall have the same meaning as set forth in Section
2(a)(9) of the Act.
(6) "Covered Security" shall have the meaning set forth in Section
2(a)(36) of the Act, except that it shall not include direct obligations of the
United States government, bankers' acceptances, bank certificates of deposit,
commercial paper, high quality short-term debt instruments (including repurchase
agreements) and shares of registered open-end investment companies.
(7) "Investment Personnel" means (a) any Portfolio Managers who are
employees of NAS as well as any other person such as a securities analyst and/or
trader who is an employee of NAS (or of any company in a control relationship to
NAS) who, in connection with his or her regular functions or duties, makes or
participates in the making of recommendations regarding a Client's purchase or
sale of securities (including providing information and advice to Portfolio
Managers or helping with the execution of a Portfolio Managers' decisions) or
(b) any natural person who controls NAS and who obtains information concerning
recommendations to a Client regarding the purchase or sale of securities by a
Client.
(8) "Portfolio Managers" means those individuals who, in connection
with his or her regular duties, are entrusted with the direct responsibility and
authority to make investment decisions affecting any Client.
(9) "Purchase or sale of a Covered Security" includes, among other
things, the writing of an option to purchase or sell a Covered Security.
(10) "Security held or to be acquired" by a Client means any Covered
Security which, within the most recent 15 days, (a) is or has been held by a
Client; (b) is being or has been considered for purchase by a Client; and (c)
any option to purchase or sell, and any Covered Security which is convertible
into or exchangeable for a Covered Security described in subparts (a) and (b) of
this definition.
2
<PAGE> 3
B. STATEMENT OF GENERAL PRINCIPLES
It is the duty of all directors, officers and employees to place the
interests of NAS' Clients, first at all times. Consistent with that duty, all
Access Persons and Investment Personnel of NAS must (1) conduct all personal
Covered Securities transactions in a manner that is consistent with this Code of
Ethics; (2) avoid any actual or potential conflict of personal interest with the
interests of NAS' Clients; and (3) adhere to the fundamental standard that they
should not take inappropriate advantage of their positions of trust and
responsibility.
THIS CODE OF ETHICS APPLIES TO TRANSACTIONS IN COVERED SECURITIES FOR
PERSONAL ACCOUNTS OF ALL DIRECTORS, OFFICERS, EMPLOYEES AND ADVISORY PERSONS OF
NAS AND ANY OTHER ACCOUNTS IN WHICH THEY HAVE ANY BENEFICIAL OWNERSHIP. IT
IMPOSES CERTAIN INVESTMENT RESTRICTIONS AND PROHIBITIONS AND REQUIRES THE
REPORTS SET FORTH BELOW. IF DIRECTORS, OFFICERS OR EMPLOYEES OF NAS BECOMES
AWARE OF MATERIAL NON-PUBLIC INFORMATION, OR IF A CLIENT IS ACTIVE IN A GIVEN
COVERED SECURITY, SOME PERSONNEL MAY FIND THEMSELVES "FROZEN" IN A POSITION. NAS
WILL NOT BEAR ANY LOSSES IN PERSONAL ACCOUNTS RESULTING FROM THE IMPLEMENTATION
OF ANY PORTION OF THE CODE OF ETHICS.
C. GENERAL PROHIBITIONS
(1) All directors, officers and employees of NAS shall keep all
information pertaining to Clients' portfolio transactions confidential. No
person with access to Covered Securities holdings, recommendations or pending
transactions should disclose this information to any person, unless such
disclosure is made in connection with his or her regular functions or duties.
Special care should be taken to avoid discussing confidential information in
circumstances which would disclose this information to anyone who would not have
access to such information in the normal course of events.
(2) No Access Person shall utilize information concerning prospective
or actual portfolio transactions in any manner which might prove detrimental to
the interests of a Client.
(3) No Access Person shall use his or her position for his or her
personal benefit or attempt to cause a Client to purchase, sell or hold a
particular Covered Security when that action may reasonably be expected to
create a personal benefit for the Access Person.
(4) No Access Person shall engage in any act, practice or course of
conduct, which would violate the provisions of the Rule set forth above.
D. PERSONAL TRADING RESTRICTIONS
(1) Pre-clearance
-------------
Access Persons are required to pre-clear personal Covered Securities
transactions (excluding those exempted under Section D(8) below) with the
designated compliance personnel. Requests for pre-clearance must be made in
writing on the Pre-clearance Request Form provided by the compliance officer.
Transactions should not be placed for execution until pre-clearance
3
<PAGE> 4
approval has been received. Pre-clearance approval is good only for the day
received; therefore, orders should be placed as market or day limit orders. If
for any reason the trade is not executed on the day on which pre-clearance
approval is received, the Access Person must submit a new request and receive
approval prior to placing any subsequent order.
(2) Initial Public Offerings ("IPOs")
---------------------------------
Investment Personnel are prohibited from acquiring any Covered Security
in an IPO. Investment Personnel may, however, request and receive approval to
participate in a conversion offering (as described in NASD's Freeriding and
Withholding Interpretations ("NASD Rules")). In approving any such request, the
onus for substantiating and documenting compliance with the NASD Rules rests on
the individual seeking approval. Also, notwithstanding proof of compliance with
the NASD Rules, approval may be withheld if the reviewing compliance personnel
believes that an actual or potential conflict of interest exists with respect to
any Client.
(3) Private Placements
------------------
Investment Personnel must obtain prior approval from the appropriate
compliance officer before acquiring Covered Securities in a private placement.
In determining whether to grant such prior approval, the appropriate officer
shall determine (among other factors) whether the investment opportunity should
be reserved for a Client(s), and whether the opportunity is being offered to the
individual by virtue of his or her position with NAS. Any Investment Personnel
who have been authorized to acquire Covered Securities in a private placement,
must disclose that investment when he or she is involved in any subsequent
consideration of an investment by a Client in that issuer. In such
circumstances, Investment Personnel with no personal interest in the particular
issuer shall independently review the Client's decision to purchase that
issuer's Covered Securities.
(4) 60 Day Holding Period
---------------------
Investment Personnel shall not profit from the purchase and sale, or
sale and purchase, of the same (or equivalent) Covered Securities within sixty
(60) calendar days. Trades made in violation of this policy should be unwound,
if possible. In the event such trades cannot be unwound, any profits realized on
such short-term trades shall be subject to disgorgement to the appropriate
Client account or the account of NAS.
(5) Blackout Period
---------------
(a) Same Day
--------
Access Persons are prohibited from executing any personal
Covered Securities transaction on a day when a Client has a pending buy
or sell order in that same Covered Security. This prohibition shall be
lifted once the Client executes or withdraws its order for the Covered
Security in question. However, directors of NAS who are not officers of
NAS or any of its affiliates and who, on the day they execute a
personal Covered
4
<PAGE> 5
Securities transaction, have no knowledge of what a Client is trading
on that day, are not subject to the Same Day Blackout Period.
(b) Seven Day
---------
All Portfolio Managers are prohibited from executing any
personal Covered Securities transactions within seven (7) calendar days
before or after the day any Client advised by such person trades in
that Covered Security.
(c) Trades made in violation of these blackout periods should
be unwound, if possible. Otherwise, any profits realized on such
short-term trades shall be subject to disgorgement to the appropriate
Client account or the account of NAS.
(6) Gifts
-----
No Investment Personnel shall seek or accept anything of more than de
minimis value, either directly or indirectly, from broker-dealers or other
persons, which to the actual knowledge of the Investment Personnel, do business
or might do business with a Client or NAS. For purposes of this provision, the
following gifts will not be considered to be in violation of this section: (a)
an occasional meal; (b) an occasional ticket to a sporting event, the theater or
comparable entertainment; and (c) other gifts of nominal cost.
(7) Exempted Transactions
---------------------
The prohibitions of Section (D)(4)-(5) of this Code of Ethics shall not
apply to:
(a) purchases or sales effected in any account over which the
Access Person or Investment Personnel has no direct or indirect
influence or control;
(b) purchases or sales which are nonvolitional(1) on the part
of the Access Person, Investment Personnel or a Client;
(c) purchases which are part of an automatic dividend
reinvestment plan; or
(d) purchases effected upon the exercise of rights issued by
an issuer pro-rata to all holders of a class of its Covered Securities,
to the extent such rights were acquired from such issuer, and sales of
such rights so acquired.
(8) Access Persons are generally required to obtain pre-clearance
before executing any trade. However, in certain instances an Access Person is
relieved from obtaining pre-clearance, but must report the transaction. In other
instances, the Access Person is relieved of both of the duty to obtain
pre-clearance and to report the transaction.
- ----------
(1) Nonvolitional purchases or sales include those transactions which do not
involve a willing act or conscious decision on the part of the director, officer
or employee. For example, shares received or disposed of by Access Persons or
Investment Personnel in a merger, recapitalization or similar transaction are
considered nonvolitional.
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<PAGE> 6
(a) Access Persons do not have to pre-clear the following
transactions, but must report them:
(i) Stocks when the total purchase/sale of the particular
issuer is 500 shares or fewer in a calendar quarter.
(ii) Option contracts on stock when the total
purchase/sale of the contract is 500 shares or fewer of a
particular issuer in any calendar quarter.
(iii) Corporate debt Covered Securities (2) rated in the
highest grades by any Nationally Rated Statistical Rating
Organization if the purchase/sale is $25,000.00 or less per
issue in any calendar quarter.
(iv) Municipal bonds if the purchase/sale is $25,000.00 or
less per issue in any calendar quarter.
*PROVISION (8)(a) AND ITS SUB-PARTS DO NOT RELIEVE
ACCESS PERSONS OF THEIR DUTY TO REPORT THE TRANSACTIONS
DESCRIBED THEREIN. FURTHERMORE, THIS PROVISION DOES NOT APPLY
TO TRANSACTIONS COVERED UNDER SECTIONS D(2) AND D(3).
(b) The following transactions are exempt from the
prohibitions contained in this Code of Ethics, do not require prior
clearance and do not have to be reported (securities which do not
qualify as Covered Securities under this Code of Ethics are also exempt
from these reporting requirements):
(i) Variable annuities.
(ii) Oil, gas or other mineral leases.
(iii) Commodities, commodity contracts or futures
contracts.
(9) Investment Personnel are prohibited from serving on the boards of
directors of publicly traded companies, absent prior authorization by the
appropriate compliance officer. Such authorization should be based upon a
determination that the board service would be consistent with the interests of
Clients. Where service on a board of directors is authorized, Investment
Personnel serving as directors should be isolated from those making investment
decisions regarding the company through "Chinese Wall" procedures.
E. REPORTING, DISCLOSURE AND CERTIFICATION REQUIREMENTS
(1) Initial Holdings Reports
------------------------
- ----------
(2) Corporate debt Covered Securities which are rated in the highest grades have
an extremely strong capacity to pay principal and interest. The following
Corporate debt Covered Securities are considered to have the highest ratings:
(a) bonds rated AA or higher by Standard & Poor's Corporation; (b) bonds rated
Aa or higher by Moody's Investors Service, Inc.; and (c) bonds rated A or higher
by Fitch or Duff.
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<PAGE> 7
All Access Persons shall disclose all personal Covered Securities
holdings to the appropriate compliance officer. The Initial Report shall be made
on the form attached as Exhibit A and shall contain the following information:
(a) the title, number of shares and principal amount of each
Covered Security in which the Access Person had any direct or indirect
beneficial ownership when the person became an Access Person;
(b) the name of any broker, dealer or bank with whom the
Access Person maintained an account in which any Covered Securities
were held for the direct or indirect benefit of the Access Person as of
the date the person became an Access Person; and
(c) the date that the report is submitted by the Access
Person.
All Access Persons currently employed by NAS shall submit an Initial
Report to the appropriate compliance officer within ten days of the date of this
Code of Ethics. All other Initial Reports shall be made no later than 10 days
after the person becomes an Access Person.
(2) Quarterly Reports
-----------------
(a) All Access Persons shall report to the appropriate
compliance officer, the information described below in Sub-paragraph
(2)(c) of this Section with respect to transactions in any Covered
Security in which such person has, or by reason of such transaction
acquires, any direct or indirect beneficial ownership in the Covered
Security.
(b) Reports required to be made under this Paragraph (2) shall
be made not later than 10 days after the end of the calendar quarter in
which the transaction to which the report relates was effected. All
Access Persons shall be required to submit a report for all periods,
including those periods in which no Covered Securities transactions
were effected. A report shall be made on the form attached hereto as
Exhibit B or on any other form containing the following information:
(i) the date of the transaction, the title of the
Covered Security, the interest rate and maturity date (if
applicable), the number of shares, and the principal amount of
each Covered Security involved;
(ii) the nature of the transaction (i.e., purchase,
sale or any other type of acquisition or disposition);
(iii) the price at which the transaction was
effected;
(iv) the name of the broker, dealer or bank with or
through whom the transaction was effected; and
(v) the date the report is submitted.
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<PAGE> 8
(c) Any such report may contain a statement that the report
shall not be construed as an admission by the person making such report
that he or she has any direct or indirect beneficial ownership in the
Covered Security to which the report relates.
(d) All Access Persons shall direct their brokers to supply
duplicate copies of all monthly brokerage statements (excluding
confirmations) for all Covered Securities accounts maintained by the
Access Person to the appropriate compliance officer, on a timely basis.
In addition, with respect to any account established by the Access
Person in which any Covered Securities were held during the quarter for
the direct or indirect benefit of the Access Person, the Access Person
shall report the following information:
(i) (vi) the name of the broker, dealer or bank with
whom the Access Person established the
account;
(ii) (vii) the date the account was established; and
(iii) (viii) the date the report is submitted.
(3) Annual Holdings Reports
-----------------------
All Access Persons shall disclose all personal Covered Securities
holdings on an annual basis on the Form attached as Exhibit C within 30 days
after the end of the calendar year. All Annual Reports shall provide information
on personal Covered Securities holdings that is current as of a date no more
than 30 days before the Annual Report is submitted. Such Annual Reports shall
contain the following information:
(a) the title, number of shares and principal amount of each
Covered Security in which the Access Person had any direct or indirect
beneficial ownership;
(b) the name of any broker, dealer or bank with whom the
Access Person maintains an account in which any Covered Securities are
held for the direct or indirect benefit of the Access Person; and
(c) the date that the report is submitted by the Access
Person.
(4) Certification of Compliance with Code of Ethics
-----------------------------------------------
All Access Persons shall certify annually that:
(a) they have read and understand the Code of Ethics and
recognize that they are subject to its provisions;
(b) they have complied with the requirements of the Code of
Ethics; and
(c) they have reported all personal Covered Securities
transactions required to be reported pursuant to the requirements of
the Code of Ethics.
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<PAGE> 9
(5) Personal Brokerage Accounts
---------------------------
No director, officer or employee shall open a personal brokerage
account directly or indirectly without obtaining prior authorization from the
appropriate compliance officer. In addition, all directors, officers and
employees of NAS shall provide compliance personnel with a listing of all
brokerage accounts in which the director, officer or employee has a direct or
indirect interest upon commencing employment and on an annual basis thereafter.
These reports may be made using Exhibits A or C, as applicable.
(6) Review of Reports and Notification
----------------------------------
NAS will appoint compliance personnel to review all brokerage account
statements and Quarterly, Initial and Annual Reports to detect conflicts of
interest and abusive practices. In addition, the appropriate compliance officer
of NAS shall notify each Access Person that he or she is subject to the
reporting requirements provided under this Code of Ethics and shall deliver a
copy of this Code of Ethics to each person upon request.
F. REPORTING OF VIOLATIONS TO THE BOARDS
Any person, including the compliance officer, shall promptly report all
violations and apparent violations of this Code of Ethics and the reporting
requirements thereunder to the Board.
G. BOARD APPROVAL
(1) Upon its adoption, the compliance officer shall submit a copy of
the Code of Ethics to the board of each investment company Client for which NAS
serves as investment adviser, sub-adviser or principal underwriter for approval
no later than September 1, 2000.
(2) NAS is further required to obtain approval from each investment
company Client for any material changes to this Code of Ethics within six (6)
months of any such change.
H. ANNUAL REPORTING OF NAS TO INVESTMENT COMPANY CLIENTS
NAS shall prepare a written annual report relating to its Code of
Ethics to the board of each investment company Client for which it acts as
investment adviser, sub-adviser or principal underwriter. Such annual report
shall:
(1) summarize existing procedures concerning personal investing and any
changes in the procedures made during the past year;
(2) identify any material violations requiring significant remedial
action during the past year;
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<PAGE> 10
(3) identify any recommended changes in the existing restrictions or
procedures based upon experience under its Code of Ethics, evolving industry
practices or developments in applicable laws or regulations; and
(4) certify that NAS has adopted procedures reasonably necessary to
prevent Access Persons from violating this Code of Ethics.
I. SANCTIONS
Upon discovering a violation of this Code, the Board may impose such
sanctions as it deems appropriate, including, among other things, issuing a
letter of censure or suspension or terminating the employment of the violator or
referring the matter to the appropriate regulatory or governmental authority.
J. RETENTION OF RECORDS
The Adviser must, at its principal place of business, maintain records
in the manner and to the extent set out below and must make these records
available to the U.S. Securities and Exchange Commission ("SEC") or any
representative of the SEC at any time and from time to time for reasonable
periodic, special or other examination:
(1) A copy of this Code of Ethics, or any Code of Ethics which within
the past five (5) years has been in effect, shall be preserved in an easily
accessible place;
(2) A record of any violation of this Code of Ethics, and of any action
taken as a result of such violation, shall be preserved in an easily accessible
place for a period of not less than five (5) years following the end of the
fiscal year in which the violation occurs;
(3) A copy of each report made by an Access Person pursuant to this
Code of Ethics shall be preserved for a period of not less than five (5) years
from the end of the fiscal year in which it is made, the first two years in an
easily accessible place;
(4) A list of all persons who are, or within the past five (5) years
have been, required to make reports pursuant to this Code of Ethics shall be
maintained in an easily accessible place;
(5) A record of any decision, and the reasons supporting the decision,
to approve the acquisition by Investment Personnel of Covered Securities in a
private placement, as described in Section D(3) of this Code of Ethics, for at
least five (5) years after the end of the fiscal year in which the approval is
granted; and
(6) A copy of each annual report required under Section H for at least
five (5) years after the end of the fiscal year in which it is made, the first
two in an accessible place.
Date: March 23, 2000
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<PAGE> 11
Exhibit A
---------
NATIONWIDE ADVISORY SERVICES, INC.
CODE OF ETHICS
INITIAL REPORT
To the Compliance Officer of NAS:
1. I hereby acknowledge receipt of a copy of the Code of Ethics for
NAS.
2. I have read and understand the Code and recognize that I am subject
thereto in the capacity of an "Access Person."
3. Except as noted below, I hereby certify that I have no knowledge of
the existence of any personal conflict of interest relationship which may
involve any Client, such as any economic relationship between my transactions
and Covered Securities held or to be acquired by any such Client.
4. As of the date below I had a direct or indirect beneficial ownership
in the following Covered Securities:
Title of Security Number of Shares Dollar Amount Type of Interest
----------------- ---------------- of Transaction (Direct or Indirect)
-------------- --------------------
5. I hereby represent that I maintain account(s) as of the date this
report is submitted in which Covered Securities are held for my direct or
indirect benefit with the brokers, dealers or banks listed below.
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<PAGE> 12
Name of Broker, Bank or Dealer with Whom Date Established
Account Maintained ----------------
------------------
Name:
--------------------------------------
Title:
------------------------------------
Date Report Submitted:
--------------------
12
<PAGE> 13
Exhibit B
---------
NATIONWIDE ADVISORY SERVICES, INC.
CODE OF ETHICS
Quarterly Securities Transactions Report
For the Calendar Quarter Ended: _________
To the Compliance Officer of NAS:
During the quarter referred to above, the following transactions were
effected in Covered Securities of which I had, or by reason of such transaction
acquired, direct or indirect beneficial ownership, and which are required to be
reported pursuant to the Code of Ethics adopted by NAS.
<TABLE>
<CAPTION>
========================================================================================================================
TITLE OF DATE OF NO. OF INTEREST RATE AND DOLLAR NATURE OF PRICE BROKER/
SECURITY TRANSACTION SHARES MATURITY DATE (if AMOUNT OF TRANSACTION DEALER
applicable) TRANSACTION (Purchase, Sale, OR BANK THROUGH
Other) WHOM EFFECTED
<S> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
========================================================================================================================
</TABLE>
This report (i) excludes transactions with respect to which I had no
direct or indirect influence or control, (ii) other transactions not required to
be reported, and (iii) is not an admission that I have or had any direct or
indirect beneficial ownership in the Covered Securities listed above.
I hereby represent that I established the brokerage accounts listed
below, in which Covered Securities were held during the quarter referenced above
for my indirect or direct benefit. I further understand that in compliance with
the Code I must have copies of my monthly brokerage statements sent to the
compliance officer.
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<PAGE> 14
Name of Broker, Dealer or Bank with Whom Date Established
Account Established ----------------
-------------------
Except as noted in this report, I hereby certify that I have no
knowledge of the existence of any personal conflict of interest relationship
which may involve any Client, such as the existence of any economic relationship
between my transactions and Covered Securities held or to be acquired by any
Client.
Name:
----------------------------
Title:
----------------------------
Date Report Submitted:
------------
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Exhibit C
---------
NATIONWIDE ADVISORY SERVICES, INC.
CODE OF ETHICS
ANNUAL REPORT
To the Compliance Officer of NAS:
1. I have read and understand the Code and recognize that I am subject
thereto in the capacity of an "Access Person."
2. I hereby certify that, during the year ended December 31, 200__, I
have complied with the requirements of the Code and I have reported all Covered
Securities transactions required to be reported pursuant to the Code.
3. Except as noted below, I hereby certify that I have no knowledge of
the existence of any personal conflict of interest relationship which may
involve a Client, such as any economic relationship between my transactions and
Covered Securities held or to be acquired by a Client.
4. As of December 31, 200__, I had a direct or indirect beneficial
ownership in the following Covered Securities:
<TABLE>
<CAPTION>
Principal Amount Type of Interest Broker/Dealer or Bank
Title of Security Number of Shares of Securities Sold (Direct or Indirect) Through Whom Effected
----------------- ---------------- ------------------ -------------------- ---------------------
<S> <C> <C> <C> <C>
</TABLE>
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<PAGE> 16
5. I hereby represent that I maintain the account(s) listed below in
which Covered Securities are held for my direct or indirect benefit with the
brokers, dealers or banks listed below.
Name of Broker, Bank or Dealer with Whom Date Established
Account Maintained ----------------
------------------
Name:
---------------------------------
Title:
--------------------------------
Date Report Submitted:
----------------
16
