<PAGE> 1
As filed with the Securities and Exchange Commission on March 27, 1998
File Nos. 2-86188; 811-3836
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES
ACT OF 1933
Pre-Effective Amendment No. ___
Post-Effective Amendment No. 28 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940 ___
Amendment No. 28 [X]
(Check appropriate box or boxes)
ANCHOR SERIES TRUST
(Exact Name of Registrant as Specified in Charter)
The SunAmerica Center
733 Third Avenue - 3rd Floor
New York, NY 10017-3204
(Address of Principal Executive Office)(Zip Code)
Registrant's telephone number, including area code: (800) 858-8850
Robert M. Zakem, Esq.
Senior Vice President and General Counsel
SunAmerica Asset Management Corp.
The SunAmerica Center
733 Third Avenue - 3rd Floor
New York, NY 10017-3204
(Name and Address of Agent for Service)
Copy to:
Susan L. Harris, Esq.
SunAmerica Inc.
1 SunAmerica Center, Century City
Los Angeles, CA 90067-6022
It is proposed that this filing will become effective (check appropriate box)
immediately upon filing pursuant X on April 1, 1998 pursuant
to paragraph (b) to paragraph (b)
__ 60 days after filing pursuant __ on (date) pursuant to
to paragraph (a) paragraph (a) of Rule 485
--------------------
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<PAGE> 2
ANCHOR SERIES TRUST
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
Item Number
in Form N-1A Caption
PART A - PROSPECTUS
<S> <C> <C>
1. Cover Page Cover Page
2. Synopsis - Fee Table *
3. Condensed Financial Financial Highlights
Information
4. General Description of The Trust; Investment Objectives and
Registrant Policies; Investment Restrictions;
Special Considerations; and
Description of the Trust
5. Management of the Fund Management of the Trust
5A. Management's Discussion of Cover Page
Fund Performance
6. Capital Stock and Other The Trust; Description of the Trust
Securities
7. Purchase of Securities The Trust; Net Asset Value;
Being Offered Distribution and Redemption of
Shares; Inquiries
8. Redemption or Repurchase The Trust; Distribution and
Redemption of Shares; Inquires
9. Pending Legal Proceedings *
PART B - STATEMENT OF ADDITIONAL INFORMATION
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information and The Trust; General Information;
History Ownership of Shares
13. Investment Objectives Investment Objectives and Policies
14. Management of the Fund SunAmerica Asset Management Corp.;
Officers and Trustees of the Trust
15. Control Persons and Ownership of Shares
Principal Holders of Securities
16. Investment Advisory and SunAmerica Asset Management Corp.
Other Services and Wellington Management Company;
Custodian
17. Brokerage Allocation and Portfolio Transactions and Brokerage
Other Practices
18. Capital Stock and Other General Information
Securities
19. Purchase, Redemption and Net Asset Value
Pricing of Securities
Being Offered
20. Tax Status Dividends, Distributions and Taxes
21. Underwriters *
22. Calculation of Performance Net Asset Value
Data
23. Financial Statements Financial Statements
</TABLE>
PART C
<PAGE> 3
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C of this Registration Statement.
* Omitted from the Prospectus or Statement of Additional Information
because the item is not applicable.
<PAGE> 4
PROSPECTUS -- APRIL 1, 1998
- --------------------------------------------------------------------------------
ANCHOR SERIES TRUST
- --------------------------------------------------------------------------------
P.O. BOX 54299
LOS ANGELES, CALIFORNIA, 90054-0299
Anchor Series Trust (the "Trust") is an open-end diversified management
investment company. The Trust includes twelve Portfolios, each of which has its
own investment objective and policies.
Shares of the Trust are issued and redeemed only in connection with
investments in and payments under variable annuity contracts and variable life
insurance policies. The contracts involve fees and expenses not described in
this Prospectus and may also involve certain restrictions or limitations on the
allocation of purchase payments or contract values to one or more series of the
Trust. Certain Portfolios of the Trust may not be available in connection with a
particular contract. See the applicable contract prospectus for information
regarding contract fees and expenses and any restrictions or limitations.
The twelve Portfolios of the Trust are as follows:
The FOREIGN SECURITIES PORTFOLIO seeks long-term capital appreciation
through investment primarily in equity securities issued by foreign companies.
The CAPITAL APPRECIATION PORTFOLIO seeks long-term capital appreciation.
This Portfolio invests in growth equity securities which are widely diversified
by industry and company.
The GROWTH PORTFOLIO seeks capital appreciation primarily through
investments in growth equity securities.
The NATURAL RESOURCES PORTFOLIO seeks a total return in excess of the U.S.
rate of inflation as represented by the Consumer Price Index. This Portfolio
invests primarily in equity securities of U.S. or foreign companies which are
expected to provide favorable returns in periods of rising inflation.
The GROWTH AND INCOME PORTFOLIO seeks to provide high current income and
long-term capital appreciation by investing primarily in securities that provide
the potential for growth and offer income, such as dividend-paying stocks and
securities convertible into common stock.
The STRATEGIC MULTI-ASSET PORTFOLIO seeks high long-term total investment
return by actively allocating the Portfolio's assets among the following asset
classes: equity securities of U.S. and foreign companies, aggressive growth
equity securities, global fixed income securities including high-yield,
high-risk bonds and cash.
(The list of Portfolios continues on the next page.)
As a result of the market risk inherent in any investment, there is no
assurance that the investment objective of any of the Portfolios will be
realized. INVESTMENTS IN A PORTFOLIO ARE NEITHER INSURED NOR GUARANTEED BY THE
U.S. GOVERNMENT OR ANY OTHER ENTITY OR PERSON.
This Prospectus sets forth concisely the information that a prospective
investor should know before investing in the Trust. Please read it carefully and
retain it for future reference. A Statement of Additional Information dated
April 1, 1998 has been filed with the Securities and Exchange Commission.
Further information about the performance of the Portfolios is contained in the
Trust's Annual Report to Shareholders. The Annual Report to Shareholders and the
Statement of Additional Information may be obtained upon request and without
charge by writing to the Trust at the above address or by calling (800)
445-SUN2.
----------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
----------------------------------------
<PAGE> 5
The MULTI-ASSET PORTFOLIO seeks long-term total investment return
consistent with moderate investment risk by allocating the Portfolio's assets
among the following asset classes: equity securities, investment grade fixed
income securities and cash.
The HIGH YIELD PORTFOLIO seeks to produce high current income. A secondary
investment objective is capital appreciation. The Portfolio invests in
high-yielding, high-risk, income producing corporate bonds. IN ADDITION TO OTHER
RISKS, THESE HIGH-YIELD, HIGH-RISK BONDS (ALSO KNOWN AS "JUNK BONDS") TYPICALLY
ARE SUBJECT TO GREATER MARKET FLUCTUATIONS AND RISK LOSS OF INCOME AND PRINCIPAL
DUE TO DEFAULT BY THE ISSUER THAN ARE INVESTMENTS IN LOWER-YIELDING,
HIGHER-RATED BONDS. SEE "RISK FACTORS -- HIGH YIELD BONDS" UNDER "HIGH YIELD
PORTFOLIO" FOR A DISCUSSION OF THE RISKS ASSOCIATED WITH HIGH-YIELD, HIGH-RISK
SECURITIES.
The TARGET '98 PORTFOLIO seeks a predictable compounded investment return
for the specified time period, consistent with preservation of capital by
investing primarily in zero coupon securities maturing NOVEMBER 15, 1998 and
current interest-bearing, investment grade debt obligations which are issued by
the U.S. Government, its agencies and instrumentalities, and both domestic and
foreign corporations. EFFECTIVE JANUARY 1, 1998, SHARES OF THE PORTFOLIO ARE NO
LONGER AVAILABLE FOR PURCHASE, NOR ARE ANY TRANSFERS INTO THE PORTFOLIO
PERMITTED.
The FIXED INCOME PORTFOLIO seeks a high level of current income consistent
with preservation of capital and invests primarily in investment grade, fixed
income securities.
The GOVERNMENT AND QUALITY BOND PORTFOLIO seeks relatively high current
income, liquidity and security of principal. This Portfolio invests in
obligations issued, guaranteed or insured by the U.S. Government, its agencies
or instrumentalities and in investment grade corporate debt securities.
The MONEY MARKET PORTFOLIO seeks current income consistent with stability
of principal through investment in a diversified portfolio of money market
instruments maturing in 397 days or less. THE MONEY MARKET PORTFOLIO SEEKS TO
MAINTAIN A STABLE PRICE PER SHARE, BUT THERE IS NO ASSURANCE THAT THIS PORTFOLIO
WILL CONTINUE TO MAINTAIN SUCH STABILITY.
<PAGE> 6
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM PAGE
---- ----
<S> <C>
FINANCIAL HIGHLIGHTS........................................ 2
THE TRUST................................................... 5
INVESTMENT OBJECTIVES AND POLICIES.......................... 5
EQUITY PORTFOLIOS....................................... 5
Foreign Securities Portfolio.......................... 5
Capital Appreciation Portfolio........................ 6
Growth Portfolio...................................... 7
Natural Resources Portfolio........................... 7
GROWTH AND INCOME PORTFOLIO............................. 8
ALLOCATION PORTFOLIOS................................... 9
Strategic Multi-Asset and Multi-Asset Portfolios...... 9
Asset Allocation Approach............................. 10
INCOME PORTFOLIOS....................................... 11
High Yield Portfolio.................................. 11
Target '98 Portfolio.................................. 12
Fixed Income Portfolio................................ 14
Government and Quality Bond Portfolio................. 14
MONEY MARKET PORTFOLIO.................................. 15
REPURCHASE AGREEMENTS................................... 16
ILLIQUID SECURITIES..................................... 17
HEDGING AND INCOME ENHANCEMENT STRATEGIES............... 17
Options Transactions.................................. 17
Futures Contracts and Options Thereon................. 17
Foreign Currency Hedging or Income Enhancement
Strategies........................................... 18
Special Risks of Hedging and Income Enhancement
Strategies........................................... 18
Forward Commitments................................... 18
INVESTMENT RESTRICTIONS..................................... 18
SPECIAL CONSIDERATIONS...................................... 19
MANAGEMENT OF THE TRUST..................................... 19
The Trustees............................................ 19
SunAmerica Asset Management Corp. ...................... 19
Wellington Management Company, LLP...................... 20
Portfolio Management.................................... 21
Custodian, Transfer and Dividend Paying Agent........... 22
PORTFOLIO TRANSACTIONS...................................... 22
NET ASSET VALUE............................................. 22
DIVIDENDS, DISTRIBUTIONS AND TAXES.......................... 23
DESCRIPTION OF THE TRUST.................................... 23
REPORTS AND INDEPENDENT ACCOUNTANTS......................... 23
DISTRIBUTION AND REDEMPTION OF SHARES; INQUIRIES............ 24
GENERAL INFORMATION......................................... 24
Year 2000 Compliance.................................. 24
APPENDIX A
</TABLE>
(i)
<PAGE> 7
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FINANCIAL HIGHLIGHTS*
- --------------------------------------------------------------------------------
ANCHOR SERIES TRUST
The following selected Financial Highlights have been audited by Price
Waterhouse LLP, independent accountants, whose unqualified report for the 5
years in the period ended December 31, 1997 is included in the Trust's Annual
Report. This information should be read in conjunction with the financial
statements and notes thereto, which are included in the Statement of Additional
Information.
<TABLE>
<CAPTION>
DIVIDENDS
NET REALIZED DECLARED DIVIDENDS NET NET
NET ASSET NET & UNREALIZED TOTAL FROM FROM NET FROM NET ASSET ASSETS
VALUE INVEST- GAIN (LOSS) INVEST- INVEST- REALIZED VALUE END OF
YEAR BEGINNING MENT ON MENT MENT GAIN ON END OF TOTAL PERIOD
ENDED OF PERIOD INCOME INVESTMENTS OPERATIONS INCOME INVESTMENTS PERIOD RETURN** (000'S)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Foreign Securities Portfolio
12/31/88 $ 8.78 $ 0.11+ $ 1.82 $ 1.93 $(0.08) $-- $ 10.63 22.0% $ 16,785
12/31/89 10.63 0.13 2.96 3.09 (0.02) -- 13.70 29.1 45,261
12/31/90 13.70 0.18 (1.88) (1.70) (0.30) (1.45) 10.25 (12.8) 34,237
12/31/91 10.25 0.07 (0.09) (0.02) (0.12) -- 10.11 (0.3) 30,823
12/31/92 10.11 0.13 (1.43) (1.30) (0.06) (0.28) 8.47 (13.1) 29,204
12/31/93 8.47 0.05 2.50 2.55 (0.09) -- 10.93 30.2 72,579
12/31/94 10.93 0.11 (0.46) (0.35) (0.03) -- 10.55 (3.2) 68,641
12/31/95 10.55 0.13 1.19 1.32 (0.05) (0.01) 11.81 12.6 53,609
12/31/96 11.81 0.15 1.19 1.34 (0.21) -- 12.94 11.5 48,036
12/31/97 12.94 0.11 (0.14) (0.03) (0.31) (1.20) 11.40 (1.0) 36,148
<CAPTION>
RATIO OF NET
RATIO OF INVESTMENT
EXPENSES INCOME TO PORTFOLIO AVERAGE
YEAR TO AVERAGE AVERAGE NET TURNOVER COMMISSION
ENDED NET ASSETS ASSETS RATE PER SHARE @
- --------- -----------------------------------------------------
<S> <C> <C> <C> <C>
12/31/88 1.7%+ 1.1%+ 79.5% $ N/A
12/31/89 1.8 1.1 61.8 N/A
12/31/90 1.7 1.3 75.1 N/A
12/31/91 1.4 0.7 64.2 N/A
12/31/92 1.3 1.4 144.2 N/A
12/31/93 1.3 0.5 47.7 N/A
12/31/94 1.2 1.0 73.9 N/A
12/31/95 1.2 1.2 33.0 N/A
12/31/96 1.4 1.2 74.3 0.0062
12/31/97 1.4 0.9 79.9 0.0056
<CAPTION>
Capital Appreciation Portfolio
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
12/31/88 7.95 0.09 1.64 1.73 (0.05) -- 9.63 21.1 19,976
12/31/89 9.63 0.18 2.23 2.41 (0.01) -- 12.03 25.0 35,951
12/31/90 12.03 0.13 (2.04) (1.91) (0.29) (0.02) 9.81 (16.2) 27,568
12/31/91 9.81 0.09 5.41 5.50 (0.01) (0.07) 15.23 56.1 45,976
12/31/92 15.23 0.01 3.70 3.71 (0.07) (1.12) 17.75 25.9 83,414
12/31/93 17.75 (0.03) 3.73 3.70 (0.01) (1.16) 20.28 21.1 182,515
12/31/94 20.28 (0.02) (0.71) (0.73) -- (2.04) 17.51 (3.8) 229,544
12/31/95 17.51 0.06 6.00 6.06 (0.15) (0.20) 23.22 34.6 356,218
12/31/96 23.22 0.06 5.73 5.79 (0.06) (0.95) 28.00 25.1 567,672
12/31/97 28.00 0.02 7.05 7.07 (0.05) (2.81) 32.21 25.4 814,311
<CAPTION>
<S> <C> <C> <C> <C>
12/31/88 1.1 1.0 30.3 N/A
12/31/89 1.0 1.6 30.9 N/A
12/31/90 1.0 1.2 37.2 N/A
12/31/91 1.0 0.7 72.9 N/A
12/31/92 0.9 0.1 92.9 N/A
12/31/93 0.9 (0.2) 111.2 N/A
12/31/94 0.8 (0.1) 64.0 N/A
12/31/95 0.8 0.3 60.1 N/A
12/31/96 0.8 0.2 69.2 0.0517
12/31/97 0.7 0.1 60.1 0.0548
<CAPTION>
Growth Portfolio
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
12/31/88 12.45 0.22 1.37 1.59 -- -- 14.04 12.8 195,105
12/31/89 14.04 0.31 3.91 4.22 (0.29) -- 17.97 30.1 171,593
12/31/90 17.97 0.27 (0.50) (0.23) (0.56) (1.72) 15.46 (1.6) 151,527
12/31/91 15.46 0.22 6.05 6.27 (0.12) (0.21) 21.40 40.8 231,857
12/31/92 21.40 0.09 0.99 1.08 (0.19) (0.62) 21.67 5.4 279,291
12/31/93 21.67 0.05 1.60 1.65 (0.08) (0.92) 22.32 7.8 311,050
12/31/94 22.32 0.05 (1.03) (0.98) (0.05) (3.11) 18.18 (4.7) 246,149
12/31/95 18.18 0.11 4.62 4.73 (0.05) (3.38) 19.48 26.3 307,857
12/31/96 19.48 0.20 4.57 4.77 (0.11) (0.95) 23.19 25.0 366,602
12/31/97 23.19 0.16 6.76 6.92 (0.20) (2.87) 27.04 30.4 485,528
<CAPTION>
Growth Portfolio
<S> <C> <C> <C> <C>
12/31/88 1.0 1.6 37.6 N/A
12/31/89 1.0 1.8 26.9 N/A
12/31/90 0.9 1.6 22.2 N/A
12/31/91 0.9 1.2 36.9 N/A
12/31/92 0.9 0.5 37.9 N/A
12/31/93 0.9 0.2 66.3 N/A
12/31/94 0.8 0.2 74.8 N/A
12/31/95 0.9 0.6 92.1 N/A
12/31/96 0.8 0.9 51.7 0.0515
12/31/97 0.8 0.6 32.2 0.0538
<CAPTION>
Natural Resources Portfolio
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
12/31/88 10.00 0.33+ 0.84 1.17 (0.17) -- 11.00 11.7 12,324
12/31/89 11.00 0.39 1.63 2.02 (0.12) -- 12.90 18.3 16,971
12/31/90 12.90 0.33 (2.10) (1.77) (0.61) (0.80) 9.72 (15.0) 14,954
12/31/91 9.72 0.26 0.21 0.47 (0.13) -- 10.06 4.9 9,407
12/31/92 10.06 0.21 0.05 0.26 (0.39) -- 9.93 2.5 8,796
12/31/93 9.93 0.15 3.42 3.57 (0.17) -- 13.33 36.2 18,255
12/31/94 13.33 0.23 (0.09) 0.14 (0.09) (0.09) 13.29 1.0 21,230
12/31/95 13.29 0.18 2.15 2.33 (0.21) (0.29) 15.12 17.5 28,941
12/31/96 15.12 0.22 1.89 2.11 (0.13) (0.23) 16.87 14.1 45,329
12/31/97 16.87 0.20 (1.49) (1.29) (0.17) (0.99) 14.42 (8.6) 50,054
<CAPTION>
Natural Resources Portfolio
<S> <C> <C> <C> <C>
12/31/88 1.6+ 3.2+ 20.0 N/A
12/31/89 1.5 3.3 38.2 N/A
12/31/90 1.4 3.0 26.6 N/A
12/31/91 1.2 2.5 2.6 N/A
12/31/92 1.3 2.1 18.7 N/A
12/31/93 1.1 1.3 34.5 N/A
12/31/94 1.0 1.7 36.0 N/A
12/31/95 1.0 1.3 32.0 N/A
12/31/96 0.9 1.3 52.5 0.0409
12/31/97 0.9 1.2 27.9 0.0319
</TABLE>
* Selected data for a share of beneficial interest outstanding throughout each
period (calculated based upon average shares outstanding).
** Does not reflect expenses that apply to the separate accounts of Anchor
National Life Insurance Company, First SunAmerica Life Insurance Company,
Phoenix Mutual Life Insurance Company and Presidential Life Insurance
Company. If such expenses had been included, total return would have been
lower for each period presented.
@ The average commission per share is derived by taking the agency commissions
paid on equity securities trades and dividing by the number of shares
purchased and sold. This information was not required to be disclosed prior
to 1996.
+ Net of expense reimbursement.
2
<PAGE> 8
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FINANCIAL HIGHLIGHTS* (CONTINUED)
- --------------------------------------------------------------------------------
ANCHOR SERIES TRUST
<TABLE>
<CAPTION>
DIVIDENDS
NET REALIZED DECLARED DIVIDENDS NET NET
NET ASSET NET & UNREALIZED TOTAL FROM FROM NET FROM NET ASSET ASSETS
VALUE INVEST- GAIN (LOSS) INVEST- INVEST- REALIZED VALUE END OF
YEAR BEGINNING MENT ON MENT MENT GAIN ON END OF TOTAL PERIOD
ENDED OF PERIOD INCOME INVESTMENTS OPERATIONS INCOME INVESTMENTS PERIOD RETURN** (000'S)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Growth and Income Portfolio
12/31/88 $ 8.44 $ 0.57 $ 0.65 $ 1.22 $(0.55) $-- $ 9.11 14.5% $ 17,653
12/31/89 9.11 0.57 0.77 1.34 -- -- 10.45 14.7 19,027
12/31/90 10.45 0.63 (0.98) (0.35) (1.34) -- 8.76 (3.8) 13,352
12/31/91 8.76 0.64 1.70 2.34 (0.12) -- 10.98 26.8 14,551
12/31/92 10.98 0.65 1.50 2.15 (0.64) -- 12.49 20.1 23,723
12/31/93 12.49 0.61 2.11 2.72 (0.55) (0.08) 14.58 22.0 41,555
12/31/94 14.58 0.66 (1.96) (1.30) (0.52) (1.20) 11.56 (9.7) 34,995
12/31/95 11.56 0.61 1.29 1.90 (0.83) (0.62) 12.01 16.6 32,008
12/31/96+ 12.01 0.33 2.02 2.35 (0.77) -- 13.59 20.2 33,465
12/31/97 13.59 0.15 3.74 3.89 (0.34) -- 17.14 28.8 44,417
<CAPTION>
RATIO OF NET
RATIO OF INVESTMENT
EXPENSES INCOME TO PORTFOLIO AVERAGE
YEAR TO AVERAGE AVERAGE NET TURNOVER COMMISSION
ENDED NET ASSETS ASSETS RATE PER SHARE @
- --------- -----------------------------------------------------
<S> <C> <C> <C> <C>
12/31/88 1.0% 6.1% 52.8% $ N/A
12/31/89 1.0 5.6 77.0 N/A
12/31/90 1.1 6.6 107.0 N/A
12/31/91 1.1 6.4 109.0 N/A
12/31/92 1.0 5.6 86.5 N/A
12/31/93 0.9 4.4 86.2 N/A
12/31/94 0.9 4.9 50.7 N/A
12/31/95 0.9 5.2 88.8 N/A
12/31/96+ 0.9 2.5 108.5 0.0477
12/31/97 0.8 1.0 49.4 0.0522
<CAPTION>
Strategic Multi-Asset Portfolio
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
12/31/88 9.00 0.36 0.98 1.34 (0.28) -- 10.06 14.9 83,479
12/31/89 10.06 0.41 1.58 1.99 (0.05) -- 12.00 19.8 108,434
12/31/90 12.00 0.38 (1.26) (0.88) (0.83) (0.12) 10.17 (7.8) 87,329
12/31/91 10.17 0.26 2.20 2.46 -- -- 12.63 24.2 88,585
12/31/92 12.63 0.23 0.25 0.48 (0.34) (0.32) 12.45 3.9 79,621
12/31/93 12.45 0.21 1.68 1.89 (0.28) -- 14.06 15.3 76,466
12/31/94 14.06 0.24 (0.53) (0.29) (0.20) (2.28) 11.29 (2.6) 65,357
12/31/95 11.29 0.32 2.18 2.50 (0.23) (1.78) 11.78 22.8 64,026
12/31/96 11.78 0.25 1.41 1.66 (0.40) (0.84) 12.20 14.8 57,744
12/31/97 12.20 0.23 1.48 1.71 (0.31) (2.32) 11.28 14.3 53,289
<CAPTION>
Strategic MUlti-Asset Portfolio
<S> <C> <C> <C> <C>
12/31/88 1.4 3.7 37.4 N/A
12/31/89 1.4 3.7 36.6 N/A
12/31/90 1.4 3.4 28.0 N/A
12/31/91 1.3 2.3 42.0 N/A
12/31/92 1.3 1.8 57.5 N/A
12/31/93 1.3 1.2 73.9 N/A
12/31/94 1.3 1.8 63.7 N/A
12/31/95 1.3 2.7 36.9 N/A
12/31/96 1.4 2.0 51.3 0.0064
12/31/97 1.4 1.8 59.7 0.0070
<CAPTION>
Multi-Asset Portfolio
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
12/31/88 9.19 0.44 0.44 0.88 (0.42) -- 9.65 9.6 161,622
12/31/89 9.65 0.48 1.42 1.90 (0.01) -- 11.54 19.7 168,986
12/31/90 11.54 0.48 (0.30) 0.18 (1.03) -- 10.69 1.6 151,329
12/31/91 10.69 0.45 2.45 2.90 (0.06) -- 13.53 27.3 177,429
12/31/92 13.53 0.41 0.67 1.08 (0.47) (0.35) 13.79 8.2 207,533
12/31/93 13.79 0.36 0.63 0.99 (0.44) (0.46) 13.88 7.3 208,900
12/31/94 13.88 0.39 (0.60) (0.21) (0.47) (1.49) 11.71 (1.7) 164,159
12/31/95 11.71 0.40 2.47 2.87 (0.49) (1.05) 13.04 24.9 168,243
12/31/96 13.04 0.35 1.36 1.71 (0.49) (0.91) 13.35 13.9 150,619
12/31/97 13.35 0.34 2.36 2.70 (0.43) (2.10) 13.52 21.1 145,685
<CAPTION>
Multi-Asset Portfolio
<S> <C> <C> <C> <C>
12/31/88 1.2 4.5 30.8 N/A
12/31/89 1.2 4.4 36.9 N/A
12/31/90 1.2 4.4 48.7 N/A
12/31/91 1.2 3.8 50.7 N/A
12/31/92 1.1 3.1 38.6 N/A
12/31/93 1.1 2.6 48.2 N/A
12/31/94 1.1 3.0 82.5 N/A
12/31/95 1.1 3.2 85.9 N/A
12/31/96 1.1 2.6 64.1 0.0517
12/31/97 1.1 2.4 56.5 0.0546
<CAPTION>
High Yield Portfolio
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
12/31/88 9.80 1.23 0.17 1.40 (1.18) -- 10.02 14.3 57,916
12/31/89 10.02 1.27 (1.53) (0.26) (0.07) -- 9.69 (2.8) 33,430
12/31/90 9.69 0.99 (1.85) (0.86) (2.87) -- 5.96 (10.8) 20,695
12/31/91 5.96 0.81 1.16 1.97 (0.05) -- 7.88 33.1 33,046
12/31/92 7.88 0.81 0.28 1.09 (0.58) -- 8.39 13.9 47,140
12/31/93 8.39 0.79 0.79 1.58 (0.54) -- 9.43 19.1 79,303
12/31/94 9.43 0.15 (0.56) (0.41) (1.15) -- 7.87 (4.5) 48,057
12/31/95 7.87 0.77 0.67 1.44 (0.98) -- 8.33 18.8 46,817
12/31/96 8.33 0.74 0.19 0.93 (0.88) -- 8.38 11.7 45,687
12/31/97 8.38 0.75 0.18 0.93 (0.93) -- 8.38 11.4 40,193
<CAPTION>
High Yield Portfolio
<S> <C> <C> <C> <C>
12/31/88 0.9 11.4 41.5 N/A
12/31/89 1.0 12.2 43.9 N/A
12/31/90 1.0 13.2 50.9 N/A
12/31/91 1.0 11.3 54.9 N/A
12/31/92 0.9 9.7 134.9 N/A
12/31/93 0.9 8.5 121.1 N/A
12/31/94 0.9 9.0 97.9 N/A
12/31/95 0.9 9.2 68.1 N/A
12/31/96 0.9 8.8 58.0 N/A
12/31/97 0.9 8.8 101.4 0.0600
</TABLE>
* Selected data for a share of beneficial interest outstanding throughout each
period (calculated based upon average shares outstanding).
** Does not reflect expenses that apply to the separate accounts of Anchor
National Life Insurance Company, First SunAmerica Life Insurance Company,
Phoenix Mutual Life Insurance Company and Presidential Life Insurance
Company. If such expenses had been included, total return would have been
lower for each period presented.
@ The average commission per share is derived by taking the agency commissions
paid on equity securities trades and dividing by the number of shares
purchased and sold. This information was not required to be disclosed prior
to 1996.
+ Prior to March 1, 1996, the Portfolio was invested primarily in convertible
debt securities. Since that date, the Portfolio primarily invests in common
stock.
3
<PAGE> 9
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS* (CONTINUED)
- --------------------------------------------------------------------------------
ANCHOR SERIES TRUST
<TABLE>
<CAPTION>
DIVIDENDS
NET REALIZED DECLARED DIVIDENDS NET NET
NET ASSET NET & UNREALIZED TOTAL FROM FROM NET FROM NET ASSET ASSETS
VALUE INVEST- GAIN (LOSS) INVEST- INVEST- REALIZED VALUE END OF
YEAR BEGINNING MENT ON MENT MENT GAIN ON END OF TOTAL PERIOD
ENDED OF PERIOD INCOME INVESTMENTS OPERATIONS INCOME INVESTMENTS PERIOD RETURN** (000'S)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Target '98 Portfolio
5/2/88-
12/31/88 $10.00 $ 0.49+ $ 0.23 $ 0.72 $(0.16) $-- $ 10.56 7.9% $ 5,718
12/31/89 10.56 0.84 0.99 1.83 (0.05) -- 12.34 17.3 15,385
12/31/90 12.34 0.87 (0.12) 0.75 (1.54) (0.08) 11.47 1.7 14,614
12/31/91 11.47 0.83 1.33 2.16 -- -- 13.63 18.9 12,553
12/31/92 13.63 0.82 0.16 0.98 (0.79) (0.25) 13.57 7.2 19,227
12/31/93 13.57 0.82 0.71 1.53 (0.93) (0.23) 13.94 11.2 20,500
12/31/94 13.94 0.83 (1.39) (0.56) (1.11) (0.07) 12.20 (4.1) 19,194
12/31/95 12.20 0.86 0.88 1.74 (1.30) -- 12.64 14.6 12,774
12/31/96 12.64 0.81 (0.37) 0.44 (1.41) -- 11.67 3.7 10,172
12/31/97 11.67 0.78 (0.19) 0.59 (1.19) -- 11.07 5.2 7,412
<CAPTION>
RATIO OF NET
RATIO OF INVESTMENT
EXPENSES INCOME TO PORTFOLIO AVERAGE
YEAR TO AVERAGE AVERAGE NET TURNOVER COMMISSION
ENDED NET ASSETS ASSETS RATE PER SHARE @
- --------- -----------------------------------------------------
<S> <C> <C> <C> <C>
Target '98 Portfolio
5/2/88-
12/31/88 0.8%#+ 7.8%#+ 13.0% $ N/A
12/31/89 1.1 7.3 21.9 N/A
12/31/90 1.0 7.5 6.8 N/A
12/31/91 1.0 6.9 14.4 N/A
12/31/92 0.9 6.0 37.3 N/A
12/31/93 0.9 5.7 20.8 N/A
12/31/94 0.8 6.5 9.2 N/A
12/31/95 0.9 6.7 38.6 N/A
12/31/96 0.9 6.5 -- N/A
12/31/97 1.0 6.8 -- N/A
<CAPTION>
Fixed Income Portfolio
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
12/31/88 12.38 0.98 (0.11) 0.87 (1.14) -- 12.11 7.0 48,044
12/31/89 12.11 0.98 0.58 1.56 -- -- 13.67 12.6 42,512
12/31/90 13.67 0.96 0.01 0.97 (2.07) -- 12.57 7.9 34,392
12/31/91 12.57 0.96 0.95 1.91 (0.05) -- 14.43 15.2 37,887
12/31/92 14.43 0.98 (0.04) 0.94 (1.06) -- 14.31 6.5 40,001
12/31/93 14.31 0.95 0.19 1.14 (0.91) -- 14.54 8.0 41,116
12/31/94 14.54 0.89 (1.36) (0.47) (1.17) -- 12.90 (3.2) 28,582
12/31/95 12.90 0.90 1.52 2.42 (1.16) -- 14.16 19.2 27,975
12/31/96 14.16 0.93 (0.64) 0.29 (1.15) -- 13.30 2.4 22,743
12/31/97 13.30 0.91 0.30 1.21 (1.23) -- 13.28 9.4 18,315
<CAPTION>
Fixed Income Portfolio
<S> <C> <C> <C> <C>
12/31/88 0.8 7.6 45.6 N/A
12/31/89 0.9 7.6 34.0 N/A
12/31/90 0.9 7.5 52.2 N/A
12/31/91 0.9 7.2 55.3 N/A
12/31/92 0.8 6.8 31.8 N/A
12/31/93 0.8 6.3 45.9 N/A
12/31/94 0.8 6.5 56.5 N/A
12/31/95 0.8 6.5 76.7 N/A
12/31/96 0.8 6.8 77.9 N/A
12/31/97 0.9 6.9 58.0 0.0500
<CAPTION>
Government and Quality Bond Portfolio
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
12/31/88 11.97 1.13 (0.08) 1.05 (1.43) -- 11.59 8.8 195,984
12/31/89 11.59 1.10 0.71 1.81 -- -- 13.40 15.6 163,082
12/31/90 13.40 1.05 (0.09) 0.96 (2.30) -- 12.06 7.8 155,522
12/31/91 12.06 1.00 1.08 2.08 (0.11) -- 14.03 17.3 197,463
12/31/92 14.03 1.02 (0.05) 0.97 (1.07) -- 13.93 6.9 207,860
12/31/93 13.93 0.90 0.25 1.15 (0.86) -- 14.22 8.3 264,660
12/31/94 14.22 0.86 (1.30) (0.44) (0.73) (0.19) 12.86 (3.1) 232,530
12/31/95 12.86 0.90 1.55 2.45 (1.08) -- 14.23 19.4 225,579
12/31/96 14.23 0.87 (0.50) 0.37 (0.90) (0.03) 13.67 2.9 221,603
12/31/97 13.67 0.84 0.42 1.26 (0.92) (0.05) 13.96 9.5 234,623
<CAPTION>
Government and Quality Bond Portfolio
<S> <C> <C> <C> <C>
12/31/88 0.8 8.9 120.5 N/A
12/31/89 0.8 8.6 71.8 N/A
12/31/90 0.8 8.5 63.3 N/A
12/31/91 0.8 7.8 87.5 N/A
12/31/92 0.8 7.3 76.4 N/A
12/31/93 0.7 6.2 93.2 N/A
12/31/94 0.7 6.4 117.6 N/A
12/31/95 0.7 6.5 135.2 N/A
12/31/96 0.7 6.3 106.7 N/A
12/31/97 0.7 6.1 75.7 N/A
<CAPTION>
Money Market Portfolio
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
12/31/88 1.00 0.07 -- 0.07 (0.07) -- 1.00 -- 171,364
12/31/89 1.00 0.08 -- 0.08 (0.08) -- 1.00 8.2 248,774
12/31/90 1.00 0.07 -- 0.07 (0.07) -- 1.00 7.4 181,956
12/31/91 1.00 0.06 -- 0.06 (0.06) -- 1.00 5.6 119,855
12/31/92 1.00 0.03 -- 0.03 (0.03) -- 1.00 3.4 127,262
12/31/93 1.00 0.02 -- 0.02 (0.02) -- 1.00 2.0 99,309
12/31/94 1.00 0.04 -- 0.04 (0.04) -- 1.00 3.8 126,004
12/31/95 1.00 0.05 -- 0.05 (0.05) -- 1.00 5.6 93,692
12/31/96 1.00 0.05 -- 0.05 (0.05) -- 1.00 5.0 74,001
12/31/97 1.00 0.05 -- 0.05 (0.05) -- 1.00 5.1 69,804
<CAPTION>
Money Market Portfolio
<S> <C> <C> <C> <C>
12/31/88 0.7 7.2 -- N/A
12/31/89 0.7 8.6 -- N/A
12/31/90 0.7 7.6 -- N/A
12/31/91 0.7 5.7 -- N/A
12/31/92 0.6 3.3 -- N/A
12/31/93 0.6 2.7 -- N/A
12/31/94 0.6 3.8 -- N/A
12/31/95 0.6 5.5 -- N/A
12/31/96 0.6 4.9 -- N/A
12/31/97 0.6 5.0 -- N/A
</TABLE>
* Selected data for a share of beneficial interest outstanding throughout each
period (calculated based upon average shares outstanding).
** Does not reflect expenses that apply to the separate accounts of Anchor
National Life Insurance Company, First SunAmerica Life Insurance Company,
Phoenix Mutual Life Insurance Company and Presidential Life Insurance
Company. If such expenses had been included, total return would have been
lower for each period presented.
@ The average commission per share is derived by taking the agency commissions
paid on equity securities trades and dividing by the number of shares
purchased and sold. This information was not required to be disclosed prior to
1996.
+ Net of expense reimbursement.
# Annualized.
4
<PAGE> 10
- --------------------------------------------------------------------------------
THE TRUST
- --------------------------------------------------------------------------------
ANCHOR SERIES TRUST (the "Trust") is an open-end diversified management
investment company. This Prospectus includes the twelve separate portfolios of
the Trust which are the: Foreign Securities Portfolio, Capital Appreciation
Portfolio, Growth Portfolio, Natural Resources Portfolio, Growth and Income
Portfolio (formerly, the Convertible Securities Portfolio), Strategic
Multi-Asset Portfolio, Multi-Asset Portfolio, High Yield Portfolio, Target '98
Portfolio, Fixed Income Portfolio, Government and Quality Bond Portfolio, and
Money Market Portfolio (each a "Portfolio" and collectively the "Portfolios").
The Trust issues a separate series of shares for each Portfolio, which in some
instances have rights separate from other series of shares. The Trustees may
provide for additional portfolios from time to time. The Declaration of Trust
permits the Trustees to issue an unlimited number of full or fractional shares
of each series of shares. (See "Dividends, Distributions and Taxes.")
SunAmerica Asset Management Corp. ("SAAMCo" or the "Adviser"), an indirect
wholly owned subsidiary of SunAmerica Inc., serves as investment adviser for all
the portfolios of the Trust. (See "SAAMCo.") Wellington Management Company, LLP
("WMC" or the "Sub-Adviser") serves as sub-adviser for all the Portfolios of the
Trust. (See "Wellington Management Company, LLP.") When referred to collectively
herein, SAAMCo and WMC shall be referred to as the "Advisers."
Shares of the Portfolios are issued and redeemed only in connection with
investments in and payments under variable annuity contracts and variable life
insurance policies ("Variable Contracts") of Anchor National Life Insurance
Company, First SunAmerica Life Insurance Company, Phoenix Mutual Life Insurance
Company and Presidential Life Insurance Company (the "Life Companies"). Certain
series of the Trust may not be available in connection with a particular
contract. Anchor National Life Insurance Company and First SunAmerica Life
Insurance Company are under common control with, and therefore are affiliated
with, the Adviser. Phoenix Mutual Life Insurance Company and Presidential Life
Insurance Company are not affiliates of the Adviser. The Trust does not foresee
a disadvantage to contract owners arising out of the fact that the Trust offers
its shares for Variable Contracts other than those offered by life insurance
companies affiliated with the Adviser. Nevertheless, the Trust's Board of
Trustees intends to monitor events in order to identify any material
irreconcilable conflicts which may possibly arise and to determine what action,
if any, should be taken in response thereto. If such a conflict were to occur,
one or more insurance company separate accounts might withdraw their investments
in the Trust. This might force the Trust to sell portfolio securities at
disadvantageous prices.
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVES AND POLICIES
- --------------------------------------------------------------------------------
Each Portfolio of the Trust has a different investment objective and is
managed separately. The risks and opportunities of each Portfolio should be
examined separately. The differences in objectives and policies among the
Portfolios will affect the investment return of each Portfolio and the degree of
market and financial risk of each Portfolio. The investment objective of each
Portfolio stated below may not be changed without the approval of the holders of
the outstanding shares of each Portfolio affected. There is no assurance that
the investment objectives of the various Portfolios will be met.
EQUITY PORTFOLIOS
FOREIGN SECURITIES PORTFOLIO
The investment objective of this Portfolio is long-term capital
appreciation through investment in a diversified portfolio of primarily equity
securities issued by foreign companies and primarily denominated in foreign
currencies. The Portfolio may also invest up to 20% of its assets in foreign
fixed income securities issued by domestic and foreign companies, foreign
governments and their agencies and instrumentalities and supranational agencies.
Investments will cover a broad range of companies and industries in a number of
foreign countries and may be denominated in U.S. dollars or foreign currencies.
The Sub-Adviser anticipates that, under normal market conditions, the Portfolio
will diversify its investments among a minimum of five countries.
Securities will be selected on the basis of fundamental analysis to
identify those companies which, in the judgment of the Sub-Adviser, possess
above-average capital appreciation potential. In addition to fundamental
5
<PAGE> 11
analysis of companies and their industries, the Sub-Adviser evaluates the
economic and political climate of the country in which the company is located
and the principal securities markets in which such securities are traded. The
Sub-Adviser believes that fundamental analysis coupled with diversification
among a number of countries and among a broad range of companies may serve to
lessen the risks which may be associated with investing in foreign securities.
All or a portion of the foreign securities purchased by the Portfolio may
be in the form of Depositary Receipts such as American Depositary Receipts
("ADRs"), European Depositary Receipts ("EDRs"), Global Depositary Receipts
("GDRs"), and other similar global instruments. ADRs are typically issued by a
U.S. bank or trust company, and evidence ownership of underlying securities
issued by a foreign corporation. EDRs are receipts issued in Europe, typically
by foreign banks and trust companies, and evidence ownership of either foreign
or domestic underlying securities. GDRs are issued globally, and evidence a
similar ownership arrangement. Generally, ADRs are designed for trading in the
United States securities markets, EDRs and GDRs are designed for trading in
non-U.S. securities markets.
A significant portion of the Portfolio's equity investments are expected to
be in securities which are not listed for trading on domestic securities
exchanges and, although publicly traded, may be less liquid than securities
issued by larger, more seasoned companies which trade on domestic securities
exchanges. The Portfolio's policy of investing in smaller, less seasoned
companies will subject the Portfolio to greater risk than may be involved in
investing in securities which are not selected for such growth characteristics.
In addition to the capital appreciation opportunities which may exist,
investments in foreign markets involve special risks and considerations not
typically associated with investing in the United States. Such risks and
considerations may include political and economic instability, differing
accounting and financial reporting standards, higher commission rates on foreign
portfolio transactions, less readily available public information regarding
issuers, potential adverse changes in tax and exchange control regulations, and
the potential for restrictions on the flow of international capital. Many
foreign countries impose withholding taxes on income from investments in such
countries which may not be recoverable by the Portfolio. Also, the value of
foreign currencies relative to the U.S. dollar will fluctuate and will therefore
affect, either favorably or unfavorably, the value of the underlying securities
which the Portfolio owns.
The Portfolio may engage in options transactions and may purchase and sell
futures contracts and options thereon to reduce certain risks of its investments
to enhance income or to gain country exposure. The Sub-Adviser will not attempt
to actively time either short-term market trends or short-term currency trends
in any market. The Portfolio may enter into forward foreign exchange contracts.
(See "Hedging and Income Enhancement Strategies.")
The Portfolio intends, except under unusual market conditions or to meet
liquidity needs, to remain fully invested in foreign equity securities. However,
the Portfolio may invest in short-term money market instruments denominated in
U.S. dollars, including repurchase agreements, which are authorized for purchase
by the Money Market Portfolio. (See "Money Market Portfolio" and "Repurchase
Agreements.") In addition, the Portfolio may purchase when-issued securities.
(See "When-Issued Securities" in the Statement of Additional Information.)
CAPITAL APPRECIATION PORTFOLIO
The investment objective of this Portfolio is to seek long-term capital
appreciation primarily through investments in growth equity securities which are
widely diversified by industry and company. In contrast to the majority of
growth equity securities which will be selected for the Growth Portfolio, the
Capital Appreciation Portfolio will generally consist of a greater proportion of
securities of smaller companies which may be newer and less seasoned, companies
which represent new or changing industries, and those which, in the opinion of
the Sub-Adviser, represent special situations, the potential future value of
which has not been recognized by other institutional investors. In seeking to
achieve its objective, the Portfolio will invest primarily in U.S. common stocks
and may sell covered call options on certain of such stocks on U.S. exchanges,
purchase call and put options and combinations of such options on U.S. exchanges
and enter into closing transactions with respect to certain of its option
positions on the exchanges. In addition, the Portfolio may invest in debt
securities and preferred stocks that are convertible into, or that carry
warrants to purchase, common stocks or other equity interests. The Portfolio
also may engage in transactions involving stock index futures and options
thereon for income enhancement or as a hedge against changes in market
conditions. (See "Hedging and Income Enhancement Strategies.") In addition, the
Portfolio may invest up to 25% of its total assets in foreign securities and may
engage in forward foreign exchange
6
<PAGE> 12
contracts with respect to these investments. (See the discussion under "Foreign
Securities Portfolio" above and "Foreign Securities" in the Statement of
Additional Information.)
A significant portion of the Portfolio's equity investments are expected to
be in securities which are not listed for trading on domestic securities
exchanges and, although publicly traded, may be less liquid than securities
issued by larger, more seasoned companies which trade on domestic securities
exchanges.
As a result of its investment policies, the Portfolio's securities can be
expected on average to exhibit greater volatility than the equity markets as a
whole as measured by the price movement of the Standard & Poor's 500 Composite
Stock Index. The relative position size of each security holding within the
Portfolio may be determined, in part, by the relative capitalization of the
issue in the equity markets as a whole. Therefore, highly capitalized companies
may be allowed a larger position in the Portfolio than smaller capitalized
companies. As a result, the overall diversification of the Portfolio's holdings
may serve to reduce the specific risk associated with investments in any one
issuer.
The Portfolio may also invest in short-term money market instruments,
including repurchase agreements, authorized for purchase by the Money Market
Portfolio. (See "Money Market Portfolio" and "Repurchase Agreements.") In
addition, the Portfolio may purchase when-issued securities. (See "When-Issued
Securities" in the Statement of Additional Information.)
GROWTH PORTFOLIO
The investment objective of this Portfolio is to seek capital appreciation
primarily through investments in growth equity securities. Growth equity
securities include seasoned companies with proven records and above-average
earnings growth, and smaller companies with outstanding growth records and
potential. Growth equity securities tend to have above-average price/earnings
ratios and less-than-average current yield. The Portfolio's investments will be
widely diversified by industry and company. The Portfolio may also engage in
transactions involving stock index futures and options thereon for income
enhancement or as a hedge against changes in market conditions. (See "Hedging
and Income Enhancement Strategies.")
The majority of the Portfolio's equity investments are securities listed on
the New York Stock Exchange and other domestic securities exchanges. The
Portfolio also invests in unlisted securities, but these are generally
securities that have an established over-the-counter market, although the depth
and liquidity of that market may vary from time to time and from security to
security. In addition, the Portfolio may invest up to 25% of its total assets in
foreign securities and may engage in forward foreign exchange contracts with
respect to these investments. (See the discussion under "Foreign Securities
Portfolio" and "Foreign Securities" in the Statement of Additional Information.)
Convertible securities may constitute up to 20% of the Portfolio's net
assets, and may be used for defensive purposes or when they are an attractive
alternative to the underlying common stock. In seeking to achieve its objective
the Portfolio will primarily invest in U.S. common stocks and may sell covered
call options on certain of such stocks on U.S. exchanges, purchase call and put
options and combinations of such options on U.S. exchanges, and enter into
closing transactions with respect to certain of its option positions on the
exchanges.
The Portfolio intends, except under unusual market conditions or to meet
liquidity needs, to remain fully invested in equity securities. However, the
Portfolio may invest in short-term money market instruments, including
repurchase agreements, authorized for purchase by the Money Market Portfolio.
(See "Money Market Portfolio" and "Repurchase Agreements.") In addition, the
Portfolio may purchase when-issued securities. (See "When-Issued Securities" in
the Statement of Additional Information.)
NATURAL RESOURCES PORTFOLIO
The investment objective of this Portfolio is to provide a total return in
excess of the U.S. rate of inflation as represented by the Consumer Price Index.
The Portfolio will invest primarily in equity securities of companies which are
expected to benefit from rising inflation, and in debt obligations and fixed
income securities which are expected to provide favorable returns in periods of
rising inflation. The Portfolio will invest in domestic securities and foreign
securities including ADRs, EDRs or GDRs. Securities issued by foreign issuers
may be denominated in U.S. dollars or foreign currencies. (See "Foreign
Securities Portfolio.")
7
<PAGE> 13
Investments will be chosen primarily based on their historical and
projected relationship with inflation. The Portfolio will invest in securities
issued by companies engaged in exploration, mining, fabrication, processing or
trading in gold, and other precious metals and minerals including diamonds, and
natural resources including oil, timber, and agricultural commodities; real
estate investment trusts ("REITs"); and other investments which are expected to
provide a hedge against anticipated inflation. The Portfolio will concentrate
its investments by investing at least 25% of its assets in the securities of
companies in gold-related industries, including exploration, mining,
fabrication, processing and trading in gold. In addition, the Portfolio may
invest in securities (including debt securities and preferred stock) the terms
of which are related to the market value of gold and other natural resource
assets, and may also invest its assets in short-term investments including
non-dollar denominated instruments. The Portfolio may also invest up to 10% of
its assets in the securities of investment companies (including foreign
investment companies) which make investments that are expected to provide a
hedge against anticipated inflation. However, the Portfolio will not invest more
than 5% of its assets in any single investment company and will not purchase
more than 3% of the voting stock of an investment company. In addition, the
Portfolio will not purchase the securities of any closed-end investment company
which would result in the funds which are advised by the Adviser or by the
Sub-Adviser owning, in the aggregate, more than 10% of the voting stock of the
closed-end investment company. If the Portfolio invests in investment companies,
the Portfolio's shareholders will bear not only their proportionate share of
expenses of the Portfolio, but also indirectly will bear similar expenses of the
underlying investment company.
Investments in securities related to gold or other precious metals and
minerals are considered speculative and are impacted by a host of world-wide
economic, financial and political factors. Prices of gold and other precious
metals may fluctuate sharply over short time periods due to: changes in
inflation or expectations regarding inflation in various countries; metal sales
by governments, central banks or international agencies; investment speculation;
changes in industrial and commercial demand; and governmental prohibitions or
restrictions on the private ownership of certain precious metals or minerals.
The Portfolio's concentration in gold related industries exposes it to greater
risk than a portfolio less concentrated in a group of related industries.
The value of equity investments related to other natural resources such as
oil, timber, and agricultural commodities will fluctuate pursuant to market
conditions, generally, as well as the market for the particular natural resource
in which the issuer is involved. The Sub-Adviser believes that the values of
natural resources fluctuate differently with respect to different stages of the
inflationary cycle. In addition, the values of natural resources are subject to
numerous factors including events of nature and international politics. The
Sub-Adviser will seek securities that are attractively priced relative to the
intrinsic value of the relevant natural resource, or that are of companies which
are positioned to benefit during particular portions of the inflationary cycle.
It is expected that the market price of securities, the principal amount,
redemption terms, or conversion terms of which are related to the market price
of a natural resource asset, will fluctuate on the basis of the natural resource
on which such security is based. However, there may not be a perfect correlation
between the movements of the asset-based security and the underlying natural
resource asset. Further, such securities typically bear interest or pay
dividends at below market rates, and in certain cases at nominal rates.
The Portfolio may write covered call options on stocks, purchase put and
call options and combinations of such options, and enter into closing
transactions with respect to such options. The Portfolio also may engage in
transactions involving stock index futures contracts and options thereon and in
transactions involving the future delivery of fixed income securities
("Financial Futures Contracts") and options thereon for income enhancement or as
a hedge against changes in market conditions. The Portfolio may also engage in
forward foreign exchange contracts. (See "Hedging and Income Enhancement
Strategies.")
GROWTH AND INCOME PORTFOLIO
The investment objective of this Portfolio is to provide high current
income and long-term capital appreciation. The Portfolio will seek to achieve
its objective by investing, under normal market conditions, at least 65% of its
total assets in securities that provide the potential for growth and offer
income, such as dividend-paying common stocks and securities convertible into
common stock. The portion of the Portfolio's assets invested in equity
securities and debt securities may vary from time to time due to changes in
interest rates and economic and other factors. This Portfolio is not designed
for investors seeking a steady flow of income distributions. Rather, the
Portfolio's policy of investing in income-producing securities is intended to
provide investors with a greater consistency of investment return than may be
achieved by investing solely in growth stocks.
8
<PAGE> 14
The equity securities purchased for the Portfolio will generally be issued
by publicly-held corporations. However, the Sub-Adviser may select equity
securities for the Portfolio without regard to the size or established history
of the issuer. Generally, the prices of equity securities may be affected by
such factors as a change in a company's earnings; fluctuations in interest
rates; or changes in the rate of economic growth. Further, to the extent the
Portfolio invests in issuers with small market capitalizations, the Portfolio
would be subject to greater risk than may be involved in investing in securities
of issuers with larger market capitalizations. The securities of small
capitalization issuers typically include those of newer or less seasoned
companies, and may be more speculative than securities issued by larger, more
well-established issuers. Other risks associated with smaller or newer issuers
include less publicly-available information about the issuer; the absence of a
business history or historical pattern of performance; and the normal risks
which accompany the development of new products, markets or services.
The convertible securities in which the Portfolio may invest are not
subject to any limitations as to ratings and may include high, medium, lower and
unrated securities. However, the Portfolio may not invest more than 20% of its
total assets in convertible securities rated below "Baa" by Moody's Investors
Service, Inc. ("Moody's") or "BBB" by Standard and Poor's Ratings Services, A
Division of The McGraw-Hill Companies Inc. ("Standard and Poor's") (including
convertible securities that have been downgraded), or in unrated convertible
securities that are of comparable quality as determined by the Sub-Adviser.
Convertible securities rated lower than "Baa" by Moody's or "BBB" by Standard
and Poor's or unrated securities of comparable quality, commonly referred to as
"junk bonds" or "high yield securities," are speculative and generally involve a
higher risk of loss of principal and income than higher-rated securities. See
"High Yield Portfolio" below and the Statement of Additional Information for a
discussion of the risks associated with lower-rated, high-yield securities.
The Portfolio may also invest up to 20% of its total assets in equity
securities of foreign companies in developed countries which are traded on a
recognized domestic or foreign securities exchange. Although such foreign
securities may be denominated in foreign currencies, the Portfolio anticipates
that the majority of its foreign investments will be in ADRs, EDRs or GDRs. See
"Foreign Securities Portfolio" for a discussion of these types of securities.
The Portfolio may enter into forward currency contracts to protect against
uncertainty in the level of future exchange rates. However, the Sub-Adviser will
not actively attempt to time either short-term market trends or short-term
currency trends in any market. See "Hedging and Income Enhancement Strategies"
below.
In addition to the equity and convertible securities described above, the
Portfolio may invest up to 35% of its total assets in the following instruments:
short-term money market instruments denominated in U.S. dollars including
repurchase agreements and Section 4(2) commercial paper, which are authorized
for purchase by the Money Market Portfolio (see "Money Market Portfolio" and
"Repurchase Agreements"); fixed-income securities, including obligations issued
or guaranteed as to principal and interest by the U.S. government, its agencies
or instrumentalities, including mortgage-related securities; high quality debt
securities issued by foreign sovereigns; corporate debt securities rated at
least "BBB" by Standard and Poor's or "Baa" by Moody's, commonly known as
"investment grade securities," or unrated securities that are deemed to be of
comparable quality by the Sub-Adviser; and equity and convertible securities of
issuers that are not paying a dividend, if there exists the potential for growth
of capital or future income. See the Statement of Additional Information
concerning these securities.
Finally, the Portfolio may enter into contracts on financial futures or
stock index futures, or options thereon, for income enhancement or hedging
purposes. See "Hedging and Income Enhancement Strategies" below. The Portfolio
may also make loans of portfolio securities and invest in securities issued on a
"when-issued" or "delayed delivery" basis. (See "When-Issued Securities" and
"Loans of Portfolio Securities" in the Statement of Additional Information.) In
addition, in any period of market weakness or of uncertain market conditions,
the Portfolio may establish a temporary defensive position to preserve capital
by investing up to 100% of total assets in cash, cash equivalents or high
quality short-term fixed-income securities.
ALLOCATION PORTFOLIOS
STRATEGIC MULTI-ASSET AND MULTI-ASSET PORTFOLIOS
The investment objective of the Strategic Multi-Asset and Multi-Asset
Portfolios is to seek high long-term total investment return. Total investment
return consists of dividends, interest and other income, and net realized and
unrealized appreciation and depreciation in the value of each Portfolio's
security holdings. Each Portfolio will allocate its assets among the asset
classes described below. Although the Strategic Multi-Asset Portfolio is
designed to offer the potential for higher investment return than the
Multi-Asset Portfolio, it can be expected to result in greater price volatility
and potentially greater risk of loss than the Multi-Asset Portfolio.
9
<PAGE> 15
The assets of the Strategic Multi-Asset and the Multi-Asset Portfolios will
be actively allocated among the following sub-portfolios:
Core Equity Sub-Portfolio -- The investment objective of the Core Equity
Sub-Portfolio is to seek long term capital appreciation by investing in a
diversified portfolio of common stocks, securities convertible into common
stocks, ADRs, EDRs and GDRs.
Global Core Equity Sub-Portfolio -- The Global Core Equity Sub-Portfolio
seeks long term capital appreciation by investing primarily in equity securities
issued by U.S. and foreign companies. For a description of foreign investments
and the risks associated with foreign investing, see "Foreign Securities
Portfolio."
Core Bond Sub-Portfolio -- The investment objective of the Core Bond
Sub-Portfolio is to seek a high level of current income consistent with the
preservation of capital by investing primarily in investment grade fixed income
securities.
Global Core Bond Plus Sub-Portfolio -- The investment objective of the
Global Core Bond Plus Sub-Portfolio is to seek a high level of current income by
investing in a diverse group of fixed income securities issued by U.S. and
foreign companies, foreign governments and their agencies and instrumentalities,
and supranational agencies, including high-yield, high-risk income producing
bonds. These high yield securities are typically subject to greater market
fluctuations and risk loss of income and principal due to default by the issuer.
(See "Risk Factors -- High Yield Bonds" under "High Yield Portfolio" for a
discussion of the risks associated with high-yield securities.)
Capital Appreciation Sub-Portfolio -- The Capital Appreciation
Sub-Portfolio seeks long term capital appreciation by investing in a widely
diversified portfolio of growth equity securities. The Capital Appreciation
Sub-Portfolio will invest in substantially the same securities as the Capital
Appreciation Portfolio. (See "Capital Appreciation Portfolio.")
Money Market Sub-Portfolio -- The Money Market Sub-Portfolio seeks current
income consistent with stability of principal by investing in a diversified
portfolio of money market instruments. The Money Market Sub-Portfolio seeks to
maintain a stable price per share, but there is no assurance that the
Sub-Portfolio will meet this objective. The Money Market Sub-Portfolio will
invest in substantially the same securities as the Money Market Portfolio. (See
"Money Market Portfolio.")
The assets of the MULTI-ASSET PORTFOLIO will be allocated between the Core
Equity Sub-Portfolio and the Core Bond Sub-Portfolio described above. The assets
of the STRATEGIC MULTI-ASSET PORTFOLIO will be allocated among the Global Core
Equity, Global Core Bond Plus, Capital Appreciation and Money Market
Sub-Portfolios.
ASSET ALLOCATION APPROACH
The Sub-Adviser will actively manage the allocation of assets between or
among the Sub-Portfolios based upon its judgment of the projected investment
environment for financial assets, relative fundamental values, attractiveness
and expected future returns of each sector. The Sub-Adviser will base its asset
allocation decisions on fundamental analysis and will not attempt to make
short-term market timing decisions among the market sectors. As a result, shifts
in asset allocation are expected to be gradual and continuous and each Portfolio
will normally have some portion of its assets invested in each relevant
Sub-Portfolio at all times.
The Portfolios do not have percentage limitations on the amount allocated
to each market sector or sub-sector and may emphasize such sectors or
sub-sectors indicated by the Sub-Adviser's analysis and judgment. Although each
of the Sub-Portfolios described above intends to be fully invested, a
Sub-Portfolio may hold cash or cash equivalents and may invest any portion or
all of its assets in high quality money market instruments for temporary
defensive purposes, to meet liquidity needs or in anticipation of investment of
assets. Each Sub-Portfolio may also purchase when-issued securities. (See
"When-Issued Securities" in the Statement of Additional Information).
The Sub-Adviser may use futures and options for hedging purposes, income
enhancement or to effect allocation decisions in an efficient manner. Each
Portfolio may sell (write) covered call options on stocks, purchase put and call
options and combinations of such options, and enter into closing transactions
with respect to such options. The Portfolios also may engage in transactions
involving stock index futures contracts and options thereon and Financial
Futures Contracts and options thereon, and may enter into forward foreign
exchange contracts. (See "Hedging and Income Enhancement Strategies.")
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<PAGE> 16
INCOME PORTFOLIOS
HIGH YIELD PORTFOLIO
The primary objective of this Portfolio is to produce high current income.
A secondary investment objective is capital appreciation. The Portfolio will
seek its objectives by investing, except for temporary defensive purposes, at
least 65% of its assets in high-yielding, high-risk, income producing corporate
bonds, also known as "junk bonds." Although these securities can be expected to
provide higher yields, they may be subject to greater market fluctuations and
the risk of loss of income and principal, than lower yielding, higher-rated
fixed-income securities. A significant percentage of the high-yield securities
in which the Portfolio invests are securities issued in reliance on Rule 144A
under the Securities Act of 1933, as amended ("1933 Act").
Because investment in such high-yield, high-risk securities entails greater
risks, an investment in the Portfolio should not constitute a complete
investment program and may not be appropriate for all investors. The investments
of the Portfolio will be subject to greater market fluctuations and risk of loss
of income and principal due to default by an issuer than are investments in
higher rated bonds.
Generally, bonds providing the highest yield carry lower ratings (Baa or
lower by Moody's or BBB or lower by Standard and Poor's, than those assigned by
Moody's or Standard and Poor's to investment grade bonds, or are unrated.
Descriptions of the Moody's and Standard and Poor's rating categories are set
forth in Appendix A. In general, these credit ratings represent only a portion
of the data analyzed by the Sub-Adviser when evaluating bonds for purchase or
sale in the Portfolio. In many instances, the rating agencies are not able to
reflect changes in value of high-yield, high-risk bonds in a timely manner and
are therefore valuable only so much as they can be employed as one source of
credit quality data in the Portfolio's overall investment strategy.
As of December 31, 1997 the Portfolio held securities of 136 corporate
issuers, which had the following credit quality characteristics:
<TABLE>
<CAPTION>
PERCENTAGE
OF
INVESTMENT BONDS
---------- ----------
<S> <C>
Corporate Bonds
BBB+...................................................... 1%
BB........................................................ 5%
BB+....................................................... 4%
BB-....................................................... 14%
B+........................................................ 18%
B......................................................... 26%
B-........................................................ 22%
CCC+...................................................... 1%
CC........................................................ 1%
Non-rated................................................. 8%
-----
100.0%
=====
</TABLE>
The Portfolio will invest in a variety of fixed-income instruments issued
by U.S. and foreign companies, foreign governments and their agencies and
instrumentalities, and supranational agencies, which are rated less than
investment grade or are unrated but are of comparable quality as determined by
the Sub-Adviser. It can be expected that a majority of securities selected and
held will have a relatively high yield-to-maturity, when compared to investment
grade fixed-income securities. The Portfolio will also utilize other types of
securities such as discount bonds, zero coupon bonds, convertible bonds,
straight and convertible preferred stocks, warrants and common stocks. For a
more complete description of the characteristics and risks involved in investing
in these securities see the Statement of Additional Information. For a more
complete discussion of the risks involved in zero coupon bond investments see
the description of the Target '98 Portfolio. To the extent that warrants and
common stocks are used, there may be some additional investment risk and
countervailing opportunity. These securities will be selected and held when, in
the opinion of the Sub-Adviser, the less than highest available current yield is
more than offset by prospects for capital appreciation. The Portfolio in the
future will utilize such securities as from time to time may be created and
which the Adviser and Sub-Adviser deem suitable and appropriate.
11
<PAGE> 17
The Portfolio may invest, without limit, in unrated securities if such
securities offer, in the opinion of the Sub-Adviser, a relatively high yield
without undue risk. Although the Portfolio will invest primarily in lower-rated
securities, it will not invest in securities in the lowest rating categories (Ca
for Moody's and CC for Standard and Poor's) unless the Sub-Adviser believes that
the potential total return of the instrument outweighs the increased credit risk
as noted by the distressed rating of the issuer or the protection afforded to
the particular securities is stronger than would otherwise be indicated by such
low ratings.
When changing economic conditions and other factors cause the yield
difference between lower-rated and higher-rated securities to narrow, the
Portfolio may purchase higher-rated securities if the Sub-Adviser believes that
the risk of loss of income and principal may be substantially reduced with only
a relatively small reduction in yield. In addition, under unusual market or
economic conditions, the Portfolio, for temporary defensive purposes, may invest
up to 100% of its assets in cash, securities issued or guaranteed by the U.S.
Government or its instrumentalities or agencies, certificates of deposit,
bankers' acceptances and other bank obligations, commercial paper rated in the
highest category by an established rating agency, or other fixed-income
securities deemed by the Sub-Adviser to be consistent with a defensive posture.
The yield on such securities may be lower than the yield on lower-rated fixed-
income securities.
The Portfolio may invest in short-term money market instruments denominated
in U.S. dollars, including repurchase agreements, which are authorized for
purchase by the Money Market Portfolio. (See "Money Market Portfolio" and
"Repurchase Agreements.") In addition, the Portfolio may purchase when-issued
securities. (See "When-Issued Securities" in the Statement of Additional
Information.)
The Portfolio may sell (write) covered call options on stocks, purchase put
and call options on stocks and combinations of such options listed on U.S.
exchanges, and enter into closing transactions with respect to such options
positions. The Portfolio may also enter into Financial Futures Contracts and
options thereon for income enhancement or hedging positions. (See "Hedging and
Income Enhancement Strategies.")
Risk Factors -- High-Yield Bonds
The values of lower-rated securities, also referred to as "junk bonds,"
generally fluctuate more than those of higher-rated securities. In addition, a
lower rating can reflect a greater possibility of an adverse change in financial
condition affecting the ability of an issuer to make payments of interest or
principal. Because the Portfolio invests primarily in securities in lower-rated
categories, the achievement of the Portfolio's goals is more dependent on the
Sub-Adviser's ability to select suitable securities than would be the case if
the Portfolio were investing in securities in the higher-rated categories.
Investors should carefully consider their ability to assume the risks involved
before making an investment in this Portfolio.
The market value of the Portfolio's investments will change in response to
changes in interest rates and the relative financial strength of each issuer.
During periods of falling interest rates, the values of long-term fixed-income
securities generally rise. Conversely, during periods of rising interest rates
the value of such securities generally decline. Changes in the financial
strength of an issuer or changes in the ratings of any particular security may
also affect the value of these investments. The value of high-yield, high-risk
bonds may also be influenced by the bond market's perception of an issuer's
credit quality or its outlook for economic growth. In times where economic
conditions appear to be deteriorating, lower-rated bonds may decline in market
value primarily due to investor's heightened concern over an issuer's credit
quality and its ability to make timely interest and principal payments. In such
periods of real or perceived economic downturn the secondary market for
high-yield, high-risk bonds may become thin and liquidity may be significantly
reduced. This may lead to increased volatility and sudden price movements in the
secondary market.
In a volatile market the Portfolio may find it difficult to value its
securities accurately. During such times the responsibility of the Adviser and
Sub-Adviser to value Portfolio securities becomes more difficult and judgment
plays a greater role in valuation because there is less reliable, objective data
available. Fluctuations in the value of Portfolio securities will not affect
cash income but will be reflected in the Portfolio's net asset value.
TARGET '98 PORTFOLIO
The investment objective of this Portfolio is to seek a predictable
compounded investment return for the specified time period, consistent with
preservation of capital. The Portfolio will invest primarily in zero coupon
securities and current interest-bearing, investment grade debt obligations which
are issued by the U.S. Government,
12
<PAGE> 18
its agencies and instrumentalities, and both domestic and foreign corporations.
These investments will generally mature no later than November 15, 1998 (the
"Maturity Date"). Upon maturity, any remaining securities in the Portfolio will
be liquidated and the Portfolio's sole holding will be cash. All shares of the
Portfolio will be exchanged for shares of the Money Market Portfolio, unless
otherwise specified by a contract owner.
While there is no assurance that the Portfolio will succeed in achieving
its objective, it seeks capital preservation for investors who hold their
investment until maturity. In addition, the Portfolio seeks to provide investors
with a sum at the Maturity Date (the "Maturity Value") which, together with the
reinvestment of all dividends and distributions, exceeds their original
investment in the Portfolio by a relatively predictable amount. Investors are
more likely to receive the expected Maturity Value if they retain their
participation in the Portfolio until the Maturity Date. Any investor who redeems
his or her participation prior to the Maturity Date is likely to achieve a
different investment result than the return that was predicted on the date
investment was made, and may even suffer a loss.
The Portfolio will invest in both zero coupon securities and current
interest-bearing debt obligations generally maturing not later than the Maturity
Date. Zero coupon securities are non-interest bearing debt obligations which are
payable in full at maturity, and which typically trade at a substantial or deep
discount from their value at maturity. Thus, the return on these instruments is
known at the time of investment, making them suitable for this Portfolio.
However, the value of zero coupon securities, and therefore the value of the
Portfolio, may be subject to greater market fluctuations from changing interest
rates prior to maturity than the value of debt obligations of comparable
maturities that bear interest currently.
The Portfolio will invest in current interest-bearing debt obligations in
order to provide cash to pay the Portfolio's expenses, to provide liquidity and
to meet transfer and redemption requests. By managing the Portfolio to try to
match current income with expenses, the Portfolio may reduce its reinvestment
risk. Reinvestment risk is the risk that future payments cannot be reinvested at
interest rates that are as high or higher than needed to achieve the Portfolio's
predicted compounded investment return. As zero coupon securities do not pay
interest currently, they present no reinvestment risk to the Portfolio.
Zero coupon securities are generally stripped obligations of the U.S.
Government. They are also offered, to a limited extent, by corporate issuers.
The Portfolio is authorized to invest in both government and corporate zero
coupon securities. The current interest-bearing debt obligations in which the
Portfolio is authorized to invest may be offered by domestic or foreign issuers
and may be principally traded in the U.S. or foreign markets. All debt
obligations in which the Portfolio invests will be dollar denominated. Corporate
obligations must be rated at the time of purchase within the four highest
categories assigned by Moody's or by Standard and Poor's (see Appendix A).
While the creditworthiness of corporate issuers will be carefully
considered, investors bear the risk that these issuers will fail to make
payments of principal or interest when due. This credit risk cannot be
eliminated. If an issuer defaults on its obligations, the value of the Portfolio
may be adversely affected.
Investing in obligations of foreign issuers or obligations of domestic
issuers that trade in foreign markets involves special risks and considerations
not typically associated with investing in the United States. Such risks and
considerations may include political and economic instability, differing
accounting and financial reporting standards, higher commission rates on foreign
portfolio transactions, less readily available public information regarding
issuers, potential adverse changes in tax and exchange control regulations, and
the potential for restrictions on the flow of international capital. Many
foreign countries impose withholding taxes on income from investments in such
countries which may not be recoverable by the Portfolio.
The Portfolio is also permitted to invest in high quality short-term money
market instruments and repurchase agreements such as those invested in by the
Money Market Portfolio. (See "Money Market Portfolio" and "Repurchase
Agreements.") As the Maturity Date approaches, the Portfolio will invest in more
short-term, highly liquid investments to preserve capital. In addition, the
Portfolio may purchase when-issued securities. (See "When-Issued Securities" in
the Statement of Additional Information.) The Portfolio may also engage in
transactions involving Financial Futures Contracts and options thereon for
income enhancement and hedging purposes. (See "Hedging and Income Enhancement
Strategies.")
Generally, the market value of the underlying securities in the Portfolio
will vary inversely with changes in interest rates. This means that the value of
a share of the Portfolio will tend to rise as interest rates decline, and
decline as interest rates rise. While the risk of these fluctuations in value is
greater when the period to maturity is longer, they tend to diminish as the
Maturity Date approaches. Accordingly, investors are more likely to receive
their
13
<PAGE> 19
Maturity Value if they retain their investment in the Portfolio until the
Maturity Date. An investment in the Portfolio is not suited to frequent
purchases and sales in response to short-term fluctuations in the Portfolio's
net asset value.
The owner of zero coupon securities, for Federal income tax purposes,
realizes taxable interest each year equal to a portion of the difference between
the face value of the zero coupon securities and their purchase price.
Similarly, the cash distributions received from current interest-bearing debt
obligations are realized as income each year. The net investment income of the
Portfolio will equal the sum of the imputed interest earned on its zero coupon
securities and the interest upon its current interest-bearing debt obligations,
less the Portfolio's expenses.
FIXED INCOME PORTFOLIO
The investment objective of this Portfolio is to seek a high level of
current income consistent with preservation of capital. The Portfolio will
invest primarily in investment grade fixed-income securities. Portfolio
management will emphasize sector analysis, call protection and credit research,
and will attempt to maintain a high, steady and possibly growing income stream.
The Portfolio will invest at least 80% of the value of its total assets,
taken at market value at the time of investment, in one or more of the
following:
(1) Marketable debt securities of domestic and foreign issuers rated
at the time of purchase within the four highest grades assigned by Moody's
(Aaa, Aa, A or Baa) or by Standard and Poor's (AAA, AA, A or BBB) or
determined by the Sub-Adviser to be of comparable quality;
(2) Securities issued or guaranteed by the U.S. Government or its
agencies or instrumentalities, including mortgage-backed securities (see
"Government and Quality Bond Portfolio");
(3) Commercial paper rated at the time of purchase Prime-1 by Moody's
or A-1 by Standard and Poor's;
(4) Obligations of banks having total assets in excess of $1 billion.
The balance of the Portfolio's investments will include: other debt
securities (including those convertible into, or carrying warrants to purchase,
common stocks or other equity interests, and privately placed debt securities);
preferred stocks (including those convertible into, or carrying warrants to
purchase, common stocks or other equity interests); and marketable common stocks
which WMC considers likely to yield relatively high income in relation to
alternative investments. Debt securities are sometimes offered with warrants for
the purchase of common stock of the issuer of the debt security. These may be
purchased by the Portfolio only when the debt security meets the Portfolio's
investment criteria and the value of the warrants is relatively small. If the
warrant becomes valuable it will ordinarily be sold rather than exercised. It is
anticipated that no more than 20% of the assets of the Portfolio will be held in
convertible securities, and that no more than 10% of the assets of the Portfolio
will constitute warrants. To the extent that warrants are used, there may be
some additional investment risk, and countervailing opportunity, depending upon
the extent to which the underlying common stock price fluctuates.
Consistent with the Portfolio's investment objective, the Portfolio may
have up to 20% of its assets invested in instruments which are not investment
grade, including preferred stocks, when individually attractive yields offset
lower credit quality. (See "Risk Factors -- High-Yield Bonds" under "High Yield
Portfolio.") See Appendix A for a description of corporate bond ratings.
The Portfolio may invest in short-term money market instruments denominated
in U.S. dollars, including repurchase agreements, which are authorized for
purchase by the Money Market Portfolio. The Portfolio may also engage in
transactions involving Financial Futures Contracts and in options thereon for
income enhancement or hedging purposes. (See "Hedging and Income Enhancement
Strategies.") In addition, the Portfolio may purchase when-issued securities.
(See "When-Issued Securities" in the Statement of Additional Information.)
Bonds and debt securities with the lowest rating of the four investment
grade categories, BBB or Baa, may have speculative characteristics. Changes in
economic conditions or other circumstances are likely to lead to a weakened
capacity to make principal and interest payments than is the case with higher
rated bonds and debt instruments.
GOVERNMENT AND QUALITY BOND PORTFOLIO
The investment objective of this Portfolio is relatively high current
income, liquidity and security of principal. The Portfolio will seek to achieve
its objective by investing in obligations issued, guaranteed or insured by the
U.S. Government, its agencies or instrumentalities ("government securities"),
corporate debt securities rated Aa or
14
<PAGE> 20
better by Moody's or AA or better by Standard and Poor's ("high quality
corporate bonds") and U.S. dollar denominated foreign government and corporate
debt securities of comparable quality. It is currently anticipated that the
Portfolio will have the majority of its assets invested in government securities
since the Trust is permitted to treat each U.S. agency or instrumentality as a
separate issuer for purposes of determining compliance with diversification
standards imposed by Section 817(h) of the Internal Revenue Code of 1986, as
amended (the "Code"). (See "Special Considerations.")
The Portfolio may invest in mortgage-backed securities known as Ginnie Maes
("GNMA Securities"). GNMA Securities represent an interest in a pool of
mortgages insured by the Federal Housing Administration or the Farmers Home
Administration or guaranteed by the Veterans Administration. The Government
National Mortgage Association ("GNMA") guarantees the timely payment of
principal and interest on modified pass-through certificates when such payments
are due, whether or not these amounts are collected by the issuer of these
certificates on the underlying mortgages. The Portfolio may also invest in
similar mortgage-backed securities with differences in timing of payment and
pool structure, and other forms of GNMA Securities which are developed from time
to time if they are consistent with the investment objective of the Portfolio.
Mortgages included in single family or multi-family residential mortgage
pools backing an issue of GNMA Securities have a maximum maturity of up to 40
years. Scheduled payments of principal and interest are made to the registered
holders of GNMA Securities (such as the Portfolio) each month. Unscheduled
prepayments of mortgages included in these pools occur as a result of payment or
refinancing by homeowners or as a result of a default. Prepayments are passed
through to the registered holders of GNMA Securities with the regular monthly
payments of principal and interest. This has the effect of reducing future
payments on such GNMA Securities.
The Portfolio will also invest in high quality corporate bonds. High
quality corporate bonds may include straight debt securities of corporate or
trust issuers which are rated in the two highest rating categories by Moody's or
Standard and Poor's or, if not rated, determined by the Sub-Adviser to be of
comparable quality. At least 80% of the Portfolio will be invested in government
securities and high quality corporate bonds, except for temporary defensive
purposes. Up to 20% of the Portfolio may be invested in bonds rated as low as A
by Moody's or Standard and Poor's or, if not rated, determined by the
Sub-Adviser to be of comparable quality. See Appendix A for a description of
corporate bond ratings.
The Portfolio may also invest in other obligations issued, guaranteed or
insured by the United States, its agencies or instrumentalities. Some
obligations issued or guaranteed by agencies of the U.S. Government are backed
by the full faith and credit of the United States; others are backed only by the
rights of the issuer to borrow from the U.S. Treasury, such as Federal Mortgage
Association Securities. Insured obligations are generally backed by a fund
established by the agency to provide for losses. The GNMA Securities acquired by
the Portfolio have historically involved little risk of loss of principal if
held to maturity. However, if interest rates fluctuate or there are prepayments
on securities purchased at a premium, the market value of the securities may
vary.
The Portfolio may invest in short-term money market instruments denominated
in U.S. dollars, including repurchase agreements, which are authorized for
purchase by the Money Market Portfolio. (See "Money Market Portfolio" and
"Repurchase Agreements.") The Portfolio may also invest in when-issued
securities and may engage in transactions involving Financial Futures Contracts
and in options thereon for income enhancement or hedging purposes. (See
"When-Issued Securities" in the Statement of Additional Information and "Hedging
and Income Enhancement Strategies.")
MONEY MARKET PORTFOLIO
The investment objective of this Portfolio is current income consistent
with stability of principal. The Portfolio intends to comply with the Securities
and Exchange Commission ("SEC") regulations under the Investment Company Act of
1940, as amended ("1940 Act") applicable to money market funds. These
regulations impose certain quality, maturity and diversification guidelines on
the Portfolio's investments. Under these regulations, the Portfolio will invest
in a diversified portfolio of money market instruments maturing in 397 days or
less. Further, the Portfolio will maintain a dollar-weighted average portfolio
maturity of not more than 90 days.
The Portfolio will be invested in obligations denominated in U.S. dollars
which, at the time of investment, are "eligible securities" as defined in the
regulations. Under these regulations, an eligible security is an instrument that
is rated (or that has been issued by an issuer rated with respect to other
short-term debt of comparable priority and security) by at least two nationally
recognized statistical rating organizations ("NRSRO") (or if only one such
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<PAGE> 21
organization has issued a rating, by that organization) in one of the two
highest rating categories for short-term debt obligations, or an unrated
security which is determined to be of comparable quality under procedures
established by the Board of Trustees. The Portfolio may invest in: (i)
commercial paper and other short-term obligations of U.S. and foreign
corporations; (ii) obligations (including certificates of deposit, time
deposits, bank notes and bankers' acceptances) of U.S. savings and loan
institutions, U.S. commercial banks (including foreign branches of such banks),
and U.S. and London branches of foreign banks, provided that such institutions
(or, in the case of a branch, the parent institution) have total assets of $500
million or more as shown on their last published financial statements at the
time of investment; (iii) obligations issued or guaranteed as to principal and
interest by the U.S. Government or the agencies or instrumentalities thereof;
(iv) short-term obligations issued by state and local governmental issuers; (v)
obligations of foreign governments, including Canadian and Provincial Government
and Crown Agency Obligations; (vi) securities that have been structured to be
eligible money market instruments such as participation interests in special
purpose trusts that meet the quality and maturity requirements in whole or in
part due to arrangements for credit enhancement or for shortening effective
maturity; and (vii) repurchase agreements. Obligations which are rated in the
second highest rating category by any NRSRO will be limited to 5% of the
Portfolio's total assets and further limited by issuer to 1% of the Portfolio's
total assets. Descriptions of bond ratings are set forth in Appendix A.
Certain obligations purchased by the Portfolio may be variable or floating
rate instruments, may involve a demand feature and may include variable amount
master demand notes. Variable or floating rate instruments bear interest at a
rate which varies with changes in market rates. The holder of an instrument with
a demand feature may tender the instrument back to the issuer at par value prior
to maturity.
Although the Portfolio seeks to maintain a net asset value of $1.00 per
share for purposes of purchases and redemptions, there can be no assurance that
the net asset value will not vary. (See "Net Asset Value.") The Portfolio will
be affected by general changes in interest rates resulting in increases or
decreases in the value of the obligations held by the Portfolio. The value of
the securities in the Portfolio can be expected to vary inversely to the changes
in prevailing interest rates. Thus, if interest rates have increased from the
time a security was purchased, such security, if sold, might be sold at a price
less than its purchase cost. Similarly, if interest rates have declined from the
time a security was purchased, such security, if sold, might be sold at a price
greater than its purchase cost. In either instance, if the security were held to
maturity, no loss or gain would normally be realized as a result of these
fluctuations. Redemptions of shares could require the sale of investments at a
time when such a sale might not otherwise be desirable.
REPURCHASE AGREEMENTS
All Portfolios may enter into repurchase agreements (commonly called
"repos") with banks and dealers in U.S. Government securities. Under a
repurchase agreement, a Portfolio may acquire an underlying debt instrument for
a relatively short period, subject to an obligation of the seller to repurchase
and the Portfolio to resell the instrument at a fixed price and time, thereby
determining the yield during the Portfolio's holding period. This results in a
fixed rate of return insulated from market fluctuations during such period.
Under the 1940 Act, repurchase agreements are considered loans by the
Portfolios. The total amount received on repurchase would exceed the price paid
by the Portfolio, reflecting an agreed upon rate of interest for the period from
the date of the repurchase agreement to the settlement date, and would not be
related to the interest rate on the underlying securities. The difference
between the total amount to be received upon the repurchase of the securities
and the price paid by the Portfolio upon the acquisition is accrued daily as
interest. In the event of a default by an institution, the Portfolio may incur
certain costs in liquidating the collateral, and could also incur a loss if the
proceeds realized upon sale of the underlying obligations are less than the
repurchase price. In addition, if bankruptcy proceedings are commenced with
respect to the seller, realization on the collateral by a Portfolio may be
delayed or limited and the Portfolio may incur additional costs. In such case,
the Portfolio will be subject to risks associated with changes in the market
value of the collateral securities. In order to limit the risks associated with
entry into repurchase agreements, the Trustees have adopted procedures to
monitor and evaluate the creditworthiness of institutions with which it proposes
to engage in repos. The Portfolios will always obtain collateral in proper form
having a market value of not less than 102% of the purchase price (100% if such
collateral is in the form of cash). Such collateral will be cash or U.S.
Government obligations and will be in the actual or constructive possession of
the Portfolio.
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ILLIQUID SECURITIES
Each of the Portfolios may invest no more than 10% of the value of its net
assets in securities which are illiquid, including repurchase agreements
providing for settlement in more than seven days after notice. For this purpose,
not all securities which are restricted are deemed to be illiquid. For example,
restricted securities which the Board of Trustees, or the Adviser or Sub-Adviser
pursuant to guidelines established by the Board of Trustees, has determined to
be marketable, such as securities eligible for sale under Rule 144A promulgated
under the 1933 Act or certain private placements of commercial paper issued in
reliance on an exemption from the 1933 Act pursuant to Section 4(2) thereof,
will not be deemed to be illiquid for purposes of this restriction. This
investment practice could have the effect of increasing the level of illiquidity
in a Portfolio to the extent that qualified institutional buyers (as defined in
Rule 144A) become for a time uninterested in purchasing these restricted
securities. In addition, a repurchase agreement which by its terms can be
liquidated before its nominal fixed-term on seven days or less notice is
regarded as a liquid instrument. Subject to the applicable limitation on
illiquid securities investments, a Portfolio may acquire securities issued by
the U.S. Government, its agencies or instrumentalities in a private placement.
See "Illiquid Securities" in the Statement of Additional Information for a
further discussion of investments in such securities.
HEDGING AND INCOME ENHANCEMENT STRATEGIES
Each Portfolio (other than the Money Market Portfolio) may engage in
various portfolio strategies to reduce certain risks of its investments and to
attempt to enhance income. These strategies include the use of options and
futures contracts and options thereon. A Portfolio's ability to use these
strategies may be limited by market conditions and regulatory limits and there
can be no assurance that any of these strategies will succeed. New financial
products and risk management techniques continue to be developed and each
Portfolio may use these new investments and techniques to the extent consistent
with its investment objectives and policies.
OPTIONS TRANSACTIONS
A Portfolio may purchase and write (i.e., sell) put and call options on
securities and financial indices to enhance income or to hedge its portfolio.
These options may be on debt securities, aggregates of debt securities,
financial indices (e.g., Standard and Poor's 500 Composite Stock Index) and U.S.
Government securities and may be traded on securities exchanges or
over-the-counter. A Portfolio may write covered put and call options to generate
additional income through the receipt of premiums, purchase put options in an
effort to protect the value of a security that it owns against a decline in
market value and the simultaneous purchase of a call option and sale of a put
option with identical strike prices and expiration dates to protect against a
change in the price. A Portfolio may also purchase put and call options to
offset previously written put and call options of the same series. See
"Investment Objectives and Policies -- Call and Put Options on Securities" in
the Statement of Additional Information.
FUTURES CONTRACTS AND OPTIONS THEREON
Each Portfolio (other than the Money Market Portfolio) may purchase and
sell financial futures contracts and options thereon which are traded on a
commodities exchange or board of trade for certain hedging, return enhancement
and risk management purposes in accordance with regulations of the Commodity
Futures Trading Commission. These futures contracts and related options will be
on debt securities, aggregates of debt securities, financial indices and U.S.
Government securities and include futures contracts and options thereon which
are linked to the London Interbank Offered Rate (LIBOR).
A Portfolio may not purchase or sell futures contracts and related options
if immediately thereafter the sum of the amount of initial margin deposits on
such Portfolio's existing futures and options on futures and premiums paid for
such related options would exceed 5% of the market value of the Portfolio's
total net assets.
A Portfolio's successful use of futures contracts and related options
depends upon the investment adviser's ability to predict the direction of the
market and is subject to various additional risks. The correlation between
movements in the price of a futures contract and the price of the securities
being hedged is imperfect and there is a risk that the value of the securities
being hedged may increase or decrease at a greater rate than a specified futures
contract resulting in losses to a Portfolio.
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FOREIGN CURRENCY HEDGING OR INCOME ENHANCEMENT STRATEGIES
Each Portfolio (other than the Money Market Portfolio) may enter into
forward foreign currency exchange contracts and may purchase and sell
exchange-traded and over-the-counter ("OTC") options on currencies and foreign
currency futures contracts to hedge the currency exchange risk associated with
its assets or obligations denominated in foreign currencies, to adjust the
Portfolio's exposure to a particular currency or as a substitute for purchasing
or selling the underlying security.
A forward foreign exchange contract involves the future obligation to
purchase or sell a specific currency on a specified date and at a specified
price determined at the time of entering into the contract. It should be
recognized that the use of foreign currency contracts to protect the value of
the Portfolio's assets against a decline in the value of a currency does not
eliminate fluctuations in the value of the Portfolio's underlying security
holdings. In addition, although the use of foreign exchange contracts can
minimize the risk of loss due to a decline in value of the foreign currency, the
use of such contracts will tend to limit any potential gain resulting from an
increase in the relative value of the foreign currency to the U.S. dollar.
SPECIAL RISKS OF HEDGING AND INCOME ENHANCEMENT STRATEGIES
Participation in the options or futures markets involves investment risks
and transaction costs to which a Portfolio would not be subject absent the use
of these strategies. If the Sub-Adviser's prediction of movements in the
direction of the securities and interest rate markets is inaccurate, the adverse
consequences to a Portfolio may leave the Portfolio in a worse position than if
such strategies were not used. Risks inherent in the use of options and futures
contracts and options on futures contracts include: (1) dependence on the
Sub-Adviser's ability to predict correctly movements in the direction of
interest rates and securities prices; (2) imperfect correlation between the
price of options and futures contracts and options thereon and movements in the
prices of the securities being hedged; (3) the fact that skills needed to use
these strategies are different from those needed to select portfolio securities;
(4) the possible absence of a liquid secondary market for any particular
instrument at any time; and (5) the possible inability of a Portfolio to
purchase or sell a portfolio security at a time that otherwise would be
favorable for it to do so, or the possible need for a Portfolio to sell a
portfolio security at a disadvantageous time, due to the need for a Portfolio to
maintain "cover" or to segregate securities in connection with hedging
transactions.
FORWARD COMMITMENTS
Each Portfolio may enter into contracts to purchase securities for a fixed
price at a future date beyond customary settlement time ("forward commitments")
if a Portfolio holds, and maintains until the settlement date in a segregated
account, cash or liquid securities in an amount sufficient to meet the purchase
price, or if a Portfolio enters into offsetting contracts for the forward sale
of other securities it owns. Forward commitments may be considered securities in
themselves, and involve a risk of loss if the value of the security to be
purchased declines prior to the settlement date, which risk is in addition to
the risk of decline in the value of a Portfolio's other assets. Where such
purchases are made through dealers, a Portfolio relies on the dealer to
consummate the sale. The dealer's failure to do so may result in the loss to a
Portfolio of an advantageous yield or price. Although a Portfolio will generally
enter into forward commitments with the intention of acquiring securities for
the Portfolio or for delivery pursuant to options contracts it has entered into,
a Portfolio may dispose of a commitment prior to settlement if the Sub-Adviser
deems it appropriate to do so. A Portfolio may realize short-term profits or
losses upon the sale of forward commitments.
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INVESTMENT RESTRICTIONS
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In addition to the investment policies set forth above, certain additional
restrictive policies relating to the investment of assets of the Portfolios have
been adopted by the Trust. Certain investment restrictions of the Trust are
deemed fundamental policies and may not be changed without the approval of the
holders of a majority of the outstanding voting shares of each Portfolio
affected, which for this purpose and under the 1940 Act means the lesser of (i)
67% of the shares represented at a meeting at which more than 50% of the
outstanding shares are represented or (ii) more than 50% of the outstanding
shares. A change in policy affecting only one Portfolio may be effected with the
approval of a majority of the outstanding shares of such Portfolio. Details as
to such policies are set forth in the Statement of Additional Information.
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SPECIAL CONSIDERATIONS
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The Code imposes certain diversification standards on the underlying assets
of Variable Contracts held in the Portfolios of the Trust. The Code provides
that a Variable Contract shall not be treated as an annuity contract or life
insurance for any period for which the investments are not adequately
diversified, in accordance with regulations prescribed by the Treasury
Department. Disqualification of the Variable Contract as an annuity contract or
life insurance would result in imposition of federal income tax on the Contract
Owner with respect to earnings allocable to the Variable Contract prior to the
receipt of payments under the Variable Contract. The Code contains a safe harbor
provision which provides that contracts such as the Variable Contracts meet the
diversification requirements if, as of the close of each quarter, the underlying
assets meet the diversification standards for a regulated investment company and
no more than 55% of the total assets consists of cash, cash items, U.S.
Government securities and securities of other regulated investment companies.
The Treasury Department has issued Regulations (Treas. Reg. Section
1.817-5) which establish diversification requirements for the investment
portfolios underlying variable contracts, such as the Variable Contracts. The
Regulations amplify the diversification requirements for variable contracts set
forth in the Code and provide an alternative to the safe harbor provision
described above. Under the Regulations, an investment portfolio will be deemed
adequately diversified if, at the close of each calendar quarter, (i) no more
than 55% of the value of the total assets of the portfolio is represented by any
one investment; (ii) no more than 70% of the value of the total assets of the
portfolio is represented by any two investments; (iii) no more than 80% of the
value of the total assets of the portfolio is represented by any three
investments; and (iv) no more than 90% of the value of the total assets of the
portfolio is represented by any four investments. For purposes of these
regulations all securities of the same issuer are treated as a single
investment.
The Technical and Miscellaneous Revenue Act of 1988 provides that for
purposes of determining whether or not the diversification standards imposed on
the underlying assets of variable contracts by Section 817(h) of the Code have
been met, "each United States government agency or instrumentality shall be
treated as a separate issuer."
It is intended that each Portfolio of the Trust underlying the Contracts
will be managed in such a manner as to comply with these diversification
requirements.
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MANAGEMENT OF THE TRUST
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THE TRUSTEES
The Trust is organized as a Massachusetts business trust. The overall
responsibility for the supervision of the affairs of the Trust is vested in the
Trustees. The Trustees meet periodically to review the affairs of the Trust and
to establish certain guidelines which the Adviser and Sub-Adviser are expected
to follow in implementing the investment policies and objectives of the Trust.
SUNAMERICA ASSET MANAGEMENT CORP.
The Trust, on behalf of each Portfolio, has entered into an Investment
Advisory and Management Agreement (the "Agreement") with SAAMCo to handle the
Trust's day-to-day affairs.
SAAMCo, located at The SunAmerica Center, 733 Third Avenue, New York, New
York 10017-3204, is a corporation organized in 1982 under the laws of the State
of Delaware. SAAMCo is an indirect wholly owned subsidiary of SunAmerica Inc., a
financial services company. In addition to serving as adviser to the Trust, the
Adviser serves as adviser, manager and/or administrator for Anchor Pathway Fund,
Seasons Series Trust, Style Select Series, Inc., SunAmerica Equity Funds,
SunAmerica Income Funds, SunAmerica Money Market Funds, Inc., and SunAmerica
Series Trust. The Adviser managed, advised and/or administered assets in excess
of $12.5 billion as of December 31, 1997 for investment companies, individuals,
pension accounts, and corporate and trust accounts.
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SAAMCo provides investment advisory services, office space, and other facilities
for the management of the affairs of the Trust, and pays all compensation of
officers and Trustees of the Trust who are affiliated persons of SAAMCo.
The annual rate of the investment advisory fees which apply to each
Portfolio, are as follows:
Foreign Securities Portfolio pays a fee of .90% of Assets per annum;
Capital Appreciation Portfolio pays a fee of .75% of Assets per annum; Growth
Portfolio pays a fee of .75% of Assets per annum; Natural Resources Portfolio
pays a fee of .75% of Assets per annum; Growth and Income Portfolio pays a fee
of .70% of Assets per annum; Strategic Multi-Asset Portfolio pays a fee of 1% of
Assets per annum; Multi-Asset Portfolio pays a fee of 1% of Assets per annum;
High Yield Portfolio pays a fee of .70% per annum on the first $250 million of
Assets and .60% per annum over $250 million of Assets; Target '98 Portfolio pays
a fee of .625% of Assets of per annum; Fixed Income Portfolio pays a fee of
.625% of Assets per annum; Government and Quality Bond Portfolio pays a fee of
.625% of Assets per annum; and Money Market Portfolio pays a fee of .50% of
Assets per annum.
The investment management fees set out above are higher than those paid by
many other investment companies with similar investment objectives.
Notwithstanding the foregoing, SAAMCo has agreed to waive a portion of its fees
to reflect a schedule based on the asset size of a given portfolio. As a result,
in certain cases, the fees actually collected with respect to a portfolio may be
less than those set forth above. More complete information concerning the fee
waivers is contained in the Statement of Additional Information.
The term "Assets" means the average daily net assets of the Portfolio. The
Investment Advisory fees are accrued daily and paid monthly.
For the year ended December 31, 1997, SAAMCo received fees equal to the
following percentages of Assets: Foreign Securities Portfolio, 0.90%; Capital
Appreciation Portfolio, 0.65%; Growth Portfolio, 0.72%; Natural Resources
Portfolio, 0.75%; Growth and Income Portfolio, 0.70%; Strategic Multi-Asset
Portfolio, 1.00%; Multi-Asset Portfolio, 1.00%; High Yield Portfolio, 0.70%;
Target '98 Portfolio, 0.63%; Fixed Income Portfolio, 0.63%; Government and
Quality Bond Portfolio, 0.62%; and Money Market Portfolio, 0.50%.
WELLINGTON MANAGEMENT COMPANY, LLP
WMC acts as Sub-Adviser to each Portfolio of the Trust, pursuant to a
Sub-Advisory Agreement with SAAMCo to manage the investment and reinvestment of
the assets of such Portfolios. WMC is independent of SAAMCo and discharges its
responsibilities subject to the policies of the Trustees and the oversight and
supervision of SAAMCo, which pays WMC's fees.
WMC is a Massachusetts limited liability partnership of which the following
persons are managing partners: Robert W. Doran, Duncan M. McFarland and John R.
Ryan. The principal business address of WMC is 75 State Street, Boston,
Massachusetts 02109. WMC is a professional investment counseling firm which
provides investment services to investment companies, employee benefit plans,
endowments, foundations, and other institutions and individuals. As of December
31, 1997, WMC had discretionary management authority with respect to
approximately $174.5 billion of assets.
The portion of the investment advisory fees received by SAAMCo and paid to
WMC are as follows:
Foreign Securities Portfolio -- .40% per annum on the first $50 million of
Assets, .275% per annum on the next $100 million, .20% per annum on the next
$350 million, and .15% per annum over $500 million; Capital Appreciation
Portfolio -- .375% per annum on the first $50 million of Assets, .275% per annum
on the next $100 million, .20% per annum on the next $350 million, and .15% per
annum over $500 million; Growth Portfolio -- .325% per annum on the first $50
million of Assets, .225% per annum on the next $100 million, .20% per annum on
the next $350 million, and .15% per annum over $500 million; Natural Resources
Portfolio -- .35% per annum on the first $50 million of Assets, .25% per annum
on the next $100 million, .20% per annum on the next $350 million, and .15% per
annum over $500 million; Growth and Income Portfolio -- .325% per annum on the
first $50 million of Assets, .225% per annum on the next $100 million, .20% per
annum on the next $350 million, and .15% per annum over $500 million; Strategic
Multi-Asset Portfolio -- .300% per annum on the first $50 million of Assets,
.200% per annum on the next $100 million, .175% per annum on the next $350
million, and .15% per annum over $500 million; Multi-Asset Portfolio -- .250%
per annum on the first $50 million of Assets, .175% per annum on the next $100
million, .150% per annum over $150 million; High Yield Portfolio -- .30% per
annum on the first $50 million of Assets, .225% per annum on the next $100
million, .175% per annum on the next $350 million, and .15% per annum over $500
million; Target '98 Portfolio -- .225% per annum on the first $50 million of
Assets, .15% per annum on
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the next $50 million, .10% per annum on the next $400 million and .05% per annum
over $500 million; Fixed Income Portfolio -- .225% per annum on the first $50
million of Assets, .125% per annum on the next $50 million, and .10% per annum
over $100 million; Government and Quality Bond Portfolio -- .225% per annum on
the first $50 million of Assets, .125% per annum on the next $50 million, and
.10% per annum over $100 million; and Money Market Portfolio -- .075% per annum
on the first $500 million of Assets, and .020% per annum over $500 million.
For the year ended December 31, 1997, SAAMCo informed the Trust that WMC
received fees equal to the following percentages of daily net assets: Foreign
Securities Portfolio, 0.40%; Capital Appreciation Portfolio, 0.21%; Growth
Portfolio, 0.21%; Natural Resources Portfolio, 0.35%; Growth and Income
Portfolio, 0.33%; Strategic Multi-Asset Portfolio, 0.29%; Multi-Asset Portfolio,
0.20%; High Yield Portfolio, 0.30%; Target '98 Portfolio, 0.23%; Fixed Income
Portfolio, 0.23%; Government and Quality Bond Portfolio, 0.13%; and Money Market
Portfolio, 0.08%.
PORTFOLIO MANAGEMENT
The following individuals are primarily responsible for the day-to-day
management of the particular portfolios as indicated below.
Trond Skramstad, Senior Vice President and Director of International Equity
Investments, and Andrew S. Offit, Vice President and Associate Portfolio
Manager, have primary responsibility for the day to day management of the
FOREIGN SECURITIES PORTFOLIO and the GLOBAL CORE EQUITY SUB-PORTFOLIO of
STRATEGIC MULTI-ASSET PORTFOLIO. Mr. Skramstad is Chairman of WMC's Global
Equity Strategy Group which is a group of regional equity portfolio managers and
senior investment professionals responsible for providing investment research
and recommendations and has been responsible for managing the Portfolio since
1994 and the GLOBAL CORE EQUITY SUB-PORTFOLIO since 1998. Prior to joining WMC
in 1993, Mr. Skramstad was an international equity portfolio manager and
principal at Scudder, Stevens & Clark since 1990. Prior to joining WMC in 1997,
Mr. Offit was a portfolio manager at Chestnut Hill Management during 1997, and
at Fidelity Investments since 1987.
Robert D. Rands has served as the portfolio manager for the CAPITAL
APPRECIATION PORTFOLIO since its inception in 1987. Mr. Rands also manages the
CAPITAL APPRECIATION SUB-PORTFOLIO OF THE STRATEGIC MULTI-ASSET PORTFOLIO. Mr.
Rands is a Senior Vice President of WMC and joined the company in 1978.
WMC's Growth Investment Team, comprised of Frank V. Wisneski, Senior Vice
President; Matthew E. Megargel, Senior Vice President; and John J. Harrington,
Vice President, has been responsible for managing the GROWTH PORTFOLIO since
1995.
Ernst H. von Metzsch has served as the portfolio manager for the NATURAL
RESOURCES PORTFOLIO since October 24, 1994. Mr. von Metzsch is a Senior Vice
President, Partner and energy analyst at WMC and joined the company in 1973.
James Bevilacqua has served as the assistant portfolio manager of the
NATURAL RESOURCES PORTFOLIO since February, 1998. Mr. Bevilacqua is a Vice
President of WMC and joined the company in 1994. He was previously with Anderson
Consulting and General Electric.
Matthew E. Megargel has served as the portfolio manager for the GROWTH AND
INCOME PORTFOLIO since February, 1998. Mr. Megargel is a Senior Vice President
of WMC and joined the company in 1983. Mr. Megargel also manages the CORE EQUITY
SUB-PORTFOLIO OF THE MULTI-ASSET PORTFOLIO.
Adam D. Seitchik has served as the strategist for the STRATEGIC MULTI-ASSET
and the MULTI-ASSET PORTFOLIOS since February, 1997. Mr. Seitchik is a Vice
President of WMC and joined the company in 1994. He was previously with John
Hancock Investment & Pension Group.
Catherine A. Smith has served as the portfolio manager for the HIGH YIELD
PORTFOLIO since 1992. Ms. Smith is a Senior Vice President of WMC and joined the
company in 1984. Ms. Smith also manages the CORE BOND PLUS SUB-PORTFOLIO OF THE
STRATEGIC MULTI-ASSET PORTFOLIO.
Thomas L. Pappas has served as the portfolio manager for the TARGET '98
PORTFOLIO since 1992 and the FIXED INCOME PORTFOLIO since 1995. Mr. Pappas is a
Senior Vice President of WMC and joined the company in 1987.
Robert Evans has served as the portfolio manager for the GLOBAL CORE BOND
PLUS SUB-PORTFOLIO of the STRATEGIC MULTI-ASSET PORTFOLIO since February, 1998.
Mr. Evans is a Vice President of WMC and joined the
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company in 1995. Prior to joining WMC, Mr. Evans was a Senior Global Fixed
Income Portfolio Manager with Pacific Investment Management Company from 1991
through 1994.
John C. Keogh has served as the portfolio manager for the GOVERNMENT AND
QUALITY BOND PORTFOLIO since March 31, 1994. Mr. Keogh is a Senior Vice
President of WMC and joined the company in 1983. Mr. Keogh also manages the CORE
BOND SUB-PORTFOLIO OF THE MULTI-ASSET PORTFOLIO.
Timothy E. Smith has served as the portfolio manager of the MONEY MARKET
PORTFOLIO since February, 1997. Mr. Smith also manages the MONEY MARKET
SUB-PORTFOLIO OF THE STRATEGIC MULTI-ASSET PORTFOLIO. He is a Vice President of
WMC and joined the company in 1992.
CUSTODIAN, TRANSFER AND DIVIDEND PAYING AGENT
State Street Bank and Trust Company, Boston, Massachusetts, acts as
Custodian of the Trust's assets as well as Transfer and Dividend Paying Agent
and in so doing performs certain bookkeeping, data processing and administrative
services.
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PORTFOLIO TRANSACTIONS
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All purchase and sale orders of securities are placed on behalf of the
Trust by WMC for all the Portfolios. If the securities in which a particular
Portfolio invests are traded primarily in the over-the-counter market, then WMC
may deal directly with the broker-dealers who make a market in the securities
involved unless better prices and execution are available elsewhere. These
brokers may also furnish brokerage and research services, including advice as to
the advisability of investing in securities, securities analysis and reports.
Broker-dealers involved in the execution of portfolio transactions on
behalf of the Trust are selected on the basis of their professional capability
and the value and quality of their services. In selecting such broker-dealers,
WMC will consider various relevant factors, including, but not limited to, the
size and type of the transaction; the nature and character of the markets in
which the security can be purchased or sold; the execution efficiency,
settlement capability, and financial condition of the broker-dealer; the
broker-dealer's execution services rendered on a continuing basis; and the
reasonableness of any commissions.
The Trust reserves the right to effect portfolio transactions through a
broker affiliated with SAAMCo, acting as agent and not as principal, provided
that any commissions, fees or other remuneration received by such broker are
within the limitations set forth in the 1940 Act and are reasonable and fair
compared to the commissions, fees or other remuneration paid to other brokers in
connection with comparable transactions involving similar securities being
purchased or sold on an exchange during a comparable period of time.
Subject to applicable laws and regulations, the Advisers may also consider
the willingness of particular brokers to sell the Variable Contracts or
affiliated SunAmerica mutual funds as a factor in the selection of brokers for
executing portfolio transactions on behalf of the Trust.
- --------------------------------------------------------------------------------
NET ASSET VALUE
- --------------------------------------------------------------------------------
Each Portfolio is open for business on any day the New York Stock Exchange
("NYSE") is open for regular trading. Shares are valued each day as of the close
of regular trading on the NYSE (generally, 4:00 p.m., Eastern time). Each
Portfolio calculates its net asset value per share by dividing the total value
of its net assets by the number of shares outstanding. Investments for which
market quotations are readily available are valued at market at their closing
price. All other securities and assets are valued at fair value following
procedures approved by the Trustees. For a complete description of the
procedures involved in valuing various Trust assets, see the Statement of
Additional Information.
22
<PAGE> 28
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DIVIDENDS, DISTRIBUTIONS AND TAXES
- --------------------------------------------------------------------------------
Each Portfolio of the Trust intends to continue to qualify as a "Regulated
Investment Company" under certain provisions of the Code. Each Portfolio of the
Trust will be treated as a separate entity for Federal income tax purposes.
While qualified as a regulated investment company, each Portfolio of the Trust
will not be subject to Federal income taxes on net investment income and net
capital gains, if any, realized during any year provided all such net investment
company taxable income and net capital gains are distributed to its
shareholders.
Dividends on the Money Market Portfolio will be declared daily and
reinvested monthly in additional full and fractional shares of the Portfolio.
Dividends and distributions consisting of substantially all net investment
income and net realized capital gains from the Growth, Capital Appreciation,
Foreign Securities, Growth and Income, Fixed Income, Government and Quality
Bond, High Yield, Natural Resources, Multi-Asset, Strategic Multi-Asset and
Target '98 Portfolios will be declared and reinvested at least annually in
additional full and fractional shares of the respective Portfolios.
- --------------------------------------------------------------------------------
DESCRIPTION OF THE TRUST
- --------------------------------------------------------------------------------
The Trust was organized under the laws of The Commonwealth of Massachusetts
on August 26, 1983, as an unincorporated voluntary association, commonly known
as a business trust. Its offices are at The SunAmerica Center, 733 Third Avenue,
New York, New York 10017-3204. The Trust currently consists of twelve separate
investment series, each with its own investment objective. Certain series of the
Trust may not be available in connection with a particular annuity contract.
All shares of the Trust are owned by separate accounts of the Life
Companies. Pursuant to current interpretations of the 1940 Act, the Life
Companies will solicit voting instructions from contract owners with respect to
any matters that are presented to a vote of shareholders.
On any matter submitted to a vote of shareholders, all shares of the Trust
then issued and outstanding and entitled to vote shall be voted in the aggregate
and not by Portfolio except for matters concerning only a series. Certain
matters approved by a vote of all shareholders of the Trust may not be binding
on a Portfolio whose shareholders have not approved such matters. The holders of
each share of beneficial interest of the Trust shall be entitled to one vote for
each full share and a fractional vote for each fractional share of beneficial
interest. Shares of one series may not bear the same economic relationship to
the Trust as shares of another series.
The Trustees of the Trust have been elected by the shareholders of the
Trust. The Trustees themselves have the power to alter the number and the terms
of office of the Trustees, and they may at any time lengthen their own terms or
make their terms of unlimited duration (subject to certain removal procedures)
and appoint their own successors, provided that at least a majority of the
Trustees have been elected by the shareholders of the Trust at all times. The
Trust is not required to hold Annual Meetings of Shareholders. The Trustees may
call Special Meetings of Shareholders for action by shareholder vote as may be
required by the 1940 Act or the Declaration of Trust. The Declaration of Trust
provides that shareholders can remove Trustees by a vote of two-thirds of the
vote of the outstanding shares and the Declaration of Trust sets out the
procedures to be followed.
Each issued and outstanding share is entitled to participate equally in
dividends and distributions declared by the respective Portfolio and in net
assets of such Portfolio upon liquidation or dissolution remaining after
satisfaction of outstanding liabilities. The shares of each Portfolio have no
preference, pre-emptive, conversion, exchange or similar rights, and will be
freely transferable. Under certain circumstances Trust shareholders may have a
potential liability for the obligations of the Trust.
- --------------------------------------------------------------------------------
REPORTS AND INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
The Trust will furnish audited annual and unaudited semi-annual reports to
its shareholders. Price Waterhouse LLP, New York, New York, serves as the
independent accountants to the Trust.
23
<PAGE> 29
- --------------------------------------------------------------------------------
DISTRIBUTION AND REDEMPTION OF SHARES; INQUIRIES
- --------------------------------------------------------------------------------
Shares are only sold to separate accounts of the Life Companies at net
asset value. Redemptions will be effected by the separate accounts to meet
obligations under the Variable Contracts. Contract owners do not deal directly
with the Trust with respect to acquisition or redemption of shares.
Inquiries regarding the Trust should be directed to P.O. Box 54299, Los
Angeles, California, 90054-0299; telephone number: 800-445-SUN2.
- --------------------------------------------------------------------------------
GENERAL INFORMATION
- --------------------------------------------------------------------------------
YEAR 2000 COMPLIANCE
Many services provided to the Trust and its shareholders by the Adviser
rely on the smooth functioning of both the Adviser's computer and computer-based
systems as well as those of its outside providers. Many computer and
computer-based systems cannot distinguish the year 2000 from the year 1900
because of the way the systems encode and calculate dates. This Year 2000 Issue
potentially could have an adverse impact on the handling of security trades, the
payment of interest and dividends, pricing and account services. The Adviser
recognizes the importance of the Year 2000 Issue and is taking the appropriate
steps necessary in preparation of the year 2000. The Adviser fully anticipates
that its systems and those of its outside service providers will be adapted in
time for the year 2000, and to further this goal it has coordinated a plan to
repair, adapt or replace systems that are not Year 2000 compliant and has
obtained similar assurances from its outside service providers. The Adviser
expects to complete its plan significantly by the end of the 1998 calendar year
and then perform appropriate systems testing in the 1999 calendar year.
24
<PAGE> 30
- --------------------------------------------------------------------------------
APPENDIX A
DESCRIPTION OF CORPORATE BOND RATINGS
- --------------------------------------------------------------------------------
Moody's Investors Service, Inc. rates the long-term debt securities issued
by various entities from "Aaa" to "C". Aaa -- Best quality. These securities
carry the smallest degree of investment risk and are generally referred to as
"gilt edge". Interest payments are protected by a larger, 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 these issues. Aa -- High quality by all
standards. They are rated lower than the best quality bonds because margins of
protection may not be as large as in Aaa securities, fluctuation of protective
elements may be of greater amplitude, or there may be other elements present
that make the long-term risks appear somewhat greater. A -- Upper medium grade
obligations. These bonds possess many favorable investment attributes. Factors
giving security to principal and interest are considered adequate, but elements
may be present that suggest a susceptibility to impairment sometime in the
future. Baa -- Medium grade obligations. 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 -- Have speculative elements; future
cannot be considered as well assured. 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. Bonds in this class are characterized by
uncertainty of position. 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 -- Of
poor standing. Issues may be in default or there may be present elements of
danger with respect to principal or interest. Ca -- Speculative in a high
degree; often in default or have other marked shortcomings. C -- Lowest rated
class of bonds; can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Standard and Poor's Ratings Services, A Division of The McGraw-Hill
Companies, Inc. rates the long-term securities debt of various entities in
categories ranging from "AAA" to "D" according to quality. AAA -- Highest
rating. Capacity to pay interest and repay principal is extremely strong.
AA -- High grade. Very strong capacity to pay interest and repay principal.
Generally, these bonds differ from AAA issues only in a small degree. A -- Have
a strong capacity to pay interest and repay principal, although they are
somewhat more susceptible to the adverse effects of change in circumstances and
economic conditions than debt in higher rated categories. BBB -- Regarded as
having adequate capacity to pay interest and repay principal. These bonds
normally exhibit adequate protection parameters, but adverse economic conditions
or changing circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal than for debt in higher rated categories. BB, B,
CCC, CC, C -- Regarded, on balance, as predominantly speculative with respect to
capacity to pay interest and repay principal in accordance with the terms of the
obligation. BB indicates the lowest degree of speculation and C the highest
degree of speculation. While this debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposures to adverse conditions. C1 -- Reserved for income bonds on which
no interest is being paid. D -- In default and payment of interest and/or
repayment of principal is in arrears.
<PAGE> 31
STATEMENT OF ADDITIONAL INFORMATION
ANCHOR SERIES TRUST
THIS IS NOT A PROSPECTUS. This Statement of Additional Information should be
read in conjunction with the Prospectus for Anchor Series Trust. The Prospectus
may be obtained by calling or writing the Trust at the below address.
Capitalized terms used herein but not defined have the same meanings assigned to
them in the Prospectus.
P.O. BOX 54299
LOS ANGELES, CALIFORNIA 90054-0299
(800) 445-SUN2.
DATED: APRIL 1, 1998
<PAGE> 32
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
----
<S> <C>
THE TRUST...................................................................................................... B-3
INVESTMENT OBJECTIVES AND POLICIES............................................................................. B-3
Objectives............................................................................................ B-3
Foreign Money Market Instruments...................................................................... B-3
Variable and Floating Rate Instruments................................................................ B-4
Government Agencies Obligations....................................................................... B-4
When-Issued Securities................................................................................ B-5
Illiquid Securities................................................................................... B-6
Foreign Securities.................................................................................... B-7
Call and Put Options on Securities.................................................................... B-8
Absence of Liquid Secondary Options Market............................................................ B-11
Regulation of Futures Contracts and Options Thereon................................................... B-11
Financial Futures Contracts on Fixed Income
Securities - Characteristics and Risks....................................................... B-12
Options on Financial Futures Contracts................................................................ B-15
Warrants.............................................................................................. B-17
Stock Index Futures and Options Thereon............................................................... B-17
Stock Index Futures Characteristics and Risks......................................................... B-17
Options on Stock Index Futures and Risks.............................................................. B-21
Limitations on Stock Index Futures and Related
Options Transactions......................................................................... B-22
Foreign Currency Exchange Transactions................................................................ B-23
Options on Foreign Currencies......................................................................... B-25
Futures Contracts on Foreign Securities............................................................... B-26
Additional Risks of Options on Foreign Currencies,
Forward Contracts and Futures Contracts on
Foreign Currencies........................................................................... B-27
Loans of Portfolio Securities......................................................................... B-28
Interest Rate Swap Transactions ...................................................................... B-29
Description of Commercial Paper Ratings............................................................... B-30
Discount Bonds, Convertible Bonds and Preferred Stocks................................................ B-30
Certain Risk Factors Relating to High-Yield
(High-Risk) Bonds............................................................................ B-31
Investment Vehicles Designed to Track an Index........................................................ B-32
Further Information About the Target '98 Portfolio.................................................... B-32
INVESTMENT RESTRICTIONS........................................................................................ B-33
SUNAMERICA ASSET MANAGEMENT CORP............................................................................... B-36
Personal Securities Trading........................................................................... B-39
WELLINGTON MANAGEMENT COMPANY.................................................................................. B-40
OFFICERS AND TRUSTEES OF THE TRUST............................................................................. B-41
CUSTODIAN...................................................................................................... B-44
INDEPENDENT ACCOUNTANTS ....................................................................................... B-45
PORTFOLIO TRANSACTIONS AND BROKERAGE........................................................................... B-45
PORTFOLIO TURNOVER............................................................................................. B-48
NET ASSET VALUE................................................................................................ B-48
Foreign Securities Portfolio.......................................................................... B-49
Money Market Portfolio................................................................................ B-50
DIVIDENDS, DISTRIBUTIONS AND TAXES............................................................................. B-51
GENERAL INFORMATION............................................................................................ B-53
OWNERSHIP OF SHARES............................................................................................ B-53
FINANCIAL STATEMENTS........................................................................................... B-53
</TABLE>
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<PAGE> 33
THE TRUST
The Trust, organized as a Massachusetts business trust on August 26,
1983, is an open-end management investment company. The Trust is composed of
twelve separate Portfolios. Shares of the Trust are issued and redeemed only in
connection with investments in and payments under variable annuity contracts and
variable life insurance policies of Anchor National Life Insurance Company,
First SunAmerica Life Insurance Company, Phoenix Mutual Life Insurance Company
and Presidential Life Insurance Company (see "The Trust" in the Prospectus).
On December 1, 1992, the Board of Trustees of the Trust approved a
change of the names of the Aggressive Growth Portfolio and the Aggressive
Multi-Asset Portfolio to the Capital Appreciation Portfolio and the Strategic
Multi-Asset Portfolio, respectively.
On February 16, 1995, the Board of Trustees of the Trust approved a
change of the name of the Convertible Securities Portfolio to the Growth and
Income Portfolio.
INVESTMENT OBJECTIVES AND POLICIES
OBJECTIVES
For a description of the objectives of the Portfolios, see "Investment
Objectives and Policies" in the Prospectus. The following information is
provided for those investors wishing to have more comprehensive information than
that contained in the Prospectus.
FOREIGN MONEY MARKET INSTRUMENTS
The Money Market Portfolio will be diversified among issuers and among
industries with the exception of the banking industry and obligations of the
U.S. Government, its agencies and instrumentalities. The Money Market Portfolio
reserves the right to concentrate its investment in U.S. dollar denominated
obligations of foreign branches of U.S. banks, London and U.S. branches of
foreign banks, and commercial paper of foreign corporations, when the yields
available on such obligations exceed the yields available on obligations
otherwise permitted for investment by the Portfolio and when it is believed that
the relative return from such investments compared with the relative risk,
marketability and quality of such obligations appears to warrant such
concentration. Concentration in this context means the investment of more than
25% and up to 100% of the Portfolio's assets. These investments will meet the
quality criteria described above, but they may present investment risks in
addition to those involved in obligations of domestic banks and corporations.
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<PAGE> 34
Investment risks associated with investments in obligations of foreign
branches of U.S. banks, London and U.S. branches of foreign banks, short-term
obligations and commercial paper of foreign corporations include future
political and economic developments, the possible imposition of withholding
taxes on interest income payable on such obligations, the possible seizure or
nationalization of foreign deposits, the possible establishment of exchange
controls or the adoption of other government restrictions. Generally, the
foreign branches of the U.S. banks and the London or U.S. branches of foreign
banks are subject to fewer regulatory restrictions than are applicable to
domestic banks, and foreign branches of U.S. banks may be subject to less
stringent reserve requirements than domestic banks. The London or U.S. branches
of foreign banks, the foreign branches of U.S. banks and foreign corporations
may provide less public information than, and may not be subject to the same
accounting, auditing and financial record-keeping standards as, domestic banks.
VARIABLE AND FLOATING RATE INSTRUMENTS
Certain obligations purchased by the Portfolios of the Trust may be
variable or floating rate instruments, involve a demand feature and include
variable amount master demand notes. Variable or floating rate instruments bear
interest at a rate which varies with changes in market rates. The holder of an
instrument with a demand feature may tender the instrument back to the issuer at
par prior to maturity.
A variable amount master demand note is issued pursuant to a written
agreement between the issuer and the holder, its amount may be increased by the
holder or decreased by the holder or issuer, it is payable on demand and the
rate of interest varies based upon an agreed formula. The quality of the
underlying credit must be equivalent to the long-term bond or commercial paper
ratings applicable to permitted investment for the Money Market Portfolio. The
Sub-Adviser will monitor on an ongoing basis the earning power, cash flow and
liquidity ratios of the issuers of such instruments, and will similarly monitor
the ability of an issuer of a demand instrument to pay principal and interest on
demand.
GOVERNMENT AGENCIES OBLIGATIONS
All Portfolios may invest, to varying degrees, in government
obligations. Obligations issued by the U.S. Treasury are backed by the full
faith and credit of the U.S. Government. Obligations issued by governmental
agencies may be supported by varying levels of guarantee as to repayment of
principal and interest.
Agencies of the United States Government include, among others, Export
Import Bank of the United States, Farmers Home Administration, Federal Farm
Credit Bank, Federal Housing Administration, Government National Mortgage
Association, Maritime
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<PAGE> 35
Administration, Small Business Administration and the Tennessee Valley
Authority. The Portfolios may purchase securities guaranteed by the Government
National Mortgage Association which may represent participations in Veterans
Administration and Federal Housing Administration backed mortgage pools.
Obligations of instrumentalities of the United States Government include
securities issued by, among others, Federal Home Loan Banks, Federal Home Loan
Mortgage Corporation, Federal Intermediate Credit Banks, Federal Land Banks,
Federal National Loan Mortgage Association and the United States Postal Service.
Some of these securities are supported by the full faith and credit of the
United States Treasury (e.g., Government National Mortgage Association), others
are supported by the right of the issuer to borrow from the Treasury (e.g.,
Federal Farm Credit Bank) and still others are supported only by the credit of
the instrumentality (e.g., Federal National Mortgage Association). Guarantees of
principal by agencies or instrumentalities of the U.S. Government may be
guarantees solely of payment at the maturity of the obligation so that in the
event of a default prior to maturity there might be no market and thus no means
of realizing on the obligation prior to maturity.
WHEN-ISSUED SECURITIES
Each Portfolio may invest in securities issued on a when-issued or
delayed delivery basis at the time the purchase is made. When-issued or
delayed-delivery transactions arise when securities are purchased or sold by a
Portfolio with payment and delivery taking place a month or more in the future
in order to secure what is considered to be an advantageous price and yield to
the Portfolio at the time of entering into the transaction. Each Portfolio
generally would not pay for such securities or start earning interest on them
until they are issued or received. However, when a Portfolio purchases debt
obligations on a when- issued basis, it assumes the risks of ownership,
including the risk of price fluctuation, at the time of purchase, not at the
time of receipt. Failure of the issuer to deliver a security purchased by a
Portfolio on a when-issued basis may result in a Portfolio's incurring a loss or
missing an opportunity to make an alternative investment. When a Portfolio
enters into a commitment to purchase securities on a when-issued basis, it
establishes a segregated account with its custodian consisting of cash or liquid
securities equal to the amount of the Portfolio's commitment, which is valued at
fair market value. If on any day the market value of this segregated account
falls below the value of a Portfolio's commitment, the Portfolio will be
required to deposit additional cash or qualified securities into the account
equal to the value of the Portfolio's commitment. When the securities to be
purchased are issued, a Portfolio will pay for the securities from available
cash, from the sale of securities in the segregated account, from sales of other
securities and/or, if necessary, from the sale of the when-issued securities
themselves, although this is not
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<PAGE> 36
ordinarily expected. Securities purchased on a when-issued basis are subject to
the risk that yields available in the market, when delivery takes place, may be
higher or lower than the rate to be received on the securities a Portfolio has
committed to purchase. After a Portfolio is committed to purchase when-issued
securities, but prior to the issuance of the securities, it is subject to
adverse changes in the value of these securities based upon changes in interest
rates, as well as changes based upon the public's perception of the issuer and
its creditworthiness. Sale of securities in the segregated account or other
securities owned by a Portfolio and when-issued securities may cause the
realization of a capital gain or loss.
ILLIQUID SECURITIES
Each of the Portfolios may invest no more than 10% of its net assets,
determined as of the date of purchase, in illiquid securities including
repurchase agreements which have a maturity of longer than seven days or in
other securities that are illiquid by virtue of the absence of a readily
available market or legal or contractual restrictions on resale. Historically,
illiquid securities have included securities subject to contractual or legal
restrictions on resale because they have not been registered under the 1933 Act,
securities which are otherwise not readily marketable and repurchase agreements
having a maturity of longer than seven days. Repurchase agreements subject to
demand are deemed to have a maturity equal to the notice period. Securities
which have not been registered under the 1933 Act are referred to as private
placements or restricted securities and are purchased directly from the issuer
or in the secondary market. Mutual funds 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 a mutual
fund 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. A mutual fund might also have to
register such restricted securities in order to dispose of them, resulting in
additional expense and delay. There generally will be a lapse of time between a
mutual fund's decision to sell an unregistered security and the registration of
such security promoting sale. Adverse market conditions could impede a public
offering of such securities. When purchasing unregistered securities, the
Portfolios will seek to obtain the right of registration at the expense of the
issuer.
In recent years, a large institutional market has developed for certain
securities that are not registered under the 1933 Act, including repurchase
agreements, commercial paper, foreign securities, municipal securities and
corporate bonds and notes. Institutional investors depend on an efficient
institutional market in which the unregistered security can be readily resold or
on an
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<PAGE> 37
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.
Restricted securities eligible for resale pursuant to Rule 144A under
the 1933 Act for which there is a readily available market will not be deemed to
be illiquid. The Portfolios' Sub-Adviser will monitor the liquidity of such
restricted securities subject to the supervision of the Board of Trustees of the
Trust. In reaching liquidity decisions, the Sub-Adviser will consider, inter
alia, pursuant to guidelines and procedures established by the Trustees, the
following factors: (1) the frequency of trades and quotes for the security; (2)
the number of dealers wishing to purchase or sell the security and the number of
other potential purchasers; (3) dealer undertakings to make a market in the
security; and (4) 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).
Each of the Portfolios may invest in commercial paper issued in
reliance on the so-called private placement exemption from registration which is
afforded by Section 4(2) of the 1933 Act ("Section 4(2) paper"). Section 4(2)
paper is restricted as to disposition under the federal securities laws in that
any resale must similarly be made in an exempt transaction. Section 4(2) paper
is normally resold to other institutional investors through or with the
assistance of investment dealers who make a market in Section 4(2) paper, thus
providing liquidity. Section 4(2) paper that is issued by a company that files
reports under the Securities Exchange Act of 1934 is generally eligible to be
sold in reliance on the safe harbor of Rule 144A described above. The Money
Market, Multi-Asset and Strategic Multi-Asset Portfolios' 10% limitation on
investments in illiquid securities includes Section 4(2) paper other than
Section 4(2) paper that the Adviser has determined to be liquid pursuant to
guidelines established by the Trustees. The Portfolios' Board of Trustees
delegated to the Adviser the function of making day-to-day determinations of
liquidity with respect to Section 4(2) paper, pursuant to guidelines approved by
the Trustees that require the Adviser to take into account the same factors
described above for other restricted securities and require the Adviser to
perform the same monitoring and reporting functions.
FOREIGN SECURITIES
The Foreign Securities, Growth and Income, Growth, Capital
Appreciation, Natural Resources, Fixed Income, Government and Quality Bond,
Multi-Asset, and Strategic Multi-Asset Portfolios may invest in foreign debt and
equity securities. The High Yield and Target '98 Portfolios may invest in
foreign debt securities.
B-7
<PAGE> 38
Investment in securities issued by companies whose principal business
activities are outside the United States may involve significant risks not
present in domestic investments. For example, there is generally less publicly
available information about foreign companies, particularly those not subject to
the disclosure and reporting requirements of the U.S. securities laws. Foreign
issuers are generally not bound by uniform accounting, auditing, and financial
reporting requirements and standards of practice comparable to those applicable
to domestic issuers. Investments in foreign securities also involve the risk of
possible adverse changes in investment or exchange control regulations,
expropriation or confiscatory taxation, limitation on the removal of funds or
other assets of the Portfolios, political or financial instability or diplomatic
and other developments which could affect such investments. Further, economies
of particular countries or areas of the world may differ favorably or
unfavorably from the economy of the United States.
It is anticipated that in most cases the best available market for
foreign securities will be on exchanges or in over-the-counter markets located
outside of the United States. Foreign stock markets, while growing in volume and
sophistication, are generally not as developed as those in the United States,
and securities of some foreign issuers (particularly those located in developing
countries) may be less liquid and more volatile than securities of comparable
U.S. companies. In addition, foreign brokerage commissions are generally higher
than commissions on securities traded in the United States and may be
non-negotiable. In general, there is less overall governmental supervision and
regulation of securities exchanges, brokers, and listed companies than in the
United States.
CALL AND PUT OPTIONS ON SECURITIES
The Growth, Capital Appreciation, Growth and Income, Fixed Income, High
Yield, Multi-Asset, Strategic Multi-Asset and Natural Resources Portfolios may
purchase call and put options. These options my be either exchange-traded or
over the counter("OTC"). The purpose of these investments is to gain market
exposure with limited loss potential. The Growth, Capital Appreciation, Growth
and Income, Fixed Income, High Yield, Multi-Asset, Strategic Multi-Asset and
Natural Resources Portfolios may sell("write")covered call options to attempt to
realize, through the receipt of premiums, a greater return than would be
realized on the securities alone. The Portfolios intend to use covered call
options both to increase return on the securities of the Portfolios and for
defensive or hedging purposes. It is anticipated that the maximum percentage of
the Portfolios' securities subject to options primarily for income purposes will
be 30%, that the maximum percentage in options used primarily for defensive and
hedging strategies will be 50%, and that in no event will the aggregate exceed
the latter percentage.
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<PAGE> 39
A call option is a short-term contract (typically having a duration of
nine months or less). A call option gives the purchaser, in exchange for a
premium paid, the right for a specified period of time to purchase the
securities subject to the option at a specified price (the "exercise price" or
"strike price"). The writer of a call option, in return for the premium, has the
obligation, upon exercise of the option, to deliver, depending upon the terms of
the option contract, the underlying securities or a specified amount of cash to
the purchaser upon receipt of the exercise price. When a Portfolio writes a call
option, the Portfolio gives up the potential for gain on the underlying
securities or currency in excess of the exercise price of the option during the
period that the option is open.
A put option gives the purchaser, in return for a premium paid, the
right for a specified period of time, to sell the securities subject to the
option to the writer of the put at the specified exercise price. The writer of
the put option, in return for the premium, has the obligation, upon exercise of
the option, to acquire the securities underlying the option at the exercise
price. Therefore, if the Portfolio sells puts, it might be obligated to purchase
the underlying securities for more than their current market price.
A call option is "covered" if the Portfolio owns the underlying
security covered by the call or has an absolute and immediate right to acquire
that security without additional cash consideration (or for additional cash
consideration held in a segregated account by its custodian). A call option is
also covered if the Portfolio holds on a share-for-share basis a call on the
same security as the call written where the exercise price of the call held is
equal to or less than the exercise price of the call written, or else holds on a
share-for-share basis a put on the same security as the put written where the
exercise price of the put held is equal to or greater than the exercise price of
the put written.
The premium paid by the purchaser of an option will be determined by,
among other things, the relationship of the exercise price to the market price
and volatility of the underlying security, the remaining term of the option,
supply and demand, and interest rates.
The writer of an option wishing to terminate a position may effect a
"closing purchase transaction." This is accomplished by buying an option of the
same series as the option previously sold. The effect of the purchase is that
the writer's position will be canceled by the clearing corporation. However, a
writer may not effect a closing purchase transaction after being notified of the
exercise of an option. Likewise, an investor who is the holder of an option may
liquidate a position by effecting a "closing sale
B-9
<PAGE> 40
transaction." This is accomplished by selling an option of the same series as
the option previously purchased.
There is no guarantee that either a closing purchase or a closing sale
transaction can be executed. Executing a closing transaction in the case of a
written call option will permit the Portfolio to write another call option on
the underlying security with either a different exercise price or expiration
date or both. Also, effecting a closing transaction will permit the cash or
proceeds from the concurrent sale of any securities subject to the options to be
used for other Portfolio investments. If the Portfolio desires to sell a
particular security on which it has written a call option, it will effect a
closing transaction prior to or concurrent with the sale of the security.
The Portfolio will realize a profit from a closing transaction if the
price of the transaction is less than the premium received from writing the
option or is more than the premium paid to purchase the option. Conversely, the
Portfolio will realize a loss from a closing transaction if the price of the
transaction is more than the premium received from writing the option or is less
than the premium paid to purchase the option. Because increases in the market
price of a call option will generally reflect increases in the market price of
the underlying security, any loss resulting from the repurchase of a call option
is likely to be offset in whole or in part by appreciation of the underlying
security owned by the Portfolio.
An option position may be closed out on a market which provides a
secondary market for an option of the same series. Although the Portfolio will
generally purchase or write those options for which there appears to be an
active secondary market, there is no assurance that a liquid secondary market
will exist for any particular option, or at any particular time, and for some
options no secondary market may exist. In such event it might not be possible to
effect closing transactions in particular options, with the result that a
Portfolio would have to exercise its options in order to realize any profit and
would incur brokerage commissions upon the exercise of call options and upon the
subsequent disposition of underlying securities acquired through the exercise of
call options. If the Portfolio, as a covered call option writer, is unable to
effect a closing purchase transaction in a secondary market, it will not be able
to sell the underlying security until a closing purchase transaction can be
executed. See below for reasons why a liquid secondary options market may not
exist.
There is no assurance that higher than anticipated trading activity or
other unforeseen events might not, at times, render certain of the facilities of
any of the clearing corporations inadequate, and thereby result in the
institution by an exchange of special procedures which may interfere with the
timely execution of
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customers' orders. However, the Options Clearing Corporation, based on forecasts
provided by the U.S. Exchanges, believes that its facilities are adequate to
handle the volume of reasonably anticipated options transactions, and such
exchanges have advised such clearing corporation that they believe their
facilities will also be adequate to handle reasonable anticipated volume.
ABSENCE OF LIQUID SECONDARY OPTIONS MARKET
Reasons for the absence of a liquid secondary market on an options
exchange include the following: (i) there may be insufficient trading interest
in certain options; (ii) restrictions may be imposed by an exchange on opening
transactions or closing transactions or both; (iii) trading halts, suspensions
or other restrictions may be imposed with respect to particular classes or
series of options or underlying securities; (iv) unusual or unforeseen
circumstances may interrupt normal operation on an exchange; (v) the facilities
of an exchange or a clearing corporation may not at all times be adequate to
handle current trading volume; or (vi) one or more exchanges could, for economic
or other reasons, decide or be compelled at some future date to discontinue the
trading of options (or a particular class or series of options), in which event
the secondary market on that exchange (or in the class or series of options)
would cease to exist, although outstanding options on that exchange that had
been issued by a clearing corporation as a result of trades on that exchange
would continue to be exercisable in accordance with their terms. The OTC
secondary market also become illiquid. The reason for this illiquidity will be
market stress, not regulatory as in the case of listed options.
REGULATION OF FUTURES CONTRACTS AND OPTIONS THEREON
The use of exchange traded futures contracts and options thereon by the
Portfolios is subject to regulation by various governmental bodies, including
the Securities and Exchange Commission ("SEC") and the Commodity Futures Trading
Commission ("CFTC"). Each of the Portfolios has represented to the CFTC that it
will use futures contracts and options on futures contracts in bona fide hedging
transactions and under other circumstances permitted by the CFTC, provided that,
for non-hedging transactions, it will not enter into futures contracts or
options thereon for which the sum of the initial margin deposits on futures
contracts and related options and premiums paid for related options exceed 5% of
the fair market value of a Portfolio's assets. The over-the-counter derivatives
markets have no direct regulation. The regulators are involved in these markets
as part of their oversight of the entities that are dealing in the OTC
derivatives markets. For example, the Securities and Exchange Commission put SEC
in quotes regulates the dealer community, and in general, the banks acting as
counterparties are regulated by the Office of the Comptroller of the Currency
(OCC).
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FUTURES CONTRACTS ON FIXED INCOME SECURITIES - CHARACTERISTICS AND
RISKS
Each Portfolio (other than the Money Market Portfolio) may enter into
contracts ("Futures Contracts') for the future delivery of fixed income
securities. This investment technique will be used to hedge (e.g., to endeavor
to protect) against anticipated future changes in interest rates or other market
factors which otherwise might adversely affect the value of each Portfolio's
securities.
A "sale" of a Futures Contract means entering into a contractual
obligation to deliver the securities called for by the contract at a specified
price on a specified date. A "purchase" of a Futures Contract means entering
into a contractual obligation to acquire the securities at a specified price on
a specified date. Typically on a daily basis, adjustments are made to recognize
differences in value arising from the delivery of securities with a different
interest rate than that specified in the contract. In some cases, securities
called for by a Futures Contract may not have been issued at the time the
contract was written. Each Portfolio may also use fixed-income futures to adjust
currency exposure.
Unlike the sale or purchase of a fixed income security by a Portfolio,
no price is paid or received by the Portfolio upon the purchase or sale of a
Futures Contract. Initially, the Portfolio will be required to deposit with the
Trust's Custodian, State Street Bank and Trust Company, an amount of cash or
U.S. Treasury obligations equal to the margin requirement specified by the
futures counterparty. This amount is known as initial margin. The nature of
initial margin in futures transactions is different from that of margin in
security transactions in that futures contract margin does not involve the
borrowing of funds by the customer to finance the transactions. Rather, the
initial margin is in the nature of a performance bond or good faith deposit on
the contract which is returned to the Portfolio upon termination of the futures
contract assuming all contractual obligations have been satisfied. The Portfolio
will be required to make funds available at the custodian to satisfy any margin
calls due to adverse market moves. Subsequent payments, called variation margin,
to and from the broker, will be made on a daily basis as the price of the
underlying fixed income security fluctuates making the long and short positions
in the futures contract more or less valuable, a process known as marking to
market. For example, when the Portfolio has purchased a Futures Contract and the
price of the underlying fixed income security has risen, that position will have
increased in value and the Portfolio will receive from the broker a variation
margin payment equal to that increase in value. Conversely, where the Portfolio
has purchased a Futures Contract and the price of the underlying fixed income
security has declined, the position would be less valuable and the Portfolio
would be required to make a variation margin payment to the broker. At any
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time prior to the expiration of the futures contract, the Portfolio may elect to
close the position by taking an opposite position in the futures contract.
During the time the Portfolio has entered into such Futures Contract the
Portfolio will maintain in a segregated account with its custodian, liquid
assets at least equal to the value of the contract.
There are several risks in connection with the use of Futures Contracts
by a Portfolio as a hedging device. One risk arises because of the imperfect
correlation between movements in the price of the Futures Contract and movements
in the price of the securities which are the subject of the hedge. The price of
the Futures Contract may move more than or less than the price of the securities
being hedged. If the price of the Futures Contract moves less than the price of
the securities which are the subject of the hedge, the hedge will not be fully
effective but, if the price of the securities being hedged has moved in an
unfavorable direction, the Portfolio would be in a better position than if it
had not hedged at all. If the price of the securities being hedged has moved in
a favorable direction, this advantage will be partially offset by the losses on
the futures position. If the price of the futures contract moves more than the
price of the securities being hedged, the Portfolio will experience either a
loss or a gain on the futures position which will not be completely offset by
movements in the price of the securities being hedged. Conversely, the Portfolio
may buy or sell fewer Futures Contracts if the historical volatility of the
price of the Futures Contracts being hedged is more than the historical
volatility of the securities.
Where Futures Contracts are purchased to hedge against a possible
increase in the price of fixed income securities before a Portfolio is able to
invest its cash (or cash equivalents) in fixed income securities in an orderly
fashion, it is possible that the market may decline instead; if the Portfolio
then concludes not to invest in fixed income securities at that time because of
concern as to possible further market decline or for other reasons, the
Portfolio will realize a loss on the Futures Contract that is not offset by a
reduction in the price of securities purchased.
Although Futures Contracts by their terms call for the actual delivery
or acquisition of securities, in most cases the contractual obligation is
fulfilled before the date of the contract without having to make or take
delivery of the security. The offsetting of a contractual obligation is
accomplished by buying (or selling, as the case may be) on a commodities
exchange, an identical Futures Contract calling for delivery in the same month.
Such a transaction, which is effected through a member of an exchange, cancels
the obligation to make or take delivery of the securities. All transactions in
the futures market are made, offset or fulfilled through a clearing house
associated with the exchange on which the contracts are traded.
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A Portfolio may purchase Futures Contracts in anticipation of a
significant market advance (for example due to a decline in interest rates). The
purchase of a Futures Contract affords a hedge against not participating in such
advance at a time when the Portfolio is not fully invested. Such purchase of a
futures contract would serve as a temporary substitute for the purchase of
individual fixed income securities which may then be purchased in an orderly
fashion. As such purchases are made, an equivalent amount of Futures Contracts
would be terminated by offsetting sales. Similarly, Futures Contracts may be
purchased to maintain the desired percentage of the Portfolio invested in fixed
income securities in the event of a large cash flow into the Portfolio. As the
cash flow is invested in individual fixed income securities an equivalent amount
of Futures Contracts would be sold.
A Portfolio may sell Futures Contracts in a general market decline (for
example due to an increase in interest rates) that may adversely affect the
aggregate market value of the fixed income securities held in the Portfolio or
in anticipation of such a decline in aggregate market value. To the extent that
changes in the Portfolio's market value correlate with the changes in the price
of a given security, the sale of futures contracts on that fixed income security
would substantially reduce the risk to the Portfolio of a market decline and, by
so doing, provide an alternative to the liquidation of fixed income securities
positions in the Portfolio with resultant transaction costs. In the event of
large cash redemptions, the Portfolio may sell an equivalent amount of Futures
Contracts to maintain the desired percentage of the Portfolio invested in fixed
income securities. This would facilitate an orderly sale of individual
securities and, as such sales were made, an equivalent amount of Futures
Contracts would be terminated.
A Portfolio will incur brokerage fees when it purchases or sells
Futures Contracts, and it will be required to maintain margin deposits. In
addition, Futures Contracts entail risks. Although the Trustees believe that use
of such contracts will benefit the Portfolios, if investment judgment about the
general direction in interest rates is incorrect, the overall performance may be
poorer than if such contracts had not been used. One risk in employing Futures
Contracts to protect against cash market price volatility is the prospect that
futures prices will correlate imperfectly with the behavior of cash prices.
There is no assurance that a liquid secondary market on an exchange or board of
trade will exist for any particular contract or at any particular time. In such
event, it may not be possible to close a futures position, and in the event of
price movements causing adverse changes in the value of the futures position,
the Portfolio would continue to be required to make daily cash payments of
variation margin. In such circumstances, an increase in the price of the fixed
income securities, if any, may partially or completely offset losses on the
futures contract. However, there is no guarantee that the
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price of the fixed income securities will, in fact, correlate with the price
movements in the futures contract and thus provide an offset to losses on a
futures contract.
Successful use of Futures Contracts by a Portfolio is also subject to
the ability to correctly predict movement in the direction of the market. For
example, if the Portfolio has hedged against the possibility of a decline in the
market value of its fixed income securities and fixed income security prices
increased instead, the Portfolio will lose part or all of the benefit of the
increased value of its fixed income securities which it has hedged because it
will have offsetting losses in its futures positions. In addition, in such
situations, if the Portfolio has insufficient cash, it may have to sell fixed
income securities to meet the daily variation margin requirements. Such sales of
fixed income securities may be, but will not necessarily be, at increased prices
which reflect the rising market. The Portfolio may have to sell securities at a
time when it may be disadvantageous to do so.
A Portfolio will limit use of futures contracts so that the exposure of
all futures contracts will not exceed 30% of its total assets. With the
assistance of the Custodian, a segregated asset account will be maintained
consisting of cash or liquid securities in an amount that will cover obligations
with respect to Futures Contracts.
OPTIONS ON FIXED INCOME FUTURES CONTRACTS
Each Portfolio (other than the Money Market Portfolio) may purchase and
write options on Fixed Income Futures Contracts which are traded on an exchange,
in order to hedge against adverse price movements, and enter into closing
transactions with respect to such options to terminate an existing position. An
option on a Fixed Income Futures Contract gives the purchaser the right, in
return for the premium paid, to assume a position in a Fixed Income Futures
Contract (a long position if the option is a call and a short position if the
option is put) at a specified exercise price at any time during the period of
the option. Upon exercise of the option, the delivery of the futures position by
the writer of the option to the holder of the option will be accompanied by
delivery of the accumulated balance in the writer's futures margin account which
represents the amount by which the market price of the Fixed Income Futures
Contract at the time of exercise exceeds, in the case of a call, or is less
than, in the case of a put, the exercise price of the option on the Fixed Income
Futures Contract. Writing a call option would provide a partial hedge against
declines in the value of the fixed income securities the Portfolio owns (but
would also limit potential capital appreciation in the fixed income securities.)
In addition, writing an option would provide a Portfolio with income in the form
of the option premium.
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The purchase of protective put options on a Fixed Income Futures
Contract is analogous to the purchase of protective puts on individual fixed
income securities, where a level of protection is sought below which no
additional economic loss would be incurred by the Portfolio. Put options on
Financial Futures Contracts may also be purchased to hedge a portfolio of fixed
income securities.
The purchase of a call option on a Fixed Income Futures Contract
represents a means of obtaining temporary exposure to anticipated increases in
the price of fixed income securities (for example due to decreases in interest
rates) at limited risk. It is analogous to the purchase of a call option on an
individual fixed income security which can be used as a substitute for a
position in the security itself. Depending on the pricing of the option compared
to either the price of the future upon which it is based, or the price of the
underlying fixed income security itself, it may be less risky than the ownership
of the Fixed Income Futures Contract or the underlying security. Like the
purchase of a Financial Futures Contract, the Portfolio would purchase a call
option on a Financial Futures Contract to hedge against an increase in the price
of fixed income securities (for example, due to a decline in interest rates)
when the Portfolio is not fully invested.
As with options on securities, the holder of an option may terminate
his position by selling an identical option. There is, however, no guarantee
that such closing transactions can be effected. Positions in options on Fixed
Income Futures Contracts may be closed out only on an exchange or board of trade
which provides a secondary market for such options. Although each Portfolio
intends to purchase or sell options only on exchanges or boards of trade where
there appears to be an active secondary market, there can be no assurance that a
liquid secondary market will exist for any particular option or at any
particular time. In such event, it may not be possible to close out an option
position, and if the Portfolio was the writer of the option, in the event of
price movements causing adverse changes in the value of the option position, the
Portfolio may continue to be required to make daily cash payments of variation
margin.
The ability to establish and close out positions on such options will
be subject to the availability of a liquid secondary market. A Portfolio will
not purchase options on Fixed Income Futures Contracts on any exchange unless
and until, in the opinion of WMC, the market for such options has developed
sufficiently that the risks in connection with options on Fixed Income Futures
Contract transactions are not greater than the risks in connection with Fixed
Income Futures Contract transactions. Compared to the use of Fixed Income
Futures Contracts, the purchase of options on Fixed Income Futures Contracts
involves less potential risk to the Portfolio because the maximum amount at risk
is the premium paid for the option (plus transaction costs). However, there may
be
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circumstances when the use of an option on a Fixed Income Futures Contract would
result in a loss to the Portfolio when the use of a Fixed Income Futures
Contract would not, such as when there is no movement in the level of interest
rates.
WARRANTS
A Portfolio may invest in common stock warrants, which entitle the
holder to buy common stock from the issuer of the warrant at a specified price
(the strike price) for a specified period of time, or index warrants, which
entitle the holder to receive a cash payment from the issuer of the warrant
based on the value of the underlying index at the time of exercise. Common stock
warrants generally do not entitle the holder to dividends or voting rights with
respect to the underlying common stock and do not represent any rights in the
assets of the issuer company. If a Portfolio were not to exercise a warrant
prior to its expiration, then the Portfolio would lose the purchase price paid
for the warrant.
A Portfolio will normally use warrants in a manner similar to its use
of options on securities or securities indices. The risk of a Portfolio's use of
warrants are generally similar to those relating to its use of options. Unlike
most options, however, warrants are issued in limited amounts and are not
obligations of a regulated clearing agency, but are backed only by the credit of
the issuer of the warrant. Also, warrants generally have longer terms than index
options. Although a Portfolio will normally invest only in exchange-listed
warrants, warrants are not likely to be as liquid as certain options backed by a
recognized clearing agency. To the extent such an investment is deemed to be
illiquid by the Sub-Adviser, it will be subject to the Portfolio's 10%
limitation on illiquid investments. In addition, the terms of warrants may limit
a Portfolio's ability to exercise the warrants at such time, or in such
quantities, as a Portfolio would otherwise wish to do.
STOCK INDEX FUTURES AND OPTIONS THEREON
Each Portfolio (other than the Money Market Portfolio) may purchase and
sell stock index futures contracts and options thereon as a hedge against
changes in market conditions or as a substitute for purchasing or selling a
security position in accordance with the strategies more specifically described
below. Each of these Portfolios presently intends to limit use of futures
contracts so that the aggregate market value of all futures contracts does not
exceed 30% of the Portfolio's total assets.
STOCK INDEX FUTURES CHARACTERISTICS AND RISKS
A Portfolio may purchase stock index futures contracts in anticipation
of a significant market or market sector advance. The purchase of a stock index
futures contract affords a hedge against
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not participating in such advance at a time when the Portfolio is not fully
invested. Such purchase of a futures contract would serve as a temporary
substitute for the purchase of individual stocks which may then be purchased in
a orderly fashion. As such purchases are made, an equivalent amount of stock
index futures contracts would be terminated by offsetting sales. Similarly stock
index futures contracts may be purchased to maintain the desired percentage of
the Portfolios invested in stocks in the event of a large cash flow into the
Portfolio. As cash flow is invested in individual stocks an equivalent amount of
stock index futures contracts would be sold. A Portfolio may also use stock
index futures may also be used to adjust country exposure.
A Portfolio may sell stock index futures contracts in anticipation of
or in a general market or market sector decline that may adversely affect the
aggregate market value of the securities held in the Portfolio. To the extent
that changes in the Portfolio's market value correlate with changes in a given
stock index, the sale of futures contracts on that index would substantially
reduce the risk to the Portfolio of a market decline and, by so doing, provides
an alternative to the liquidation of securities positions in the Portfolio with
resultant transaction costs. In the event of large cash redemptions, the
Portfolio may sell an equivalent amount of stock index futures contracts to
maintain the desired percentage of the Portfolio invested in stocks. This would
facilitate an orderly sale of individual stocks and, as such sales were made, an
equivalent amount of stock index futures contracts would be terminated.
A Portfolio will incur brokerage fees when it purchases or sells stock
index futures contracts, and it will be required to maintain margin deposits. In
addition, stock index futures contracts entail risks. Although the Trustees
believe that use of such contracts will benefit the Portfolios, if investment
judgment about the general direction in equity prices is incorrect, the overall
performance may be poorer than if such contracts had not been used.
Currently, stock index futures contracts can be purchased or sold with
respect to several indices, including, but not limited to, the Standard and
Poor's 500 Stock Index on the Chicago Mercantile Exchange, the New York Stock
Exchange Composite Index on the New York Futures Exchange and the Value Line
Composite Stock Index on the Kansas City Board of Trade. Index futures contracts
are also available on a number of foreign exchanges.
Unlike the sale or purchase of a security by a Portfolio, no price is
paid or received by the Portfolio upon the purchase or sale of a stock index
futures contract. Initially, the Portfolio will be required to deposit with the
Trust's Custodian an amount of cash or U.S. Treasury bills equal to the margin
requirement specified by the futures counterparty. This amount is known as
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initial margin. The nature of initial margin in futures transactions is
different from that of margin in security transactions in that futures contract
margin does not involve the borrowing of funds by the customer to finance the
transactions. Rather, the initial margin is in the nature of performance bond or
good faith deposit on the contract which is returned to the Portfolio upon
termination of the futures contract assuming all contractual obligations have
been satisfied. Subsequent payments, called variation margin, to and from the
broker, will be made on a daily basis as the price of the underlying stock index
fluctuates making the long and short positions in the futures contract more or
less valuable, a process known as marking to market. For example, when the
Portfolio has purchased a stock index futures contract and the price of the
underlying stock index has risen, that position will have increased in value and
the Portfolio will receive from the broker a variation margin payment equal to
the increase in value of the position. Conversely, where the Portfolio has
purchased a stock index futures contract and the price of the underlying stock
index has declined, the position would be less valuable and the Portfolio would
be required to make a variation margin payment to the broker. At any time prior
to expiration of the futures contract, the Portfolio may elect to close the
position by taking an opposite position which will operate to terminate the
Portfolio position in the futures contract.
There are several risks in connection with the use of stock index
futures in a Portfolio as a hedging device. One risk arises because of the
imperfect correlation between movements in the price of the stock index future
and movements in the price of the securities which are the subject of the hedge.
The price of the stock index future may move more than or less than the price of
the securities being hedged. If the price of the stock index future moves less
than the price of the securities which are the subject of the hedge, the hedge
will not be fully effective but, if the price of the securities being hedged has
moved in a unfavorable direction, the Portfolio would be in a better position
than if it had not hedged at all. If the price of the securities being hedged
has moved in a favorable direction, this advantage will be partially offset by
the losses on the futures position. If the price of the futures contract moves
more than the price of the securities being hedged, the Portfolio will
experience either a loss or a gain on the futures position which will not be
completely offset by movements in the price of the securities which are the
subject of the hedge. To compensate for the imperfect correlation of movements
in the price of securities being hedged and movements in the price of the stock
index futures, the Portfolio may buy or sell stock index futures contracts in a
greater dollar amount than the dollar amount of securities being hedged if the
historical volatility of the prices of such securities has been greater than the
historical volatility of the futures contract. Conversely, the Portfolio may buy
or sell fewer stock index futures contracts if the historical volatility of the
price of the securities being
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hedged is less than the historical volatility of the futures contract.
Where futures are purchased to hedge against a possible increase in the
price of stock before the Portfolio is able to invest its cash (or cash
equivalents) in stock (or options) in an orderly fashion, it is possible that
the market may decline instead; if the Portfolio then concludes not to invest in
stock or options at that time because of concern as to possible further market
decline or for other reasons, the Portfolio will realize a loss on the futures
contract that is not offset by a reduction in the price of securities purchased.
In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the stock index
futures contract and the portion of the Portfolio being hedged, the price of
stock index futures may not correlate perfectly with movement in the stock index
due to certain market distortions.
Positions in stock index futures may be closed out only on an exchange
or board of trade which provides a secondary market for such futures. Although
each Portfolio intends to purchase or sell futures only on exchanges or boards
of trade where there appears to be an active secondary market, there is no
assurance that a liquid secondary market on an exchange or board of trade will
exist for any particular contract or at any particular time. In such event it
may not be possible to close a futures position, and in the event of adverse
price movements, the Portfolio would continue to be required to make daily cash
payments of variation margin. In such circumstances, an increase in the price of
the securities, if any, may partially or completely offset losses on the futures
contract. However, as described above, there is no guarantee that the price of
the securities will, in fact, correlate with the price movements in the futures
contract and thus provide an offset to losses on a futures contract.
The Portfolios intend to purchase and sell futures contracts on the
stock index for which they can obtain the best price with consideration also
given to liquidity and the correlation of the index to the particular securities
being hedged.
Successful use of stock index futures by a Portfolio is also subject to
the ability to predict correctly movements in the direction of the market. For
example, if the Portfolio has hedged against the possibility of a decline in the
market adversely affecting stocks held in its Portfolio and stock prices
increase instead, the Portfolio will lose part or all of the benefit of the
increased value of its stocks which it has hedged because it will have
offsetting losses in its futures positions. In addition, in such situations, if
the Portfolio has insufficient cash, it may have to sell securities to meet the
daily variation margin
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requirements. Such sales of securities may be, but will not necessarily be, at
increased prices which reflect the rising market. The Portfolio may have to sell
securities at a time when it may be disadvantageous to do so.
OPTIONS ON STOCK INDEX FUTURES AND RISKS
In connection with the Portfolios' hedging strategies, each Portfolio
(other than the Money Market Portfolio) may purchase and write options on stock
index futures which are traded on a U.S. exchange or board of trade, in order to
hedge against adverse price movements, and enter into closing transactions with
respect to such options to terminate an existing position. Options on stock
index futures are similar to options on stocks except that an option on a stock
index future gives the purchaser the right, in return for the premium paid, to
assume a position in a stock index futures contract (a long position if the
option is a call and short position if the option is put), rather than to
purchase or sell stock, at a specified exercise price at any time during the
period of the option. The purchase of protective put options on a stock index
futures contract is analogous to the purchase of protective puts on individual
stocks, where a level of protection is sought below which no additional economic
loss wold be incurred by the Portfolio. Put options on stock index futures may
also be purchased to hedge a Portfolio of stocks. Writing a call option on stock
index futures would provide a partial hedge against declines in the value of the
securities the Portfolio owns (but would also limit potential capital
appreciation in the securities). In addition, writing an option would provide a
Portfolio with income in the form of the option premium.
The purchase of a call option on a stock index future represents a
means of obtaining temporary exposure to anticipated market appreciation at
limited risk. It is analogous to the purchase of a call option on an individual
stock, which can be used as a substitute for a position in the stock itself.
Depending on the pricing of the option compared to either the price of the
futures contract upon which it is based, or the price of the underlying stock
index itself, it may be less risky than the ownership of the stock index futures
or the underlying stocks. Like the purchase of a stock index future, the
Portfolio would purchase a call option on a stock index future to hedge against
a market advance when the Portfolio is not fully invested.
Upon exercise of the option, the delivery of the futures position by
the writer of the option to the holder of the option will be accompanied by
delivery of the accumulated balance in the writer's futures margin account which
represents the amount by which the market price of the stock index futures
contract, at exercise, exceeds, in the case of a call, or is less than, in the
case of a put, the exercise price of the option on the stock index future.
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As with options on securities, the holder of an option may terminate
his position by selling an identical option. There is, however, no guarantee
that such closing transactions can be effected. Positions in options on stock
index futures contracts may be closed out only on an exchange or board of trade
which provides a secondary market for such options. Although each Portfolio
intends to purchase or sell options only on exchanges or boards of trade where
there appears to be an active secondary market, there can be no assurance that a
liquid secondary market will exist for any particular option or at any
particular time. In such event, it may not be possible to close out an option
position, and, if the Portfolio was the writer of the option, in the event of
price movements causing adverse changes in the value of the option position, the
Portfolio would continue to be required to make daily cash payments of variation
margin.
The ability to establish and close out positions on such options will
be subject to the availability of a liquid secondary market. A Portfolio will
not purchase options on stock index futures on any exchange unless and until, in
the opinion of WMC, the market for such options has developed sufficiently that
the risks in connection with options on futures transactions are not greater
than the risks in connection with stock index futures transactions. Compared to
the use of stock index futures, the purchase of options on stock index futures
contracts involves less potential risk to the Portfolio because the maximum
amount at risk is the premium paid for the options (plus transactions costs).
However, there may be circumstances when the use of an option on a stock index
future would result in a loss to the Portfolio when the use of a stock index
future would not, such as when there is no movement in the level of the index.
LIMITATIONS ON STOCK INDEX FUTURES AND RELATED OPTIONS TRANSACTIONS
Each Portfolio authorized to invest in these instruments will not
engage in transactions in stock index futures contracts or related options for
speculation but only as a hedge against changes resulting from market conditions
in the values of securities held in the Portfolio or which it intends to
purchase and where the transactions are economically appropriate to the
reduction of risks inherent in the ongoing management of the Portfolio. Each
Portfolio authorized to invest in these instruments presently intends to limit
its transactions so that the aggregate market exposure of all futures contracts
does not exceed 30% of the Portfolio's total assets. In instances involving the
purchase of stock index futures contracts by those Portfolios, an amount of cash
or liquid securities, equal to the market value of the futures contracts, will
be deposited in a segregated account with the Portfolio's Custodian or in a
margin account with a broker to collateralize the position and thereby ensure
that the use of such futures is unleveraged. (See "Stock Index Futures and
Options
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Thereon" for the Portfolios authorized to purchase and sell stock index futures
contracts and options.)
FOREIGN CURRENCY EXCHANGE TRANSACTIONS
Since investments in companies whose principal business activities are
located outside of the United States will frequently involve currencies of
foreign countries, and since assets of certain Portfolios may temporarily be
held in bank deposits in foreign currencies during the completion of investment
programs, the value of the assets of a Portfolio as measured in U.S. dollars may
be affected favorably or unfavorably by changes in foreign currency exchange
rates and exchange control regulations. Although the Portfolio values its assets
daily in terms of U.S. dollars, it does conduct its foreign currency exchange
transactions on a spot (e.g., cash) basis at the spot rate prevailing in the
foreign currency exchange market or through entering into contracts to purchase
or sell foreign currencies at a future date (e.g., a "forward foreign currency"
contract or "forward" contract). It will convert currency on a spot basis from
time to time, and investors should be aware of the costs of currency conversion.
Although foreign exchange dealers do not charge a fee for conversion, they do
realize a profit based on the difference (the "spread") between the prices at
which they are buying and selling various currencies. Thus, a dealer may offer
to sell a foreign currency at one rate, while offering a lesser rate of exchange
should the Portfolio desire to resell that currency to the dealer. The
Portfolios do not intend to speculate in foreign currency exchange rates or
forward contracts, but they are permitted to make prudent investments.
A forward contract involves an obligation to purchase or sell a
specific currency at a future date, which may be any fixed number of days from
the date of the contract, agreed upon by the parties, at a price set at the time
of the contract. These contracts are traded in the interbank market conducted
directly between currency traders (usually large commercial banks) and their
customers. A forward contract generally has no deposit requirement, and no
commissions are charged for trades.
The Portfolios may enter into forward contracts for the purpose of
adjusting country exposure as a part of an overall investment strategy as a
substitute for purchasing or selling a security, or to protect against a
possible loss resulting from an adverse change in the relationship between the
U.S. dollar and the foreign currency during the period between the date a
foreign security is purchased or sold and the date on which payment is made or
received. Forward contracts may be utilized when the Sub-Adviser believes that
the currency of a particular foreign country may suffer a substantial decline
against the U.S. dollar. In this case, it may enter into a forward contract to
sell, for a fixed amount of U.S. dollars, the amount of foreign currency
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approximating the value of some or all of the Portfolio's securities denominated
in such foreign currency.
Under normal circumstances, consideration of the prospect for currency
parities will be incorporated in the longer term investment decisions made with
regard to overall diversification strategies. However, it is important to have
the flexibility to enter into such forward contracts when the best interests of
the Portfolio will be served. The Custodian will maintain, in a segregated
account, an amount of cash or liquid securities equal to the Portfolio's
commitments under forward contracts except to the extent they are otherwise
"covered." If the value of the securities declines, additional cash or
securities will be segregated on a daily basis so that the value will equal the
amount of the Portfolio's commitments with respect to such contracts.
The Portfolios generally will not enter into a forward contract with a
term of greater than one year. At the maturity of a forward contract, a
Portfolio may either sell the portfolio security and make delivery of the
foreign currency, or it may retain the security and terminate its contractual
obligation to deliver the foreign currency by purchasing an "offsetting"
contract with the same currency trader obligating it to purchase, on the same
maturity date, the same amount of the foreign currency.
It is impossible to forecast with precision the market value of
portfolio securities at the expiration of the contract. Accordingly, if a
decision is made to sell the security and make delivery of the foreign currency
it may be necessary to purchase additional foreign currency on the spot market
(and bear the expense of such purchase), if the market value of the security is
less than the amount of foreign currency the Portfolio is obligated to deliver.
Conversely, it may be necessary to sell on the spot market some of the foreign
currency received upon the sale of the portfolio security if its market value
exceeds the amount of foreign currency the Portfolio is obligated to deliver.
If the Portfolio retains the portfolio security and engages in an
offsetting transaction, the Portfolio will incur a gain or loss (as described
below) to the extent that there has been movement in forward contract prices. If
the Portfolio engages in an offsetting transaction, it may subsequently enter
into a new forward contract to sell the foreign currency. Should forward prices
decline during the period between entering into a forward contract for the sale
of the foreign currency and the date it enters into an offsetting contract for
the purchase of the foreign currency, the Portfolio will realize a gain to the
extent the price of the currency it has agreed to sell exceeds the price of the
currency it has agreed to purchase. Should forward prices increase, the
Portfolio will suffer a loss to the extent that the price of the currency it has
agreed to purchase exceeds the price of the currency it has agreed to sell.
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The Portfolios are not required to enter into such transactions with
regard to its foreign currency-denominated securities and will not do so unless
deemed appropriate by the Sub-Adviser. It also should be realized that this
method of protecting the value of securities against a decline in the value of a
currency does not eliminate fluctuations in the underlying prices of the
securities. It simply establishes a rate of exchange which one can achieve at
some future point in time. Additionally, although such contracts tend to
minimize the risk of loss due to a decline in the value of the hedged currency,
at the same time, they tend to limit any potential gain which might result
should the value of such currency increase.
American Depositary Receipts ("ADRs"), Global Depositary Receipts
("GDRs"), European Depositary Receipts ("EDRs") and other forms of depositary
receipts for securities of foreign issuers provide an alternative method for the
Portfolios to make foreign investments. These securities will not be denominated
in the same currency as the securities into which they may be converted.
Generally, ADRs, in registered form, are designed for use in U.S. securities
markets and GDRs, in bearer form, are designed for use in non-U.S. securities
markets. ADRs are receipts typically issued by a U.S. bank or trust company
evidencing ownership of the underlying securities. GDRs are Global receipts
evidencing a similar arrangement. EDRs are receipts issued in Europe, typically
by forein banks and trust companies, and evidence ownership of either foreign or
domestic underlying securities.
OPTIONS ON FOREIGN CURRENCIES
The Growth, Capital Appreciation, Growth & Income, High Yield,
Multi-Asset, Strategic Multi-Asset and Natural Resources Portfolios may purchase
put and call options on foreign currencies for defensive or hedging purposes.
For example, a decline in the dollar value of a foreign currency in which
portfolio securities are denominated will reduce the dollar value of such
securities, even if their value in the foreign currency remains constant. In
order to protect against such diminutions in the value of portfolio securities,
a Portfolio may purchase put options on the foreign currency. If the value of
the currency does decline, a Portfolio will have the right to sell such currency
for a fixed amount in dollars and will thereby offset, in whole or in part, the
adverse effect on its portfolio which otherwise would have resulted.
Conversely, where a rise in the dollar value of a currency in which
securities to be acquired are denominated is projected, thereby increasing the
cost of such securities, a Portfolio may purchase call options thereon. The
purchase of such options could offset, at least partially, the effects of the
adverse movements in exchange rates. As in the case of other types of options,
however, the benefit to the Portfolio deriving from purchases of foreign
currency options will be reduced by the amount of the premium and
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related transaction costs. In addition, where currency exchange rates do not
move in the direction or to the extent anticipated, the Portfolio could sustain
losses on transactions in foreign currency options which would require it to
forego a portion or all of the benefits of advantageous changes in such rates.
A Portfolio may also sell (write) covered call options on foreign
currencies for defensive or hedging purposes. For example, where the Portfolio
anticipates a decline in the dollar value of foreign currency denominated
securities due to adverse fluctuations in exchange rates it could, instead of
purchasing a put option,, write a call option on the relevant currency. If the
expected decline occurs, the option will most likely not be exercised, and the
diminution in value of portfolio securities will be offset by the amount of the
premium received. For a more general discussion regarding the opening and
closing of options positions and the risks of these transactions, see "Call and
Put Options on Securities" above.
A call option written on a foreign currency covered by the Portfolio is
"covered" if the Portfolio owns the underlying foreign currency covered by the
call or has an absolute and immediate right to acquire that foreign currency
without additional cash consideration(or for additional cash consideration held
in a segregated account by its Custodian) upon conversion or exchange of other
foreign currency held in its portfolio. A call option is also covered if the
Portfolio has a call on the same foreign currency and in the same principal
amount as the call written where the exercise price of the call held (a) is
equal to or less than the exercise price of the call written or (b) is greater
than the exercise price of the call written if the difference is maintained by
the Portfolio in cash, U.S. Government securities and other high quality liquid
debt securities in a segregated account with its Custodian.
As in the case of other types of options, however, the writing of a
foreign currency option will constitute only a partial hedge up to the amount of
the premium, and only if rates move in the expected direction. If this does not
occur, the option may be exercised and the Portfolio would be required to
purchase or sell the underlying currency at a loss which may not be offset by
the amount of the premium. Through the writing of options on foreign currencies,
a Portfolio also may be required to forego all or a portion of the benefits
which might otherwise have been obtained from favorable movements in exchange
rates.
FUTURES CONTRACTS ON FOREIGN CURRENCIES
The Portfolios may enter into foreign currency futures contract to
achieve the same objectives discussed above with
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respect to currency forward contracts. A foreign currency futures contract is an
agreement pursuant to which one party agrees to make delivery, and the other
party agrees to accept delivery, of a currency at a specified price on a
specified date. Although such futures contracts by their terms call for actual
delivery or acceptance of a currency, in most cases the contracts are closed out
before their settlement date without the making or taking of delivery. For a
more general discussion regarding the opening and closing of futures contracts
positions and the risks of these transactions, see "Futures Contracts on Fixed
Income Securities-Characteristics and Risks" above.
ADDITIONAL RISKS OF OPTIONS ON FOREIGN CURRENCIES, FORWARD
CONTRACTS AND FUTURES CONTRACTS ON FOREIGN CURRENCIES.
Options on foreign currencies and forward contracts are not traded on
contract markets regulated by the CFTC or (with the exception of certain foreign
currency options) by the SEC. To the contrary, such instruments are traded
through financial institutions acting as market-makers, although foreign
currency options are also traded on certain national securities exchanges, such
as the Philadelphia Stock Exchange and the Chicago Board Options Exchange,
subject to SEC regulation. Similarly, options on currencies may be traded
over-the-counter. In an over-the-counter trading environment, many of the
protections afforded to exchange participants will not be available. For
example, there are no daily price fluctuation limits, and adverse market
movements could therefore continue to an unlimited extent over a period of time.
Although the purchaser of an option cannot lose more than the amount of the
premium plus related transaction costs, this entire amount could be lost.
Moreover, the option writer and a trader of forward contracts could lose amounts
substantially in excess of their initial investments, due to the margin and
collateral requirements associated with such positions.
Options on foreign currencies traded on national securities exchanges
are within the jurisdiction of the SEC, as are other securities traded on such
exchanges. As a result, many of the protections provided to traders on organized
exchanges will be available with respect to such transactions. In particular,
all foreign currency option positions entered into on a national securities
exchange are cleared and guaranteed by the Options Clearing Corporation ("OCC"),
thereby reducing the risk of counterparty default. Further, a liquid secondary
market in options traded on a national securities exchange may be more readily
available than in the over the counter market, potentially permitting the
Portfolio to liquidate open positions at a profit prior to exercise or
expiration, or to limit losses in the event of adverse market movements.
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The purchase and sale of exchange-traded foreign currency options,
however, is subject to the risks of the availability of a liquid secondary
market described above, as well as the risks regarding adverse market movements,
margining of options written, the nature of the foreign currency market,
possible intervention by governmental authorities and the effects of other
political and economic events. In addition, exchange-traded options on foreign
currencies involve certain risks not presented by the over-the-counter market.
For example, exercise and settlement of such options must be made exclusively
through the OCC, which has established banking relationships in applicable
foreign countries for this purpose. As a result, the OCC may, if it determines
that foreign governmental restrictions or taxes would prevent the orderly
settlement of foreign currency options exercises, or would result in undue
burdens on the OCC or its clearing member, impose special procedures on exercise
and settlement, such as technical changes in the mechanics of delivery of
currency, the fixing of dollar settlement prices or prohibitions on exercise.
As in the case of forward contracts, certain options on foreign
currencies are traded over-the-counter and involve liquidity and credit risks
which may not be present in the case of exchange-traded currency options. The
Portfolio's ability to terminate over-the-counter options will be more limited
than with exchange-traded options. It is also possible that broker-dealers
participating in over-the-counter options transactions will not fulfill their
obligations. Until such time as the staff of the SEC changes its position, the
Portfolio will treat purchased over-the-counter options and assets used to cover
written over-the-counter options as illiquid securities. With respect to options
written with primary dealers in U.S. Government securities pursuant to an
agreement requiring a closing purchase transaction at a formula price, the
amount of illiquid securities may be calculated with reference to the repurchase
formula.
In addition, futures contracts, options on futures contracts, forward
contracts and options on foreign currencies may be traded on foreign exchanges.
Such transactions are subject to the risk of governmental actions affecting
trading in or the prices of foreign currencies or securities. The value of such
positions also could be adversely affected by:(i) other complex foreign
political and economic factors; (ii) lesser availability than in the United
States of data on which to make trading decisions; (iii) delays in the
Portfolio's ability to act upon economic events occurring in foreign markets
during non-business hours in the United States; (iv) the imposition of different
exercise and settlement terms and procedures and margin requirements than in the
United States; and (v) lesser trading volume.
LOANS OF PORTFOLIO SECURITIES
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Consistent with applicable regulatory requirements, the Growth and
Income Portfolio may lend portfolio securities in amounts up to 33% of total
assets to brokers, dealers and other financial institutions, provided, that such
loans are callable at any time by the Portfolio and are at all times secured by
cash or equivalent collateral that is equal to at least the market value,
determined daily, of the loaned securities. In lending its portfolio securities,
the Portfolio receives income while retaining the securities' potential for
capital appreciation. The advantage of such loans is that the Portfolio
continues to receive the interest and dividends on the loaned securities while
at the same time earning interest on the collateral, which will be invested in
short-term obligations. A loan may be terminated by the borrower on one business
day's notice or by the Portfolio at any time. If the borrower fails to maintain
the requisite amount of collateral, the loan automatically terminates, and the
Portfolio could use the collateral to replace the securities while holding the
borrower liable for any excess of replacement cost over collateral. As with any
extensions of credit, there are risks of delay in recovery and in some cases
even loss of rights in the collateral should the borrower of the securities fail
financially. However, these loans of portfolio securities will only be made to
firms deemed by the Sub-Adviser to be creditworthy. On termination of the loan,
the borrower is required to return the securities to the Portfolio; and any gain
or loss in the market price of the loaned security during the loan would inure
to the Portfolio. The Portfolio will pay reasonable finders', administrative and
custodial fees in connection with a loan of its securities or may share the
interest earned on collateral with the borrower.
Since voting or consent rights which accompany loaned securities pass
to the borrower, the Portfolio will follow the policy of calling the loan, in
whole or in part as may be appropriate, to permit the exercise of such rights if
the matters involved would have a material effect on the Portfolio's investment
in the securities which are the subject of the loan.
INTEREST-RATE SWAP TRANSACTIONS
The Growth and Income Portfolio, Fixed Income Portfolio, Foreign
Securities Portfolio, High Yield Portfolio, Natural Resources Portfolio,
Multi-Asset Portfolio and Strategic Multi-Asset Portfolio may each enter into
interest rate swaps. Interest rate swaps involve the exchange by a Portfolio
with another party of their respective commitments to pay or receive interest,
for example, an exchange of floating rate payments for fixed-rate payments. A
Portfolio expects to enter into these transactions primarily to preserve a
return or spread on a particular investment or portion of its portfolio or to
protect against any increase in the price of securities a Portfolio anticipates
purchasing at a later date. A Portfolio intends to use these transactions as a
hedge and not as a speculative investment. The risk of loss with
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respect to interest rate swaps is limited to the net amount of interest payments
that the portfolio is contractually obligated to make and will not exceed 5% of
a Portfolio's net assets. The use of interest rate swaps may involve investment
techniques and risks different from those associated with ordinary portfolio
transactions. If the Adviser is incorrect in its forecast of market values,
interest rates and other applicable factors, the investment performance of the
Portfolio would diminish compared to what it would have been if the investment
technique was never used.
DESCRIPTION OF COMMERCIAL PAPER RATINGS
The following descriptions of commercial paper ratings have been
published by Standard and Poor's and Moody's, respectively.
Commercial paper rated A by Standard and Poor's is regarded by Standard
and Poor's as having the greatest capacity for timely payment. Issues rated A
are further refined by use of the numbers 1+, 1, 2, and 3 to indicate the
relative degree of safety. Issues rated A-1+ are those with an "overwhelming
degree" of credit protection. Those rated A-1 reflect a "very strong" degree of
safety regarding timely payment. Those rated A-2 reflect a "strong" degree of
safety regarding timely payment but not as high as A-1.
Moody's employs designations to indicate the relative repayment
capacity of rated issuers as follows:
<TABLE>
<S> <C>
Prime-1 Highest Quality
Prime-2 Higher Quality
</TABLE>
DISCOUNT BONDS, CONVERTIBLE BONDS AND PREFERRED STOCKS
Discount bonds are bonds issued below par, or trading below par, where
the yield to maturity is greater than the current yield. Zero coupon bonds are
bonds which pay no current coupon, but where income is accrued during the
passage of time and the bond, as a result of this accrued interest, should
increase in value from purchase price to maturity value. The sale of a zero
coupon bond on an interim basis, between purchase and maturity, may result in a
cash gain or loss depending on market conditions; and payment of any cash return
depends on the issuer's ability to meet maturity requirements on maturity date.
Convertible bonds and preferred stocks are fixed-income instruments
which provide for the regular payment of a coupon or dividend, but which also
allow the holder to convert the holding into shares of the underlying common
stock. Thus the valuation of
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prospective return of these instruments is some combination of the current yield
resulting from coupon or dividend payment, and capital appreciation (or
depreciation) resulting from movement of the underlying common stock and market
evaluation of conversion features. Certain issuers issue bonds or preferred
stocks with warrants, enabling the holder to purchase the issuer's common stock
or other securities. These "synthetic convertibles" will be used when the
Sub-Adviser finds the combination of current return and capital appreciation
potential relatively attractive. Warrants and common stocks are intended for
purchase only where fixed-income securities of the issuer are also owned or
expected to be purchased by the Portfolio.
CERTAIN RISK FACTORS RELATING TO HIGH-YIELD (HIGH-RISK) BONDS
The descriptions below are intended to supplement the material
in the Prospectus under "Investment Objectives and Policies."
SENSITIVITY TO INTEREST RATE AND ECONOMIC CHANGES - High-yield bonds
are very sensitive to adverse economic changes and corporate
developments. During an economic downturn or substantial period of
rising interest rates, highly leveraged issuers may experience
financial stress that would adversely affect their ability to service
their principal and interest payment obligations, to meet projected
business goals, and to obtain additional financing. If the issuer of a
bond defaulted on its obligations to pay interest or principal or
entered into bankruptcy proceedings, the Portfolio may incur losses or
expenses in seeking recovery of amounts owed to it. In addition,
periods of economic uncertainty and change can be expected to result in
increased volatility of market prices of high-yield bonds and the
Portfolio's net asset value.
PAYMENT EXPECTATIONS - High-yield bonds may contain redemption or call
provisions. If an issuer exercised these provisions in a declining
interest rate market, the Portfolio would have to replace the security
with a lower yielding security, resulting in a decreased return for
investors. Conversely, a high-yield bond's value will decrease in a
rising interest rate market, as will the value of the Portfolio's
assets. If the Portfolio experiences unexpected net redemptions, this
may force it to sell high-yield bonds without regard to their
investment merits, thereby decreasing the asset base upon which
expenses can be spread and possibly reducing the Portfolio's rate of
return.
LIQUIDITY AND VALUATION - There may be little trading in the secondary
market for particular bonds, which may affect adversely the Portfolio's
ability to value accurately or dispose of such bonds. Adverse publicity
and investor perceptions, whether or not based on fundamental analysis,
may
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decrease the values and liquidity of high-yield bonds, especially in a
thin market.
INVESTMENTS VEHICLES DESIGNED TO TRACK AN INDEX
Consistent with its investment objectives and policies, a
Portfolio may purchase interests in certain investment vehicles
designed to provide investment results which correspond generally to
the performance of a particular benchmark index, such as the S&P 500
Index or a Morgan Stanley Capital International (MSCI) country index.
Each such investment vehicle invests substantially all of its assets in
a manner designed to reproduce the composition of its benchmark index,
that is, the investment vehicle tracks all of the securities composing
the index and reflects each security's weighting within the index.
These investment vehicles can provide exposure to a market segment or
an entire foreign market though a single investment. Some investment
vehicles may be deemed private investment companies exempt from
registration under the Investment Company Act of 1940, as amended
("1940") pursuant to Section 3(c)7) thereof or may be registered under
the 1940 Act. In either such event, the Portfolio's investment would be
subject to certain limitations imposed by the 1940 Act. Interests in
such investment vehicles may be purchased in institutional resale
transactions exempt from registration under the Securities Act of 1933,
as amended ("1933 Act") pursuant to Rule 144A thereof, and may be
considered illiquid securities. As an interest holder of such
investment vehicle, a Portfolio would bear, along with other holders,
its pro rata portion of the expenses of such investment vehicle,
including any administrative and custody expenses. These expenses would
be in addition to any expenses that a Portfolio bears directly in
connection with its own operations.
FURTHER INFORMATION ABOUT THE TARGET '98 PORTFOLIO
As stated in the Prospectus, the objective of the Target '98 Portfolio
is to achieve a predictable compounded investment return for a specified period
of time, consistent with the preservation of capital. This discussion provides a
more detailed explanation of the investment policies that will be employed to
manage this Portfolio.
If the Target '98 Portfolio held only stripped securities that were
obligations of the United States Government, maturing on the Maturity Date, the
compounded investment return of the Portfolio from the date of initial
investment until the Maturity Date could be calculated arithmetically with a
relatively high degree of accuracy. However, by (i) including stripped corporate
obligations and current interest bearing debt obligations; (ii) permitting
investment in highly liquid short-term debt obligations; and (iii) actively
managing the Portfolio, the accuracy of the predicted investment return is
reduced somewhat. The reduction in accuracy
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is mitigated by: targeting the maturity dates of the Portfolio's investments to
its Maturity Date; purchasing call-protected securities; and performing
fundamental credit analysis to reduce credit risk.
The receipt of the current income introduces reinvestment risk.
Reinvestment risk is the risk that the payments received will not be reinvested
at interest rates that are as high or higher than needed to achieve the
predicted compounded investment return. Because the Portfolio employs a policy
of utilizing current income to meet its expenses, reinvestment risk is reduced.
If the Portfolio were comprised only of zero coupon securities, principal would
have to be liquidated to meet expenses, thereby compromising the objective of
providing a predictable compounded investment return.
The Sub-Adviser's goal in selecting current interest bearing debt
obligations for the Portfolio is to seek to maximize call protection and to
minimize the risk that the issuers of portfolio securities will default on their
obligation to pay or that the securities rating will be downgraded by Moody's or
Standard and Poor's. Accordingly, the Sub-Adviser intends to select investment-
grade debt obligations with call protection. The Portfolio is limited to
investments in obligations within the four highest categories assigned by
Moody's or by Standard and Poor's. Nevertheless, credit risks cannot be
completely eliminated. If an issuer defaults on its obligation to pay principal
or interest, the Portfolio's value may be adversely affected.
As stated in the Prospectus, the Portfolio is authorized to invest in
dollar denominated obligations of foreign issuers or obligations or domestic
issuers that trade in foreign markets. The risks of investing outside of the
United States are highlighted in the Prospectus and explained herein under the
following sections: Foreign Money Market Instruments, Foreign Securities and
Foreign Currency Exchange Transactions.
INVESTMENT RESTRICTIONS
The Trust has adopted the following restrictions relating to the
investment of assets of the Money Market, Fixed Income, Government and Quality
Bond, High Yield, Target '98, Growth and Income, Foreign Securities, Growth,
Capital Appreciation, Natural Resources, Multi-Asset and Strategic Multi-Asset
Portfolios. These are fundamental policies and may not be changed without the
approval of the holders of a majority of the outstanding voting shares of each
Portfolio affected (which for this purpose and under the 1940 Act, means the
lesser of (i) 67% of the shares represented at a meeting at which more than 50%
of the outstanding shares are represented or (ii) more than 50% of the
outstanding shares). A change in policy affecting only one Portfolio may be
effected with
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the approval of a majority of the outstanding shares of such Portfolio. Except
as otherwise indicated, none of the twelve Portfolios may:
1. Purchase any security (other than obligations of the U.S.
Government, its agencies or instrumentalities) if as a
result more than 5% of the Portfolio's total assets
(taken at current value) would then be invested in
securities of a single issuer, or more than 25% of its
total assets (taken at current value) would then be
invested in a single industry with the exception of the
Money Market Portfolio which intends to concentrate its
investments in the banking industry, and the Natural
Resources Portfolio which intends to concentrate its
investments in the securities of companies in gold-
related industries.
2. Purchase securities on margin (but the Trust may obtain such
short-term credits as may be necessary for the clearance of
purchases and sales of securities).
3. Make short sales of securities or maintain a short position.
4. Purchase any security if, as a result, the Portfolio would
then hold more than 10% of the outstanding voting securities
of an issuer.
5. Purchase any security, if as a result, the Portfolio would
then have more than 5% of its total assets (taken at current
value) invested in securities of companies (including
predecessors) that are less than three years old.
6. Purchase or retain securities of any company if, to the
knowledge of the Trust, Officers and Trustees of the Trust and
officers and directors of WMC or SAAMCo who individually own
more than 1/2 of 1% of the securities of that company together
own beneficially more than 5% of such securities.
7. Buy or sell commodities or commodity contracts (except
financial futures as described herein) or, with the exception
of the Natural Resources Portfolio, real estate or interests
in real estate, although a Portfolio may purchase and sell
securities which are secured by real estate and securities of
companies which invest or deal in real estate.
8. Act as underwriter except to the extent that, in connection
with the disposition of portfolio securities,
B-34
<PAGE> 65
a Portfolio may be deemed to be an underwriter under certain
Federal securities laws.
9. Make investments for the purpose of exercising control or
management.
10. Purchase any security restricted as to disposition under
Federal securities laws, if as a result, a Portfolio would
have more than 10% of its total assets (taken at current
value) invested in securities for which market quotations are
not readily available and in repurchase agreements with a
maturity of longer than seven days.
11. Invest in securities of other investment companies, except as
part of a merger, consolidation or other acquisition, with the
exception of the Natural Resources Portfolio.
12. With the exception of the Natural Resources Portfolio, invest
in interests in oil, gas or other mineral exploration or
development programs, although to the extent consistent with
its investment objectives and policies, a Portfolio may invest
in the publicly traded securities of companies which invest in
or sponsor such programs.
13. Make loans, except through (a) the purchase of bonds, debt
obligations such as GNMA securities, debentures, commercial
paper, corporate notes, and similar evidences of indebtedness
of a type commonly sold to financial institutions (subject to
the limitation in paragraph 11 above); and (b) repurchase
agreements (subject to the limitation in paragraph 11 above).
The purchase of a portion of an issue of securities described
under (a) above distributed publicly, whether or not the
purchase is made on the original issuance, is not considered
the making a loan.
14. Borrow money or pledge Portfolio assets except for temporary
or emergency purposes and then only in an amount not in excess
of 10% of the value of its assets in which case it may pledge,
mortgage or hypothecate any of its assets as security for such
borrowing, but not to an extent greater than 5% of the value
of the assets, except with respect to the Foreign Securities
Portfolio or Natural Resources Portfolio which may borrow
money or pledge its assets in an amount not in excess of 20%
of the value of its assets. No more than 5% of the assets of
each Portfolio may be borrowed from non-banks. (Neither the
deposit in escrow of underlying securities in connection with
the writing of call options, nor the deposit of U.S. Treasury
bills in escrow in connection
B-35
<PAGE> 66
with the writing of put options, nor the deposit of cash and
cash equivalents in a segregated account with the Trust's
Custodian or in a margin account with a broker in connection
with futures, or related options transactions or in connection
with the writing of call and put options in spread
transactions, is deemed to be a pledge.)
15. Write, purchase or sell puts, calls or combinations thereof on
stocks, except as described under Investment Objectives and
Policies with respect to the Growth, Capital Appreciation,
Growth and Income, Fixed Income, High Yield, Multi-Asset,
Strategic Multi-Asset and Natural Resources Portfolios.
SUNAMERICA ASSET MANAGEMENT CORP.
SunAmerica Asset Management Corp. ("SAAMCo"), The SunAmerica Center,
733 Third Avenue, New York, New York 10017-3204, has been retained pursuant to
an Investment Advisory and Management Agreement (the "Advisory Agreement") to
supervise the management and investment programs of the Foreign
Securities,Capital Appreciation, Growth, Natural Resources, Growth and Income,
High Yield, Target '98, Fixed Income, Government and Quality Bond, Strategic
Multi-Asset, Multi-Asset, and Money Market Portfolios of the Trust.
SAAMCo is engaged in providing investment advice and management
services to the Trust, other mutual funds, pension funds, and related assets and
programs offered by the affiliated companies of SunAmerica Inc. SAAMCo also
provides investment advice to individual companies and clients. As of December
31, 1997, SAAMCo, advise and/or administer in excess of 12 billion of assets.
SAAMCo provides investment advisory services, office space, and other facilities
for the management of the Trust's affairs, and pays all compensation of officers
and Trustees of the Trust who are "interested persons" of SAAMCo. The Trust pays
all other expenses incurred in the operation of the Trust, including fees and
expenses of disinterested Trustees of the Trust, except those affirmatively
undertaken by SAAMCo or WMC.
The Advisory Agreement provides that SAAMCo shall act as investment
adviser to the Trust, manage the Trust's investments, administer its business
affairs, furnish offices, necessary facilities and equipment, provide clerical,
bookkeeping and administrative services, and permit any of SAAMCo's officers or
employees to serve without compensation as Trustees or officers of the Trust if
duly elected to such positions. Under the Advisory Agreement, the Trust agrees
to assume and pay certain charges and expenses of its operations, including: the
compensation of the Trustees (other than those affiliated with SAAMCo or WMC),
the charges and expenses of independent accountants, legal counsel,
B-36
<PAGE> 67
expenses of registering or qualifying shares for sale, any transfer or dividend
disbursing agent, any registrar of the Trust, the Custodian (including fees for
safekeeping of securities), costs of calculating net asset value, all costs of
acquiring and disposing of portfolio securities, interest (if any) on
obligations incurred by the Trust, membership dues in the Investment Company
Institute or any similar organization, reports and notices to shareholders,
miscellaneous expenses and all taxes and fees to Federal, state or other
governmental agencies.
Each Portfolio pays its actual expenses for custodian services and a
portion of the Custodian's costs determined by the ratio of portfolio assets to
the total assets of the Trust, brokerage commissions or transaction costs, and
registration fees. Subject to supervision of the Board of Trustees, fees for
independent accountants, legal counsel, costs of reports of notices to
shareholders will be allocated based on the relative net assets of each
Portfolio. With respect to audit or legal fees clearly attributable to one
Portfolio, they will be assessed, subject to review by the Board of Trustees,
against that Portfolio.
The Advisory Agreement continues in effect from year to year, in
accordance with its terms, only so long as such continuance is specifically
approved at least annually by the Board of Trustees or by vote of a majority of
the outstanding voting securities of the Trust. The Advisory Agreement may be
terminated, as to any Portfolio named therein at any time, without the payment
of any penalty, by the Trustees or by a vote of a majority of the outstanding
shares of the Trust or of any Portfolio of the Trust, on not less than thirty
(30) days or more than sixty (60) days' prior written notice to SAAMCo, or by
SAAMCo, on ninety (90) days' prior written notice to the Trust. The Advisory
Agreement terminates automatically in the event of its assignment.
Under the terms of the Advisory Agreement, SAAMCo is not liable to the
Portfolios, or their shareholders, for any act or omission by it or for any
losses sustained by the Portfolios or their shareholders, except in the case of
willful misfeasance, bad faith, gross negligence or reckless disregard of duty.
With respect to the investment advisory fees, SAAMCo has agreed to
waive its fees to the extent necessary so that the fees actually collected
reflect the fee schedules set forth below at the following annual percentages of
each portfolio's average daily net assets (other than the Natural Resources
Portfolio, for which no fee waiver is in effect):
<TABLE>
<CAPTION>
AVERAGE DAILY MANAGEMENT
PORTFOLIO NET ASSETS FEE
- --------- ------------- ----------
<S> <C> <C>
Foreign Securities $0-$100 million .900%
> $100 million .825%
</TABLE>
B-37
<PAGE> 68
<TABLE>
<S> <C> <C>
> $250 million .750%
> $500 million .700%
Capital Appreciation $0-$100 million .750%
> $100 million .675%
> $250 million .625%
> $500 million .600%
Growth $0-$250 million .750%
> $250 million .675%
> $500 million .600%
Growth and Income $0-$100 million .700%
> $100 million .650%
> $250 million .600%
> $500 million .575%
Strategic Multi-Asset,
Multi-Asset $0-$200 million 1.000%
> $200 million .875%
> $500 million .800%
High Yield $0-$250 million .700%
> $250 million .575%
> $500 million .500%
Target '98 $0-$100 million .625%
> $100 million .570%
> $250 million .525%
> $500 million .500%
Government & Quality Bond,
Fixed Income $0-$200 million .625%
> $200 million .575%
> $500 million .500%
</TABLE>
<TABLE>
<CAPTION>
AVERAGE DAILY MANAGEMENT
PORTFOLIO NET ASSETS FEE
- --------- ------------- ----------
<S> <C> <C>
Money Market $0-$150 million .500%
> $150 million .475%
> $250 million .450%
> $500 million .425%
</TABLE>
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<PAGE> 69
The following table sets forth the total advisory fees earned by the
Adviser from each Portfolio pursuant to the Advisory Agreement for the fiscal
years ended December 31, 1997, 1996, and 1995.
ADVISORY FEES
<TABLE>
<CAPTION>
FUND 1997 1996 1995
---- ---- ---- ----
<S> <C> <C> <C>
Foreign Securities Portfolio $ 404,182 $ 473,257 $ 525,490
Capital Appreciation Portfolio $4,366,046 $3,030,849 $1,992,705
Growth Portfolio $3,049,207 $2,393,836 $2,044,069
Natural Resources Portfolio $ 380,856 $ 302,086 $ 195,327
Growth and Income Portfolio $ 280,911 $ 220,009 $ 229,671
Strategic Multi-Asset Portfolio $ 563,207 $ 597,679 $ 640,025
Multi-Asset Portfolio $1,501,407 $1,569,359 $1,671,735
High Yield Portfolio $ 286,254 $ 313,621 $ 346,773
Target '98 Portfolio $ 55,542 $ 72,086 $ 98,847
Fixed Income Portfolio $ 124,001 $ 152,430 $ 174,815
Government and Quality Bond
Portfolio $1,364,101 $1,392,653 $1,346,394
Money Market Portfolio $ 383,800 $ 432,146 $ 569,193
</TABLE>
- ---------------------------------------------------
PERSONAL SECURITIES TRADING
The Trust and the Adviser have adopted a written Code of Ethics (the
"Code of Ethics") which prescribes general rules of conduct and sets forth
guidelines with respect to personal securities trading by "Access Persons"
thereof. An Access Person as defined in the Code of Ethics is an individual who
is a trustee, director, officer, general partner or advisory person of the Trust
or the Adviser. The guidelines on personal securities trading include: (i)
securities being considered for purchase or sale, or purchased or sold, by any
Investment Company advised by the Adviser, (ii) Initial Public Offerings, (iii)
private placements, (iv) blackout periods, (v) short-term trading profits, (vi)
gifts, and (vii) services as a director. These guidelines are substantially
similar to those contained in the Report of the Advisory Group on Personal
Investing issued by the Investment Company Institute's Advisory Panel.
B-39
<PAGE> 70
Finally, the Sub-Adviser has adopted a written Code of Ethics, the
provisions of which are materially similar to those in the Adviser's Code of
Ethics, and has undertaken to comply with the provisions of the Adviser's Code
of Ethics to the extent such provisions are more restrictive. Further, the
Sub-Adviser reports to the Adviser, on a quarterly basis, as to whether there
were any Code of Ethics violations by employees thereof who may be deemed Access
Persons of the Trust. In turn, the Adviser reports to the Board of Trustees as
to whether there were any violations of the Code of Ethics by Access Persons of
the Trust or the Adviser.
WELLINGTON MANAGEMENT COMPANY
Wellington Management Company, LLP serves as Sub-Adviser to all of the
Portfolios of the Trust, pursuant to the Sub-Advisory Agreement with SAAMCo.
(See "Wellington Management Company, LLP" in the Prospectus for additional
information concerning the Sub-Adviser.) Under the Sub-Advisory Agreement, the
Sub-Adviser manages the investment and reinvestment of each of the Portfolios.
The Sub-Adviser is independent of SAAMCo and discharges its responsibilities
subject to the policies of the Trustees and the oversight and supervision of
SAAMCo, which pays the Sub-Adviser's fee.
The Sub-Advisory Agreement continues in effect from year to year, in
accordance with its terms, only so long as such continuance is specifically
approved at least annually by the Board of Trustees or by vote of a majority of
the outstanding voting securities of the Trust. The Sub-Advisory Agreement
provides that it will terminate in the event of an assignment (as defined in the
1940 Act) or upon termination of the Advisory Agreement. The sub- advisory
agreement may be terminated at anytime, without penalty, by the Trustees, by the
holders of a majority of the respective Portfolio's outstanding voting
securities, by the adviser or not less than 30 nor more than 60 days written
notice to the Sub-Adviser, or by the Sub-Adviser on 90 days written notice to
the Adviser and the Trust. Under the terms of the Sub-Advisory Agreement, the
Sub-Adviser is not liable to the Portfolios, or their shareholders, for any act
or omission by it or for any losses sustained by the Portfolios or their
shareholders, except in the case of willful misfeasance, bad faith, gross
negligence or reckless disregard of obligations or duties.
The following table sets forth the total sub-advisory fees received by
WMC, as reported to the Trust by SAAMCo, for each Portfolio pursuant to the
Sub-Advisory Agreement for the fiscal years ended December 31, 1997, 1996, and
1995.
SUB-ADVISORY FEES
B-40
<PAGE> 71
<TABLE>
<CAPTION>
FUND 1997 1996 1995
<S> <C> <C> <C>
Foreign Securities Portfolio $ 179,429 $ 206,599 $223,066
Capital Appreciation Portfolio $1,429,761 $1,057,476 $736,837
Growth Portfolio $ 910,003 $ 766,639 $637,763
Natural Resources Portfolio $ 175,784 $ 140,974 $ 91,152
Growth and Income Portfolio $ 130,423 $ 102,147 $106,633
Strategic Multi-Asset Portfolio $ 162,641 $ 169,536 $178,005
Multi-Asset Portfolio $ 299,772 $ 310,404 $325,760
High Yield Portfolio $ 122,680 $ 134,409 $148,328
Target '98 Portfolio $ 19,995 $ 25,951 $ 35,585
Fixed Income Portfolio $ 44,640 $ 54,875 $ 62,934
Government and Quality Bond
Portfolio $ 294,844 $ 299,809 $291,764
Money Market Portfolio 57,570 $ 64,822 $ 85,379
</TABLE>
OFFICERS AND TRUSTEES OF THE TRUST
The following table lists the Trustees and executive officers of the
Trust, their ages, business addresses and principal occupations during the past
five years. The SunAmerica Mutual Funds consist of SunAmerica Equity Funds,
SunAmerica Income Funds, SunAmerica Money Market Funds, Inc. and Style Select
Series, Inc. An asterisk indicates those Trustees who may be deemed to be
"interested persons" of the Trust as that term is defined in the 1940 Act.
<TABLE>
<CAPTION>
Position Principal Occupations
Name, Age and Address with the Fund During Past 5 Years
- --------------------- ------------- -------------------
<S> <C> <C>
S. James Coppersmith, 64 Trustee Formerly, President and
7 Elmwood Road General Manager, WCVB-TV,a
Marblehead, MA 01945 division of the Hearst
Corporation from 1982 to
1994 (retired);
Director/Trustee of the
SunAmerica Mutual Funds.
Samuel M. Eisenstat, 56 Trustee and Attorney in private
430 East 86 Street Chairman of practice; Trustee of RPS
New York, NY 10028 the Board Realty Trust since
December 1988;
Director of Volt Information
</TABLE>
B-41
<PAGE> 72
<TABLE>
<S> <C> <C>
Sciences Funding, Inc., subsidiary of Volt
Information Sciences, Inc. since October 1993;
Director/Trustee and Chairman of the Boards of
the SunAmerica Mutual Funds.
Stephen J. Gutman, 53 Trustee Chairman of the Board, Chief Operating and
340 East 79 Street Executive Officer of Beau Brummel Casuals
New York, NY 10021 Limited, Inc., a menswear special retailer
since May 1989; Director/Trustee of the
SunAmerica Mutual Fundsl
Peter A. Harbeck*, 44 Trustee and President, SAAMCo
The SunAmerica Center President and SunAmerica Capital
733 Third Avenue Services, Inc. ("SACS")
New York, NY 10017-3204 since August, 1995; Director and Chief
Operating Officer of SAAMCo and President of
SunAmerica Fund Services, Inc., ("SAFS")
since May 1988; President of SunAmerica
Mutual Funds; Executive Vice President of
SAAMCo, from May 1988 to August 1995;
Executive Vice President, SACS, from
November 1991 to August 1995; and Director,
Resources Trust Company.
Peter C. Sutton, 33 Treasurer Vice President, SAAMCo,
The SunAmerica Center since September 1994;
733 Third Avenue Treasurer, SunAmerica
New York, NY 10017-3204 Mutual Funds (since
February 1996 and Style
Select Series, Inc. since
September 1996; Vice
President, SunAmerica
Series Trust and Anchor
Pathway Fund, since
October 1994; Controller,
SunAmerica Mutual Funds
(March 1993 - February 1996) and
Assistant
</TABLE>
B-42
<PAGE> 73
<TABLE>
<S> <C> <C>
Controller, SunAmerica Mutual
Funds(1990-1993).
Robert M. Zakem, 40 Secretary Senior Vice President and
The SunAmerica Center General Counsel of SAAMCo,
733 Third Avenue since April 1993; Executive Vice President and
New York, NY 10017-3204 Director, SACS, since February 1993; and
Vice President of SAFS, since January 1994;
Formerly, Vice President and Associate
General Counsel, SAAMCo, from March 1992 to
April 1993; Associate, Piper & Marbury from
1989 to 1992.
</TABLE>
Each of the non-affiliated Trustees is entitled to compensation from
the Trust consisting of an annual fee of $20,000 in addition to reimbursement of
out-of-pocket expenses in connection with attendance at meetings of the
Trustees. In addition, Mr. Eisenstat receives an aggregate of $2,000 in annual
compensation for serving as Chairman of the Board of the Trust. These expenses
are allocated on the basis of the relative net assets of each Portfolio.
Officers are compensated by SAAMCo or its affiliates and receive no compensation
from the Trust.
In addition, each non-affiliated Trustee also serves on the Audit
Committee of the Board of Trustees. Each member of the Audit Committee receives
an aggregate of $5,000 in annual compensation for serving on the Audit
Committees of all of the SunAmerica Mutual Funds and the Trust. With respect to
the Trust, each member of the Audit Committee receives a pro rata portion of the
$5,000 annual compensation, based on the relative net assets of the Trust. The
Trust also has a Nominating Committee, comprised solely of non-affiliated
Trustees, which recommends to the Trustees those persons to be nominated for
election as Trustees by shareholders and selects and proposes nominees for
election by Trustees between shareholders' meetings. Members of the Nominating
Committee serve without compensation.
The Trustees (and Directors) of the SunAmerica Mutual Funds and the
Trust have adopted the SunAmerica Disinterested Trustees' and Directors'
Retirement Plan (the "Retirement Plan") effective January 1, 1993 for the
unaffiliated Trustees. The Retirement Plan provides generally that if a
non-affiliated Trustee who has at least 10 years of consecutive service as a
non-affiliated Trustee of any of the SunAmerica Mutual Funds (an "Eligible
Trustee") retires after reaching age 60 but before age 70 or dies while a
Trustee, such person will be eligible to receive a retirement or death benefit
from each SunAmerica mutual fund with respect to
B-43
<PAGE> 74
which he or she is an Eligible Trustee. As of each birthday, prior to the 70th
birthday, each Eligible Trustee will be credited with an amount equal to (i) 50%
of his or her regular fees (excluding committee fees) for services as a
Disinterested Trustee of each SunAmerica mutual fund for the calendar year in
which such birthday occurs, plus (ii) 8.5% of any amounts credited under clause
(i) during prior years. An Eligible Trustee may receive any benefits payable
under the Retirement Plan, at his or her election, either in one lump sum or in
up to fifteen annual installments.
As of March 2, 1998, the Trustees and officers of the Trust owned in
the aggregate, less than 1% of the Trust's total outstanding shares.
The following table sets forth information summarizing the compensation
of each disinterested Trustee for his services as Trustee for the fiscal year
ended December 31, 1997. Neither the Trustees who are interested persons of the
Trust nor any officers of the Trust receive any compensation.
<TABLE>
<CAPTION>
COMPENSATION TABLE
AGGREGATE PENSION OR ESTIMATED TOTAL
COMPENSATION RETIREMENT ANNUAL COMPENSATION
FROM BENEFITS BENEFITS FROM
REGISTRANT ACCRUED AS UPON REGISTRANT
PART OF RETIREMENT AND FUND
TRUSTEE FUND COMPLEX PAID
EXPENSES* TO TRUSTEES*
- ------- ------------ --------- ---------- ------------
<S> <C> <C> <C> <C>
S. James $22,142 $38,332 29,670 $65,000
Coppersmith
Samuel M. $24,142 $33,740 46,089 $65,000
Eisenstat
Stephen J. $22,142 $34,875 60,912 $65,000
Gutman
</TABLE>
* Information is as of December 31, 1997 for the five investment companies in
the complex which pay fees to these directors/trustees. The complex consists
of the SunAmerica Mutual Funds and Anchor Series Trust.
CUSTODIAN
State Street Bank and Trust Company ("State Street"), 225 Franklin
Street, Boston, Massachusetts is the Custodian of the Trust. As Custodian, State
Street holds all securities and cash owned by the Trust, and receives for the
Trust all payments of income, payments of principal or capital distribution
received by it with respect to securities owned by the Trust and receives the
payment for the shares issued by the Trust. The Custodian releases
B-44
<PAGE> 75
and delivers securities and cash upon proper instructions from the Trust.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP, 1177 Avenue of the Americas, New York, New York,
serves as independent accountants to the Trust and, in that capacity, audits the
annual financial statements of the Trust.
PORTFOLIO TRANSACTIONS AND BROKERAGE
All purchase and sale orders of securities for the Portfolios are
placed on behalf of the Trust by the Sub-Adviser. If the securities in which a
particular Portfolio invests are traded primarily in the over-the-counter
market, then the Portfolio may deal directly with the broker-dealers who make a
market in the securities involved unless better prices and execution are
available elsewhere. These brokers may also furnish brokerage and research
services, including advice as to the advisability of investing in securities,
securities analysis and reports.
Broker-dealers involved in the execution of portfolio transactions on
behalf of the Trust are selected on the basis of their professional capability
and the value and quality of their services. In selecting such broker-dealers,
the Sub-Adviser will consider various relevant factors, including, but not
limited to, the size and type of the transaction; the nature and character of
the markets in which the security can be purchased or sold; the execution
efficiency, settlement capability, and financial condition of the broker-dealer;
the broker-dealer's execution services rendered on a continuing basis; and the
reasonableness of any commissions.
The Trust reserves the right to effect portfolio transactions through
broker-dealers affiliated with the Adviser, acting as agent and not as
principal, provided that any commissions, fees or other remuneration received by
affiliated brokers are within the limitations set forth in the 1940 Act and are
reasonable and fair compared to the commissions, fees or other remuneration paid
to other brokers in connection with comparable transactions involving similar
securities being purchased or sold on an exchange during a comparable period of
time. The Adviser, subject to applicable laws and regulations, may also consider
the willingness of particular brokers to sell the Variable Contracts as a factor
in the selection of brokers for its portfolio transactions.
Brokers may be selected to provide brokerage or research services to
the Trust or other accounts over which WMC or SAAMCo exercises investment
discretion. Such service may include advice concerning the value of securities;
the advisability of investing in, purchasing or selling securities; the
availability of securities or the purchasers or sellers of securities;
furnishing
B-45
<PAGE> 76
analysis and reports concerning issuers, industries, securities, economic
factors and trends, portfolio strategy and performance of accounts; and
effecting securities transactions and performing functions incidental thereto,
such as clearance and settlement.
The receipt of research from brokers may be useful in rendering
investment management services to the Trust and other clients of WMC and SAAMCo;
conversely, such information provided by brokers who have executed transaction
orders on behalf of other clients may be useful in carrying out obligations to
the Trust. The receipt of such research will not be substituted for independent
research and the expenses of WMC or SAAMCo will not necessarily be reduced as a
result of the receipt of such supplemental information. The Sub-Adviser may
effect individual securities transactions at commission rates in excess of the
minimum commission rates available, if WMC determines in good faith that such
amount of commission is reasonable in relation to the value of the brokerage or
research services provided by the broker or dealer, viewed in terms of either
that particular transaction or WMC's overall responsibilities with respect to
the accounts as to which it exercises investment discretion.
Some securities considered for investment by the Trust may also be
appropriate for other clients served by the Sub-Adviser. There may be occasions
when the Trust and one or more of the other clients advised by WMC will find
themselves contemporaneously engaged in purchasing or selling the same
securities from or to third parties. When this occurs, the transactions will be
averaged as to price and allocated as to amounts in accordance with an
allocation policy, which has been reviewed by the Board of Trustees and
considered to be equitable to the portfolios involved. It is recognized that in
some cases this system could have a detrimental effect on the price or volume of
the security as far as the Trust is concerned. However, it is the judgment of
the Board of Trustees of the Trust that the desirability of its advisory
arrangement with SAAMCo and the sub-advisory arrangement with WMC outweighs any
disadvantages that may result from such contemporaneous transactions.
The Board of Trustees periodically reviews performance of
responsibilities in connection with the placement of portfolio transactions on
behalf of the Trust and reviews the prices and commissions, if any, paid by the
Trust to determine if they are reasonable in relation to the benefits to the
Trust.
The following tables set forth the aggregate brokerage
commissions paid by the Portfolios and the amounts of the brokerage commissions
which were paid to affiliated broker-dealers for such Portfolios for the fiscal
years ended December 31, 1997, 1996, and 1995.
1997 BROKERAGE COMMISSIONS
B-46
<PAGE> 77
<TABLE>
<CAPTION>
PERCENTAGE OF
AMOUNT COMMISSIONS
AGGREGATE PAID TO PAID TO
BROKERAGE AFFILIATED AFFILIATED
PORTFOLIO COMMISSIONS BROKER-DEALERS BROKER
--------- ----------- -------------- -------------
<S> <C> <C> <C>
Growth Portfolio $270,013 $ 250 0.09%
Strategic Multi-Asset
Portfolio $110,345 $ 420 0.38%
Multi-Asset Portfolio $113,205 0 0
Capital Appreciation
Portfolio $948,818 $ 20,400 2.15%
Foreign Securities $213,438 0 0
Portfolio
Natural Resources $ 82,069 0 0
Portfolio
Growth and Income $ 34,572 0 0
Portfolio
High Yield Portfolio $ 351 0 0
Fixed Income Portfolio $ 9 0 0
</TABLE>
1996 BROKERAGE COMMISSIONS
<TABLE>
<CAPTION>
AMOUNT PERCENTAGE OF
AGGREGATE PAID TO COMMISSIONS PAID
BROKERAGE AFFILIATED TO AFFILIATED
PORTFOLIO COMMISSIONS BROKER/DEALERS BROKER
--------- ----------- -------------- ------
<S> <C> <C> <C>
Growth Portfolio $357,209 $6,310 1.8%
</TABLE>
B-47
<PAGE> 78
<TABLE>
<S> <C> <C> <C>
Strategic Multi-Asset
Portfolio $117,865 $ 3,963 3.4%
Multi-Asset Portfolio $107,911 $ 750 0.7%
Capital Appreciation
Portfolio $655,271 $25,962 4.0%
Natural Resources Portfolio $ 84,830 $ 1,300 1.5%
Growth and Income Portfolio $ 39,598 $ 12 0.0%
Foreign Securities Portfolio $248,098 $ 552 0.2%
</TABLE>
1995 BROKERAGE COMMISSIONS
<TABLE>
<CAPTION>
AMOUNT PERCENTAGE OF
AGGREGATE PAID TO COMMISSIONS PAID
BROKERAGE AFFILIATED TO AFFILIATED
PORTFOLIO COMMISSIONS BROKER-DEALERS BROKER
--------- ----------- -------------- ----------------
<S> <C> <C> <C>
Growth Portfolio $690,845 $ 49,609 7.2%
Strategic Multi-Asset
Portfolio $ 85,024 $ 3,341 3.9%
Multi-Asset Portfolio $ 55,803 $ 6,145 11.0%
Capital Appreciation
Portfolio $378,644 $ 35,445 9.4%
Natural Resources $ 39,262 $ 21,897 55.8%
Portfolio
</TABLE>
PORTFOLIO TURNOVER
Although the Portfolios, except for the Money Market Portfolio, do not
invest for short-term trading purposes, Portfolio securities may be sold from
time to time without regard to the length of time they have been held. A
Portfolio's turnover rate is the percentage computed by dividing the lesser of
Portfolio purchases or sales (excluding all securities whose maturities at
acquisition were one year or less) by the average value of the Portfolio
(excluding all securities whose maturities at acquisition were one year or
less). To the extent a Portfolio has a higher portfolio turnover rate (e.g.,
over 100%), brokerage commissions and other transaction costs, which are borne
directly by the Portfolio, will be correspondingly higher. See the Financial
Highlights table in the Prospectus for Portfolio Turnover Rates.
NET ASSET VALUE
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<PAGE> 79
Shares of the Trust are currently offered only to the Variable Separate
Account. The Trust is open for business on any day the New York Stock Exchange
("NYSE") is open for regular trading. Shares are valued each day as of the close
of regular trading in the NYSE (generally, 4:00 p.m., Eastern time). Each
Portfolio calculates the net asset value of its shares separately by dividing
the total value of net assets by the shares outstanding. The net asset value of
a Portfolio's shares will also be computed on each other day in which there is a
sufficient degree of trading in such Portfolio's securities that the net asset
value of its shares might be materially affected by changes in the values of the
portfolio securities; provided, however, that on such day the Trust receives a
request to purchase or redeem such Portfolio's shares. The days and times of
such computation may, in the future, be changed by the Trustees in the event
that the portfolio securities are traded in significant amounts in markets other
than the NYSE, or on days or at times other than those during which the NYSE is
open for trading.
The net asset value of a share of each Portfolio is calculated by
adding the value of all securities and other assets, deducting its accrued
liabilities, and dividing the remainder by the number of shares outstanding.
Except with respect to securities held by the Money Market Portfolio securities
of each Portfolio are valued as follows: Equity securities which are traded on
domestic stock exchanges, are valued at the last sale price as of the close of
business on the day the securities are being valued, or lacking any sales, at
the closing bid price. Securities traded in the over-the-counter market are
valued at the closing bid price or yield equivalent as obtained from one or more
dealers that make markets in the securities. Portfolio securities, which are
traded both in the over-the-counter market and on a stock exchange, are valued
according to the broadest and most representative market. Bonds and other fixed
income securities may be valued on the basis of prices provided by a pricing
service when such prices are believed to reflect the fair market value of such
securities. The prices provided by a pricing service may be determined without
regard to bid or last sale prices but take into account institutional size
trading in similar groups of securities and any developments related to specific
securities. Securities not priced in this manner are valued at the most recent
quoted bid price. Securities and assets for which market quotations are not
readily available are valued at fair value as determined in good faith by or
under the direction of the Board of Trustees of the Trust. Short-term
securities, other than GNMA securities, with maturities of sixty (60) days or
less will be valued at amortized cost.
FOREIGN SECURITIES PORTFOLIO
The Portfolio's securities are valued by appraising securities at the
last sale price, or, if no sale, at the closing bid price, if traded on an
exchange, and if not so traded, on the basis of closing over-the-counter bid
prices, if available. Dividend income from portfolio securities is recorded on
the ex-dividend date, except that, if the ex-dividend date has passed, certain
dividends
B-49
<PAGE> 80
from foreign securities are recorded as soon as the Portfolio is informed of the
dividend after the ex-dividend date.
Valuations of foreign securities are furnished by a quotation service
and are already translated into U.S. dollars. The methods used by the quotation
service and the quality of valuations so established are reviewed by officers of
the Trust under the general supervision of the Trustees. A security which is
listed or traded on more than one exchange is valued at the quotation on the
exchange determined to be the primary market for such security. Short-term
obligations that mature in 60-days or less are valued at amortized cost,
provided that such value constitutes fair value as determined in good faith by
the Board of Trustees.
Generally, all trading in foreign securities, as well as corporate
bonds, U.S. Government securities, money market instruments, and repurchase
agreements, is substantially completed each day at various times prior to the
close of regular trading on the NYSE. The values of any such securities held by
the Portfolio are determined as of such times for the purpose of computing the
net asset value. The procedures set forth above need not be used to determine
the value of debt securities owned by the Trust if, in the opinion of the Board
of Trustees, some other method (e.g., based on closing over-the-counter bid
prices in the case of debt instruments traded on an exchange) would more
accurately reflect the fair market value of such debt securities. Foreign
currency exchange rates are also generally determined prior to the close of
regular trading on the NYSE. If an extraordinary event occurs, which is expected
to materially affect the value of a security, then the security will be valued
at fair value as determined in good faith under the direction of the Trustees.
MONEY MARKET PORTFOLIO
Securities of the Money Market Portfolio are valued by the amortized
cost method Pursuant to Rule 2a-7 under the 1940 Act, which involves valuing a
security at its cost on the date of purchase and thereafter (absent unusual
circumstances) assuming a constant amortization to maturity of any discount or
premium, regardless of the impact of fluctuations in general market rates of
interest on the value of the instrument. While this method provides certainty in
valuation, it may result in periods during which value, as determined by this
method is higher or lower than the price the Portfolio would receive if it sold
the securities.
The use of this valuation method is continuously reviewed and the Board
of Trustees will make such changes as may be necessary to assure that the assets
of the Portfolio are valued fairly as determined by the Trustees in good faith,
as a particular responsibility within the overall duty of care owed to the
shareholders, to establish procedures reasonably designed, taking into account
current market conditions and the Portfolio's investment objectives, to
stabilize the net asset value per share as computed for the purpose of
distribution and redemption at $1.00 per share. The Trustees' procedures include
periodically
B-50
<PAGE> 81
monitoring as they deem appropriate and at such intervals as are reasonable in
light of current market conditions, the relationship between the amortized cost
value per share and the net asset value per share based upon available
indications of market value. The Trustees will consider what steps should be
taken, if any, in the event of a difference of more than 1/2 of 1% between the
two. The Trustees will take such steps as they consider appropriate, (e.g.,
selling securities to shorten the average portfolio maturity) to minimize any
material dilution or other unfair results which might arise from differences
between the two. The Rule requires that the Portfolio limit its investments to
instruments which the Trustees determine will present minimal credit risks and
which are of high quality as determined by at least one major rating agency, or,
in the case of any instrument that is not so rated, of comparable quality as
determined by the Trustees. It also calls for the Portfolio to maintain a dollar
weighted average portfolio maturity (not more than 90 days) appropriate to its
objective of maintaining a stable net asset value of $1.00 per share and
precludes the purchase of any instrument with a remaining maturity of more than
397 calendar days. Should the disposition of a portfolio security result in a
dollar weighted average portfolio maturity of more than 90 days, the Portfolio
will invest its available cash in such manner as to reduce such maturity to 90
days or less as soon as reasonably practicable.
It is the normal practice of the Portfolio to hold portfolio securities
to maturity. Therefore, unless a sale or other disposition of a security is
mandated by redemption requirements or other extraordinary circumstances, the
Portfolio will realize the par value of the security. Under the amortized cost
method of valuation traditionally employed by institutions for valuation of
money market instruments, neither the amount of daily income nor the net asset
value is affected by any unrealized appreciation or depreciation of the
Portfolio. In periods of declining interest rates, the indicated daily yield on
shares of the Portfolio as computed by dividing the annualized daily income of
the Portfolio by the net asset value will tend to be higher than if the
valuation was based upon market prices and estimates. In periods of rising
interest rates, the indicated daily yield on shares of the Portfolio as computed
by dividing the annualized daily income of the Portfolio by the net asset value
will tend to be lower than if the valuation was based upon market prices and
estimates.
DIVIDENDS, DISTRIBUTIONS AND TAXES
Each Portfolio is qualified and intends to remain qualified and elect
to be treated as a regulated investment company under Subchapter M under the
Code. To remain qualified as a regulated investment company, a Portfolio must,
among other things, (a) derive at least 90% of its gross income from the sales
or other disposition of securities, dividends, interest, proceeds from loans of
stock or securities and certain other related income; and (b)
B-51
<PAGE> 82
diversify its holdings so that, at the end of each fiscal quarter, (i) 50% of
the market value of the Portfolio's assets is represented by cash, government
securities and other securities limited in respect of any one issuer to 5% of
the Portfolio's net assets and to not more than 10% of the voting securities of
any one issuer (other than government securities) and (ii) not more than 25% of
the Portfolio's assets is invested in the securities (other than government
securities or the securities of other regulated investment companies) of any one
issuer.
Income received by a Portfolio from sources within foreign countries
may be subject to withholding and other taxes imposed by such countries. Income
tax treaties between certain countries and the United States may reduce or
eliminate such taxes. It is impossible to determine in advance the effective
rate of foreign tax to which a Portfolio will be subject, since the amount of
that Portfolio's assets to be invested in various countries is not known.
Shareholders are urged to consult their tax advisors regarding specific
questions as to Federal, state and local taxes.
It is the Trust's intention to distribute substantially all the net
investment income, if any, of each Portfolio. For dividend purposes, net
investment income of each Portfolio, other than the Money Market Portfolio, will
consist of all payments of dividends or interest received by such Portfolio less
the estimated expenses of such Portfolio (including fees payable to SAAMCo). Net
investment income of the Money Market Portfolio consists of (i) interest accrued
or discount earned; (ii) plus or minus all realized gains and losses on the
Portfolio securities; (iii) less the estimated expenses of the Portfolio
applicable to that dividend period.
Dividends on the Money Market Portfolio will be declared daily and
reinvested monthly in additional full and fractional shares of the respective
Portfolio. Dividends from the Growth, Fixed Income, Capital Appreciation,
Foreign Securities, Growth and Income, Multi-Asset, Strategic Multi-Asset,
Government and Quality Bond, High Yield, Natural Resources and Target '98
Portfolios will be declared and reinvested at least annually in additional full
and fractional shares of the respective Portfolios.
All net realized capital gains of each Portfolio of the Trust, if any,
are declared and distributed annually to the shareholders of the Portfolio to
which such gains are attributable.
At December 31, 1997, the Fixed Income Portfolio, High Yield Portfolio,
Money Market Portfolio and Target '98 Portfolio had capital loss carry forwards
of $1,598,757, $9,486,051, $632, and $270,582, respectively, which are available
to the extent not utilized to offset future gains from 1998 through 2004. The
utilization of such losses will be subject to annual limitations under the Code
and the regulations thereunder.
B-52
<PAGE> 83
GENERAL INFORMATION
Under Massachusetts law, shareholders of a Massachusetts business trust
may, under certain circumstances, be held personally liable as partners for the
obligations of the Trust. The Declaration of Trust contains an express
disclaimer of shareholder liability for acts or obligations of the Trust and
requires that notices of such disclaimer be given in each agreement, obligation,
or instrument entered into or executed by the Trust or the Trustees. The
Declaration of Trust provides for indemnification out of the Trust property for
any shareholders held personally liable for the obligations of the Trust, and
also provides that the Trust shall, upon request, assume the defense of any
claim made against any shareholder for any act or obligation of the Trust and
satisfy any judgment thereon. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is limited to circumstances
in which the Trust itself would be unable to meet its obligations. The
Declaration of Trust further provides that the Trustees will not be liable for
errors of judgment or mistakes of fact or law; but nothing in the Declaration of
Trust protects a Trustee against any liability to which he would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties involved in the conduct of his office.
The Trust shall be of unlimited duration subject to the provisions in
the Declaration of Trust concerning termination by action of the shareholders.
OWNERSHIP OF SHARES
As of the date of this Statement of Additional Information, shares of
the Trust are offered only to the separate accounts of the Life Companies. In
turn, these separate accounts fund variable annuity contracts and variable life
insurance policies issued by those insurance companies.
FINANCIAL STATEMENTS
Set forth following this Statement of Additional Information are the
financial statements of the Trust with respect to the fiscal year ended December
31, 1997.
B-53
<PAGE> 84
<PAGE> 1
- ---------------------
ANCHOR SERIES TRUST
MONEY MARKET PORTFOLIO INVESTMENT PORTFOLIO -- DECEMBER 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
SHORT-TERM SECURITIES -- 100.5% AMOUNT VALUE
----------------------------------------------------------------------------------------------------
<S> <C> <C>
BANK NOTES -- 14.3%
Bank of Nova Scotia 5.83% due 10/02/98................................ $ 2,000,000 $ 1,997,512
Bankers Trust Co. 6.01% due 12/10/98.................................. 2,000,000 2,000,180
Chase Manhattan Bank 5.75% due 2/11/98................................ 2,000,000 2,000,000
International Nederlanden Bank 5.84% due 3/09/98...................... 2,000,000 2,000,073
Regions Bank 5.82% due 4/17/98........................................ 2,000,000 2,000,102
-----------
TOTAL BANK NOTES (cost $9,997,867).................................... 9,997,867
-----------
COMMERCIAL PAPER -- 63.9%
American General Finance Corp. 5.60% due 2/25/98...................... 2,000,000 1,982,889
Archer Daniels Midland Co. 5.69% due 2/26/98.......................... 2,300,000 2,279,643
Associates Corp. of North America 5.58% due 2/24/98................... 2,000,000 1,983,260
BCI Funding Corp. 5.73% due 2/25/98................................... 2,300,000 2,279,865
Beneficial Corp. 5.58% due 2/24/98.................................... 2,000,000 1,983,260
Chevron Transport Corp. 5.70% due 2/13/98............................. 2,500,000 2,482,979
Eureka Securitization Inc. 5.75% due 3/10/98.......................... 2,000,000 1,978,278
FINA Oil & Chemical Co. 5.75% due 3/26/98............................. 2,500,000 2,466,458
Ford Motor Credit Europe PLC 5.68% due 2/26/98........................ 2,500,000 2,477,911
General Motors Acceptance Corp. 5.71% due 2/25/98..................... 2,500,000 2,478,191
Government Development Bank for Puerto Rico 5.70% due 2/09/98......... 2,000,000 1,987,650
Montana Blanc Capital Corp. 5.85% due 2/25/98......................... 2,500,000 2,477,656
Morgan (J.P.) & Co., Inc. 5.70% due 4/15/98........................... 2,500,000 2,458,833
Morgan Stanley Group, Inc. 5.78% due 2/17/98.......................... 2,500,000 2,481,135
Nationsbank Corp. 5.67% due 3/20/98................................... 2,500,000 2,469,288
New York Life Capital Corp. 5.68% due 2/27/98......................... 1,300,000 1,288,309
Prudential Funding Corp. 5.55% due 1/20/98............................ 2,000,000 1,994,142
Sears Roebuck Acceptance Corp. 5.62% due 2/25/98...................... 2,400,000 2,379,393
Svenska Handelsbanken 5.54% due 1/12/98............................... 2,200,000 2,196,276
Texaco, Inc. 5.75% due 3/13/98........................................ 2,500,000 2,471,649
-----------
TOTAL COMMERCIAL PAPER (cost $44,597,065)............................. 44,597,065
-----------
CORPORATE SHORT-TERM NOTES -- 7.2%
Bank of America National Association 5.65% due 1/16/98(1)............. 3,000,000 2,999,582
Peoples Security Life Insurance Co. 5.88% due 2/01/98(1).............. 2,000,000 2,000,000
-----------
TOTAL CORPORATE SHORT-TERM NOTES (cost $4,999,582).................... 4,999,582
-----------
U.S. GOVERNMENT & AGENCIES -- 14.3%
Student Loan Marketing Association 5.62% due 1/20/98(1)
(cost $10,000,000).................................................. 10,000,000 10,000,000
-----------
TOTAL SHORT-TERM SECURITIES (cost $69,594,514)........................ 69,594,514
-----------
</TABLE>
---------------------
5
<PAGE> 2
<TABLE>
<CAPTION>
PRINCIPAL
REPURCHASE AGREEMENT -- 0.8% AMOUNT VALUE
----------------------------------------------------------------------------------------------------
<S> <C> <C>
Joint Repurchase Agreement Account (Note 3)
(cost $540,000)..................................................... $ 540,000 $ 540,000
-----------
TOTAL INVESTMENTS -- (cost $70,134,514) 100.5% 70,134,514
Liabilities in excess of other assets -- (0.5) (330,333)
------ -----------
NET ASSETS -- 100.0% $69,804,181
====== ===========
</TABLE>
-----------------------------
(1) Variable rate security -- the rate reflected is as of December
31, 1997; maturity date reflects next reset date
See Notes to Financial Statements
- ---------------------
6
<PAGE> 3
- ---------------------
ANCHOR SERIES TRUST
FIXED INCOME PORTFOLIO INVESTMENT PORTFOLIO -- DECEMBER 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
BONDS & NOTES -- 98.2% AMOUNT VALUE
----------------------------------------------------------------------------------------------------
<S> <C> <C>
AEROSPACE & MILITARY TECHNOLOGY -- 0.3%
Argo-Tech Corp. 8.63% 2007*............................................ $ 30,000 $ 29,925
K & F Industries, Inc. 9.25% 2007*..................................... 5,000 5,125
Moog, Inc., Class B 10.00% 2006........................................ 25,000 27,500
------------
62,550
------------
AUTOMOTIVE -- 0.4%
Hayes Wheels International, Inc. 11.00% 2006........................... 25,000 27,875
Johnstown America Industries, Inc. 11.75% 2005......................... 30,000 32,925
Key Plastics, Inc., Class B 10.25% 2007................................ 15,000 15,900
------------
76,700
------------
CABLE -- 1.2%
Lenfest Communications, Inc. 8.38% 2005................................ 25,000 25,688
Rifkin Acquisitions Partners L.P. 11.13% 2006.......................... 25,000 27,437
Tele-Communications, Inc. 9.25% 2002................................... 150,000 164,650
------------
217,775
------------
CHEMICALS -- 0.4%
Huntsman Corp. 9.50% 2007*............................................. 15,000 15,750
Pioneer Americas Acquisition Corp., Class B 9.25% 2007................. 20,000 20,000
Sovereign Specialty Chemicals, Inc. 9.50% 2007*........................ 5,000 5,138
Texas Petrochemicals Corp. 11.13% 2006................................. 25,000 27,000
------------
67,888
------------
COMMUNICATIONS & MEDIA -- 3.1%
Benedek Communications Corp. zero coupon 2006 (1)...................... 35,000 26,250
Chancellor Radio Broadcasting Co. 8.13% 2007*.......................... 25,000 24,500
EchoStar DBS Corp. 12.50% 2002......................................... 25,000 27,312
Granite Broadcasting Corp. 10.38% 2005................................. 25,000 26,188
Jacor Communications Co. 8.75% 2007.................................... 10,000 10,250
MobileMedia Corp. 9.38% 2007+(3)....................................... 50,000 5,750
News America Holdings, Inc. 9.25% 2013................................. 300,000 357,327
Nextel Communications, Inc. zero coupon 2007*(1)....................... 60,000 36,825
Plitt Theaters, Inc. 10.88% 2004....................................... 15,000 16,219
Sullivan Graphics, Inc. 12.75% 2005.................................... 20,000 20,200
Young Broadcasting, Inc. 9.00% 2006.................................... 25,000 25,000
------------
575,821
------------
CONSUMER DISCRETIONARY -- 2.0%
Collins & Aikman Corp. 11.50% 2006..................................... 25,000 28,094
Ford Motor Co. 9.00% 2001.............................................. 250,000 272,293
LDM Technologies, Inc., Class B 10.75% 2007............................ 20,000 21,700
Pillowtex Corp. 9.00% 2007*............................................ 5,000 5,106
Standard Pacific Corp. 8.50% 2007...................................... 15,000 14,981
Walbro Corp. 9.88% 2005*............................................... 20,000 20,300
------------
362,474
------------
CONSUMER STAPLES -- 0.2%
Revlon Worldwide Parent Ciro, Class B zero coupon 2001................. 40,000 27,900
------------
</TABLE>
---------------------
7
<PAGE> 4
<TABLE>
<CAPTION>
PRINCIPAL
BONDS & NOTES (continued) AMOUNT VALUE
----------------------------------------------------------------------------------------------------
<S> <C> <C>
ENERGY -- 1.9%
Cross Timbers Oil Co., Class B 9.25% 2007.............................. $ 30,000 $ 31,200
Energy Corp. America, Class A 9.50% 2007............................... 20,000 20,000
Newfield Exploration Co. 7.45% 2007*................................... 35,000 35,514
Petroleos Mexicanos 8.85% 2007......................................... 40,000 39,627
Plains Resources, Inc., Class B 10.25% 2006............................ 50,000 53,875
YPF Sociedad Anonima 8.00% 2004........................................ 160,000 165,227
------------
345,443
------------
FINANCE -- 20.0%
Abbey National First Capital 8.20% 2004................................ 250,000 273,482
Amerus Capital I 8.85% 2027............................................ 150,000 159,921
Banponce Financial Corp. 6.75% 2001.................................... 300,000 302,901
Credit National 7.00% 2005............................................. 190,000 189,525
Dime Capital Trust I, Series A 9.33% 2027.............................. 150,000 169,674
Export-Import Bank Korea 6.38% 2006.................................... 250,000 178,390
Japan Finance Corp. Municipal Enterprises 9.13% 2000................... 400,000 430,084
KFW International Finance, Inc. 9.13% 2001............................. 400,000 436,032
Ohio National Life Insurance Co. 8.50% 2026*........................... 200,000 223,548
Pindo Deli Finance Mauritius Ltd. 10.75% 2007*......................... 10,000 8,575
Security Benefit Life Co. 8.75% 2016*.................................. 200,000 224,572
Sun Canada Financial Co. 7.25% 2015*................................... 300,000 315,255
Tembec Finance Corp. 9.88% 2005........................................ 30,000 30,600
United States Bancorp Oregon 7.50% 2026................................ 400,000 432,440
US West Capital Funding, Inc. 6.95% 2037............................... 250,000 257,518
Western Financial Savings Bank 8.88% 2007.............................. 25,000 24,125
------------
3,656,642
------------
FOOD & LODGING -- 0.1%
Del Monte Foods Co. zero coupon 2007*(1)............................... 25,000 14,406
------------
GAMING -- 0.4%
Argosy Gaming Co. 13.25% 2004.......................................... 20,000 20,900
Hollywood Casino, Inc. 12.75% 2003..................................... 25,000 26,812
Riviera Holdings Corp. 10.00% 2004*.................................... 25,000 24,813
------------
72,525
------------
HEALTHCARE -- 3.1%
Allegiance Corp. 7.00% 2026............................................ 350,000 361,287
Owens & Minor, Inc. 10.88% 2006........................................ 50,000 55,500
Tenet Healthcare Corp. 7.88% 2003...................................... 120,000 121,500
Vencor, Inc. 8.63% 2007................................................ 30,000 29,925
------------
568,212
------------
INDUSTRIAL & COMMERCIAL -- 6.2%
Cincinnati Milacron, Inc. 7.88% 2000................................... 150,000 153,570
Clark Schwebel, Inc. 10.50% 2006....................................... 10,000 10,863
Columbia University Trustees 8.62% 2001................................ 500,000 537,020
Comcast Cable Communications 8.50% 2027................................ 150,000 176,229
Elgin National Industries, Inc. 11.00% 2007*........................... 20,000 20,700
International Wire Group, Inc., Class B 11.75% 2005.................... 15,000 16,387
Neenah Corp., Class B 11.13% 2007...................................... 10,000 10,975
Park Ohio Industries, Inc. 9.25% 2007*................................. 20,000 20,300
Petroliam Nasional Bhd 7.13% 2005*..................................... 200,000 190,760
Scotsman Group, Inc. 8.63% 2007........................................ 5,000 5,019
------------
1,141,823
------------
</TABLE>
- ---------------------
8
<PAGE> 5
<TABLE>
<CAPTION>
PRINCIPAL
BONDS & NOTES (continued) AMOUNT VALUE
----------------------------------------------------------------------------------------------------
<S> <C> <C>
INFORMATION TECHNOLOGY -- 0.4%
Advanced Micro Devices, Inc. 11.00% 2003............................... $ 25,000 $ 26,750
Concentric Network Corp. Delaware 12.75% 2007*......................... 5,000 5,137
Decision Holdings Corp. zero coupon 2008(1)............................ 10,000 6,500
Fairchild Semiconductor Corp. 10.13% 2007.............................. 25,000 26,250
Iron Mountain, Inc. 8.75% 2009*........................................ 10,000 10,250
------------
74,887
------------
METALS & MINERALS -- 0.3%
A.K. Steel Corp. 9.13% 2006............................................ 15,000 15,338
Acindar Industria Argentina de Aceros SA 11.25% 2004................... 10,000 9,825
Hylsa SA de CV 9.25% 2007*............................................. 25,000 24,937
------------
50,100
------------
NON-U.S. GOVERNMENT OBLIGATIONS -- 2.7%
Republic of Argentina 11.00% 2006...................................... 230,000 247,250
Republic of Columbia 7.25% 2004........................................ 180,000 171,450
Republic of Lithuania 7.13% 2002*(2)................................... 70,000 66,325
------------
485,025
------------
PAPER PRODUCTS -- 0.3%
Grupo International Durango SA de CV 12.63% 2003....................... 25,000 27,938
Repap New Brunswick, Inc. 10.63% 2005.................................. 25,000 23,750
Silgan Holdings Corp. 9.00% 2009....................................... 10,000 10,225
------------
61,913
------------
RETAIL -- 1.3%
Guitar Center Management Co., Inc. 11.00% 2006......................... 17,000 18,721
J Crew Group, Inc. zero coupon 2008*(1)................................ 15,000 7,013
Penney (J.C.) Co., Inc. 7.40% 2037..................................... 200,000 219,110
------------
244,844
------------
TELECOMMUNICATIONS -- 1.1%
Clearnet Communications, Inc. zero coupon 2005(1)...................... 25,000 19,844
Esprit Telecommunications Group PLC 11.50% 2007........................ 5,000 5,138
GCI, Inc. 9.75% 2007................................................... 25,000 25,937
Globalstar L.P. 10.75% 2004*........................................... 35,000 34,300
GST Telecommunications, Inc. 12.75% 2007............................... 20,000 20,800
Intermedia Communications, Inc. 8.88% 2007*............................ 25,000 25,687
Iridium Capital Corp., Class C 11.25% 2005*............................ 35,000 34,475
Teleport Communications Group zero coupon 2007(1)...................... 40,000 32,600
------------
198,781
------------
U.S. GOVERNMENT & AGENCIES -- 46.8%
Federal Home Loan Mortgage Corp. 6.00% 2003............................ 480,173 475,362
Federal Home Loan Participation 11.00% 2000............................ 5,286 5,650
Government National Mortgage Association 7.00% 2012 - 2023............. 971,616 986,128
Government National Mortgage Association 7.50% 2022 - 2023............. 759,048 779,845
Government National Mortgage Association 10.00% 2000................... 18,571 19,116
Government National Mortgage Association 11.25% 1998................... 1,400 1,418
Government National Mortgage Association 13.25% 1999................... 1,053 1,112
United States Treasury Bonds 10.75% 2003............................... 520,000 633,589
United States Treasury Bonds 11.88% 2003............................... 980,000 1,274,764
United States Treasury Bonds 12.00% 2013............................... 2,985,000 4,398,218
------------
8,575,202
------------
</TABLE>
---------------------
9
<PAGE> 6
<TABLE>
<CAPTION>
PRINCIPAL
BONDS & NOTES (continued) AMOUNT VALUE
----------------------------------------------------------------------------------------------------
<S> <C> <C>
UTILITIES -- 6.0%
Cleveland Electric Illuminating Co. 7.19% 2000......................... $ 160,000 $ 162,370
Niagara Mohawk Power Corp. 5.88% 2002.................................. 750,000 735,820
WorldCom, Inc. 7.55% 2004.............................................. 200,000 209,438
------------
1,107,628
------------
TOTAL BONDS & NOTES (cost $17,652,621)................................. 17,988,539
------------
PREFERRED STOCK -- 0.2% SHARES
----------------------------------------------------------------------------------------------------
INDUSTRIAL & COMMERCIAL -- 0.2%
Fairfield Manufacturing, Inc. 11.25%(2)(4)
(cost $25,875)....................................................... 25 26,750
------------
TOTAL INVESTMENTS -- (cost $17,678,496) 98.4% 18,015,289
Other assets less liabilities -- 1.6 299,933
------ ------------
NET ASSETS -- 100.0% $18,315,222
====== =============
</TABLE>
-----------------------------
+ Non-income producing securities
* Resale restricted to qualified institutional buyers
(1) Represents a zero-coupon bond which will convert to an
interest-bearing security at a later date
(2) Fair valued security; see Note 2
(3) Issuer of the security has filed for bankruptcy and interest
payments are in default
(4) PIK ("Payment-in-Kind") payment made with additional
securities in lieu of cash
See Notes to Financial Statements
- ---------------------
10
<PAGE> 7
- ---------------------
ANCHOR SERIES TRUST
GOVERNMENT & QUALITY BOND
PORTFOLIO INVESTMENT PORTFOLIO -- DECEMBER 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
BONDS & NOTES -- 94.9% AMOUNT VALUE
----------------------------------------------------------------------------------------------------
<S> <C> <C>
FINANCE -- 13.7%
Asset Securitization Corp. 7.49% 2027................................ $ 5,000,000 $ 5,346,094
CS First Boston Corp. 7.24% 2029(1).................................. 5,000,000 5,235,156
General Electric Capital Corp. 7.50% 2035............................ 5,000,000 5,579,400
General Reinsurance Corp. 9.00% 2009................................. 5,000,000 5,991,500
Morgan (J.P.) & Co., Inc. 6.25% 2005................................. 5,000,000 4,931,900
Stanford University 6.88% 2024....................................... 5,000,000 5,001,050
-------------
32,085,100
-------------
INDUSTRIAL & COMMERCIAL -- 2.5%
Postal Square L.P. 8.95% 2022........................................ 4,758,950 5,867,690
-------------
INFORMATION & ENTERTAINMENT -- 1.9%
McDonald's Corp. 7.05% 2025.......................................... 4,370,000 4,506,314
-------------
NON-U.S. GOVERNMENT OBLIGATIONS -- 1.3%
British Columbia Province Canada 6.50% 2026.......................... 3,125,000 3,134,531
-------------
RETAIL -- 2.2%
Wal-Mart Stores, Inc. 6.75% 2023..................................... 5,000,000 5,050,650
-------------
TRANSPORTATION -- 2.6%
United Parcel Service of America, Inc. 8.38% 2020.................... 5,000,000 6,076,050
-------------
U.S. GOVERNMENT & AGENCIES -- 68.2%
Federal Home Loan Mortgage Corp. 6.00% 2008 - 2011................... 8,365,946 8,280,370
Federal Home Loan Mortgage Corp. 6.50% 2011.......................... 12,228,154 12,300,667
Federal Home Loan Mortgage Corp. 7.00% 2010 - 2011................... 16,704,635 17,010,134
Federal Home Loan Mortgage Corp. 14.75% 2010......................... 127,845 154,053
Federal National Mortgage Association 7.00% 2010 - 2011.............. 5,836,296 5,934,145
Government National Mortgage Association 6.50% 2023.................. 7,854,860 7,773,798
Government National Mortgage Association 7.00% 2009 - 2012........... 9,188,441 9,372,125
Government National Mortgage Association 10.00% 2013 - 2017.......... 2,085,713 2,300,425
Government National Mortgage Association 11.50% 2014................. 17,233 19,694
Government National Mortgage Association 12.00% 1999 - 2016.......... 80,574 86,658
Government National Mortgage Association 12.75% 2014................. 78,711 90,148
Government National Mortgage Association 13.25% 1999 - 2014.......... 19,440 22,121
Government National Mortgage Association 13.50% 2014................. 8,360 10,089
Government National Mortgage Association 13.75% 2014................. 1,407 1,611
United States Treasury Bonds 7.63% 2022.............................. 30,000,000 36,121,800
United States Treasury Notes 5.88% 1998.............................. 31,000,000 31,038,750
United States Treasury Notes 6.25% 2002.............................. 29,000,000 29,575,360
-------------
160,091,948
-------------
</TABLE>
---------------------
11
<PAGE> 8
<TABLE>
<CAPTION>
PRINCIPAL
BONDS & NOTES (continued) AMOUNT VALUE
----------------------------------------------------------------------------------------------------
<S> <C> <C>
UTILITIES -- 2.5%
Hydro Quebec Electric 8.40% 2022..................................... $ 5,000,000 $ 5,889,600
-------------
TOTAL INVESTMENT SECURITIES (cost $216,829,085)...................... 222,701,883
-------------
<CAPTION>
REPURCHASE AGREEMENT -- 4.2%
----------------------------------------------------------------------------------------------------
<S> <C> <C>
Joint Repurchase Agreement Account (Note 3) (cost $9,760,000)........ 9,760,000 9,760,000
-------------
TOTAL INVESTMENTS -- (cost $226,589,085) 99.1% 232,461,883
Other assets less liabilities -- 0.9 2,161,064
------ -------------
NET ASSETS -- 100.0% $234,622,947
====== =============
</TABLE>
-----------------------------
(1) Fair valued security; see Note 2
See Notes to Financial Statements
- ---------------------
12
<PAGE> 9
- ---------------------
ANCHOR SERIES TRUST
HIGH YIELD PORTFOLIO INVESTMENT PORTFOLIO -- DECEMBER 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
BONDS & NOTES -- 91.8% AMOUNT VALUE
----------------------------------------------------------------------------------------------------
<S> <C> <C>
AEROSPACE & MILITARY TECHNOLOGY -- 3.4%
Argo-Tech Corp. 8.63% 2007*............................................ $ 500,000 $ 498,750
K & F Industries, Inc. 9.25% 2007*..................................... 150,000 153,750
Moog, Inc., Class B 10.00% 2006........................................ 655,000 720,500
------------
1,373,000
------------
AUTOMOTIVE -- 4.0%
Federal Mogul Corp. 8.80% 2007......................................... 250,000 267,388
Hayes Wheels International, Inc. 11.00% 2006........................... 135,000 150,525
Johnstown America Industries, Inc. 11.75% 2005......................... 500,000 548,750
Key Plastics, Inc., Class B 10.25% 2007................................ 350,000 371,000
Lear Corp. 9.50% 2006.................................................. 250,000 275,000
------------
1,612,663
------------
CABLE -- 3.1%
Cablevision Systems Corp. 8.13% 2009................................... 150,000 154,500
Cablevision Systems Corp. 9.25% 2005................................... 350,000 371,000
Frontiervision Holding L.P. zero coupon 2007(1)........................ 270,000 199,800
Marcus Cable Operating Co. L.P. zero coupon 2004(1).................... 150,000 138,750
Rifkin Acquisitions Partners L.P. 11.13% 2006.......................... 350,000 384,125
------------
1,248,175
------------
CHEMICALS -- 5.7%
Acetex Corp. 9.75% 2003................................................ 350,000 362,250
Agriculture Minerals & Chemicals 10.75% 2003........................... 150,000 161,625
Buckeye Cellulose Corp. 8.50% 2005..................................... 250,000 255,625
Huntsman Corp. 9.50% 2007*............................................. 150,000 157,500
Huntsman Polymers Corp. 11.75% 2004.................................... 250,000 280,313
PCI Chemical Canada, Inc. 9.25% 2007*.................................. 60,000 59,925
Pioneer Americas Acquisition Corp., Class B 9.25% 2007................. 250,000 250,000
Sovereign Specialty Chemicals, Inc. 9.50% 2007*........................ 495,000 508,612
Texas Petrochemicals Corp. 11.13% 2006................................. 250,000 270,000
------------
2,305,850
------------
COMMUNICATIONS & MEDIA -- 7.0%
Big Flower Press Holdings 8.88% 2007................................... 125,000 124,375
Big Flower Press Holdings 8.88% 2007*.................................. 225,000 226,688
Chancellor Media Corp. 9.38% 2004...................................... 250,000 260,000
Chancellor Radio Broadcasting Co. 8.13% 2007*.......................... 250,000 245,000
EchoStar DBS Corp. 12.50% 2002......................................... 325,000 355,062
Granite Broadcasting Corp. 10.38% 2005................................. 250,000 261,875
Jacor Communications Co. 9.75% 2006.................................... 250,000 268,750
MobileMedia Corp. 9.38% 2007+(3)....................................... 500,000 57,500
Plitt Theaters, Inc. 10.88% 2004....................................... 195,000 210,844
Sullivan Graphics, Inc. 12.75% 2005.................................... 100,000 101,000
World Color Press, Inc. 9.13% 2003..................................... 250,000 260,625
Young Broadcasting, Inc. 11.75% 2004................................... 400,000 445,000
------------
2,816,719
------------
CONSUMER DISCRETIONARY -- 2.5%
Collins & Aikman Corp. 11.50% 2006..................................... 250,000 280,937
LDM Technologies, Inc., Class B 10.75% 2007............................ 250,000 271,250
</TABLE>
---------------------
13
<PAGE> 10
<TABLE>
<CAPTION>
PRINCIPAL
BONDS & NOTES (continued) AMOUNT VALUE
----------------------------------------------------------------------------------------------------
<S> <C> <C>
CONSUMER DISCRETIONARY (continued)
Polysindo International Financing Co. BV 11.38% 2006................... $ 250,000 $ 202,500
Standard Pacific Corp. 8.50% 2007...................................... 230,000 229,713
------------
984,400
------------
ENERGY -- 4.8%
Cross Timbers Oil Co., Class B 8.75% 2009*............................. 90,000 91,575
Cross Timbers Oil Co., Class B 9.25% 2007.............................. 250,000 260,000
Flores & Rucks, Inc. 9.75% 2006........................................ 150,000 164,625
Petroleos Mexicanos 8.85% 2007......................................... 750,000 743,010
Plains Resources, Inc., Class B 10.25% 2006............................ 500,000 538,750
Pride Petroleum Services, Inc. 9.38% 2007.............................. 120,000 129,000
------------
1,926,960
------------
FINANCE -- 6.5%
Hawthorne Financial Corp. 12.50% 2004*(2).............................. 350,000 350,000
Olympic Financial Ltd. 11.50% 2007..................................... 350,000 353,500
Pindo Deli Finance Mauritius Ltd. 10.75% 2007*......................... 355,000 304,412
Resource America, Inc. 12.00% 2004*.................................... 500,000 511,250
Southern Pacific Funding Corp. 11.50% 2004............................. 350,000 348,250
Tembec Finance Corp. 9.88% 2005........................................ 250,000 255,000
Western Financial Savings Bank 8.88% 2007.............................. 500,000 482,500
------------
2,604,912
------------
FOOD & LODGING -- 2.7%
Aurora Foods, Inc. 9.88% 2007.......................................... 65,000 68,413
Capstar Hotel Co. 8.75% 2007........................................... 250,000 257,500
Del Monte Foods Co. zero coupon 2007*(1)............................... 460,000 265,075
John Q. Hammons Hotels 8.88% 2004...................................... 500,000 511,250
------------
1,102,238
------------
GAMING -- 3.2%
Argosy Gaming Co. 13.25% 2004.......................................... 260,000 271,700
Fitzgeralds Gaming Corp. 12.25% 2004*.................................. 165,000 166,238
GB Property Funding Corp. 10.88% 2004.................................. 250,000 210,000
Hollywood Casino, Inc. 12.75% 2003..................................... 350,000 375,375
Lady Luck Gaming Finance Corp. 11.88% 2001............................. 250,000 253,750
------------
1,277,063
------------
GROCERY -- 1.1%
Homeland Stores, Inc. 10.00% 2003...................................... 500,000 450,625
------------
HEALTHCARE -- 3.1%
Dade International, Inc. 11.13% 2006................................... 190,000 211,375
Leiner Health Products Group. 9.63% 2007............................... 350,000 374,500
Owens & Minor, Inc. 10.88% 2006........................................ 350,000 388,500
Vencor, Inc. 8.63% 2007................................................ 260,000 259,350
------------
1,233,725
------------
INDUSTRIAL & COMMERCIAL -- 9.6%
Cabot Safety Acquisition Corp. 12.50% 2005............................. 350,000 393,750
Clark Schwebel, Inc. 10.50% 2006....................................... 325,000 353,031
Globo Comunicacoes SA 10.50% 2006*..................................... 250,000 237,500
Graphic Controls Corp., Class A 12.00% 2005............................ 225,000 251,156
Great Lakes Carbon Corp. 10.00% 2006................................... 500,000 537,500
International Wire Group, Inc., Class B 11.75% 2005.................... 455,000 497,088
Neenah Corp., Class B 11.13% 2007...................................... 350,000 384,125
Pierce Leahy Corp. 9.13% 2007.......................................... 125,000 130,000
Scotsman Group, Inc. 8.63% 2007........................................ 175,000 175,656
Specialty Equipment Cos., Inc. 11.38% 2003............................. 250,000 270,625
TV Azteca SA de CV, Class B 10.50% 2007................................ 250,000 260,000
</TABLE>
- ---------------------
14
<PAGE> 11
<TABLE>
<CAPTION>
PRINCIPAL
BONDS & NOTES (continued) AMOUNT VALUE
----------------------------------------------------------------------------------------------------
<S> <C> <C>
INDUSTRIAL & COMMERCIAL (continued)
UCAR Global Enterprises, Inc. 12.00% 2005.............................. $ 100,000 $ 112,000
Unicco Service Co. 9.88% 2007*......................................... 250,000 250,313
------------
3,852,744
------------
INFORMATION TECHNOLOGY -- 3.6%
Advanced Micro Devices, Inc. 11.00% 2003............................... 250,000 267,500
Concentric Network Corp. Delaware 12.75% 2007*......................... 130,000 133,575
Decision Holdings Corp. zero coupon 2008(1)............................ 170,000 110,500
Fairchild Semiconductor Corp. 10.13% 2007.............................. 250,000 262,500
Iron Mountain, Inc. 8.75% 2009*........................................ 110,000 112,750
Unisys Corp., Class B 12.00% 2003...................................... 500,000 566,250
------------
1,453,075
------------
METALS & MINERALS -- 7.7%
A.K. Steel Corp. 9.13% 2006............................................ 250,000 255,625
A.K. Steel Corp. 10.75% 2004........................................... 150,000 159,750
Acindar Industria Argentina de Aceros SA 11.25% 2004................... 500,000 491,250
Amtrol, Inc. 10.63% 2006............................................... 250,000 257,500
Armco, Inc. 9.00% 2007................................................. 100,000 98,000
Bethlehem Steel Corp. 10.38% 2003...................................... 350,000 376,250
CSN Iron SA 9.13% 2007*................................................ 350,000 290,500
Nortek, Inc., Class B 9.25% 2007....................................... 240,000 244,800
NS Group, Inc. 13.50% 2003............................................. 300,000 348,000
Weirton Steel Corp. 10.88% 1999........................................ 300,000 308,250
Weirton Steel Corp. 11.38% 2004........................................ 250,000 260,000
------------
3,089,925
------------
NON-U.S. GOVERNMENT OBLIGATIONS -- 2.0%
Federal Republic of Brazil 4.50% 2014.................................. 256,559 201,318
Republic of Argentina 11.00% 2006...................................... 100,000 107,500
Republic of Argentina 11.38% 2017...................................... 250,000 274,062
Republic of Brazil 6.00% 2013.......................................... 250,000 199,463
------------
782,343
------------
PAPER PRODUCTS -- 11.6%
APP International Finance Co. 11.75% 2005.............................. 125,000 115,625
Aracruz Celulose SA 10.38% 2002........................................ 60,000 60,750
Aracruz Celulose SA 10.38% 2002*....................................... 255,000 258,187
BWay Corp. 10.25% 2007*................................................ 350,000 379,750
Calmar, Inc. Delaware, Class B 11.50% 2005............................. 350,000 371,000
Container Corp. of America 9.75% 2003.................................. 250,000 268,750
Container Corp. of America, Class A 11.25% 2004........................ 600,000 654,000
Fonda Group, Inc., Class B 9.50% 2007.................................. 250,000 235,000
Industrias Klabin de Papel e Celulose SA 11.00% 2004*.................. 250,000 237,500
Paperboard Industries International, Inc. 8.38% 2007*.................. 100,000 101,500
Repap New Brunswick, Inc. 10.63% 2005.................................. 350,000 332,500
S.D. Warren Co., Class B 12.00% 2004................................... 400,000 447,000
Silgan Holdings Corp. 9.00% 2009....................................... 750,000 766,875
Silgan Holdings Corp. 13.25% 2006...................................... 80,715 91,713
Zeta Consumer Products Corp. 11.25% 2007*.............................. 350,000 356,125
------------
4,676,275
------------
RETAIL -- 0.9%
Guitar Center Management Co., Inc. 11.00% 2006*........................ 333,000 366,716
------------
TELECOMMUNICATIONS -- 7.2%
American Communications Services zero coupon 2006(1)................... 190,000 146,300
Comcast Cellular Holdings, Inc., Class B 9.50% 2007.................... 50,000 52,000
Globalstar L.P. 10.75% 2004*........................................... 500,000 490,000
</TABLE>
---------------------
15
<PAGE> 12
<TABLE>
<CAPTION>
PRINCIPAL
BONDS & NOTES (continued) AMOUNT VALUE
----------------------------------------------------------------------------------------------------
<S> <C> <C>
TELECOMMUNICATIONS (continued)
GST Telecommunications, Inc. 12.75% 2007............................... $ 165,000 $ 171,600
Hyperion Telecommunications, Inc., Class B 12.25% 2004................. 175,000 192,500
Intermedia Communications, Inc. 8.50% 2008*............................ 350,000 350,000
Intermedia Communications, Inc. 8.88% 2007*............................ 150,000 154,125
Iridium Capital Corp., Class C 11.25% 2005*............................ 350,000 344,750
McLeod, Inc. 9.25% 2007*............................................... 250,000 262,500
Microcell Telecommunications zero coupon 2007*(1)...................... CAD 220,000 85,441
Philippine Long District Telephone Co. Maine 7.85% 2007................ 250,000 217,450
Rogers Cantel, Inc. 8.30% 2007......................................... 150,000 148,875
Teleport Communications Group zero coupon 2007(1)...................... 350,000 285,250
------------
2,900,791
------------
UTILITIES -- 2.1%
Cemig 9.13% 2004*...................................................... 150,000 138,750
Korea Telecom 7.63% 2007............................................... 220,000 157,315
Texas-New Mexico Power Co. 10.75% 2003................................. 500,000 543,015
------------
839,080
------------
TOTAL BONDS & NOTES (cost $36,297,412)................................. 36,897,279
------------
PREFERRED STOCK -- 2.1% SHARES
----------------------------------------------------------------------------------------------------
COMMUNICATIONS & MEDIA -- 0.5%
Granite Broadcasting Corp. 12.75%(4)................................... 160 175,520
------------
FINANCE -- 0.7%
Superior National Insurance Group, Inc. 10.75%*(2)..................... 280 287,000
------------
INDUSTRIAL & COMMERCIAL -- 0.9%
Fairfield Manufacturing, Inc. 11.25% (2)(4)............................ 350 374,500
------------
TOTAL PREFERRED STOCK (cost $793,751).................................. 837,020
------------
WARRANTS -- 0.0%+
----------------------------------------------------------------------------------------------------
COMMUNICATIONS & MEDIA -- 0.0%
Benedek Communications Corp. 7/01/07*(2) (cost $13,800)................ 2,000 4,000
------------
TOTAL INVESTMENT SECURITIES (cost $37,104,963)......................... 37,738,299
------------
PRINCIPAL
REPURCHASE AGREEMENT -- 7.5% AMOUNT
----------------------------------------------------------------------------------------------------
Joint Repurchase Agreement Account (Note 3) (cost $3,010,000).......... $3,010,000 3,010,000
------------
TOTAL INVESTMENTS -- (cost $40,114,963) 101.4% 40,748,299
Liabilities in excess of other assets -- (1.4) (555,038)
------ ------------
NET ASSETS -- 100.0% $40,193,261
====== =============
</TABLE>
-----------------------------
+ Non-income producing securities
* Resale restricted to qualified institutional buyers
(1) Represents a zero-coupon bond which will convert to an
interest-bearing security at a later date
(2) Fair valued security; see Note 2
(3) Issuer of the security has filed for bankruptcy and interest
payments are in default
(4) PIK ("Payment-in-kind") payment made with additional
securities in lieu of cash
- ---------------------
16
<PAGE> 13
OPEN FORWARD FOREIGN CURRENCY CONTRACTS
------------------------------------------------------------------
<TABLE>
<CAPTION>
CONTRACT IN DELIVERY GROSS UNREALIZED
TO DELIVER EXCHANGE FOR DATE APPRECIATION
--------------------------------------------------------------
<S> <C> <C> <C>
CAD 125,400 USD 91,034 10/16/98 $2,745
==============
</TABLE>
CAD -- Canadian Dollar
USD -- United States Dollar
See Notes to Financial Statements
---------------------
17
<PAGE> 14
- ---------------------
ANCHOR SERIES TRUST
TARGET '98 PORTFOLIO INVESTMENT PORTFOLIO -- DECEMBER 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
BONDS & NOTES -- 95.2% AMOUNT VALUE
----------------------------------------------------------------------------------------------------
<S> <C> <C>
SUPRANATIONALS -- 7.2%
International Bank For Reconstruction & Development zero coupon 1998.... $ 550,000 $ 537,490
-----------
U.S. GOVERNMENT & AGENCIES -- 83.9%
Federal Judiciary Office Building zero coupon 1998...................... 1,000,000 965,780
Federal National Mortgage Association zero coupon 1998.................. 1,000,000 965,740
Government Trust Certificates Series 3D zero coupon 1998................ 1,000,000 952,390
Government Trust Certificates Series T zero coupon 1998................. 2,300,000 2,190,497
Tennessee Valley Authority zero coupon 1998............................. 500,000 474,650
Treasury Investment Growth Receipts zero coupon 1998.................... 500,000 476,800
United States Treasury Note Strip Prior zero coupon 1998................ 200,000 190,636
-----------
6,216,493
-----------
UTILITIES -- 4.1%
Virginia Electric & Power Co. 9.38% 1998................................ 300,000 304,287
-----------
TOTAL INVESTMENT SECURITIES (cost $6,929,803)........................... 7,058,270
-----------
<CAPTION>
REPURCHASE AGREEMENT -- 5.0%
----------------------------------------------------------------------------------------------------
<S> <C> <C>
Joint Repurchase Agreement Account (Note 3)
(cost $370,000)....................................................... 370,000 370,000
-----------
TOTAL INVESTMENTS -- (cost $7,299,803) 100.2% 7,428,270
Liabilities in excess of other assets -- (0.2) (15,792)
------ -----------
NET ASSETS -- 100.0% $7,412,478
====== ===========
</TABLE>
-----------------------------
See Notes to Financial Statements
- ---------------------
18
<PAGE> 15
- ---------------------
ANCHOR SERIES TRUST
GROWTH AND INCOME
PORTFOLIO INVESTMENT PORTFOLIO -- DECEMBER 31, 1997
<TABLE>
<CAPTION>
COMMON STOCK -- 95.3% SHARES VALUE
--------------------------------------------------------------------------------------------------------
<S> <C> <C>
CONSUMER DISCRETIONARY -- 6.2%
Retail -- 6.2%
CVS Corp............................................................. 11,000 $ 704,687
Gap, Inc............................................................. 18,000 637,875
May Department Stores Co............................................. 13,000 684,938
Wal-Mart Stores, Inc................................................. 18,000 709,875
---------
2,737,375
---------
CONSUMER STAPLES -- 8.5%
Food, Beverage & Tobacco -- 3.1%
Nabisco Holdings Corp., Class A...................................... 13,000 629,688
PepsiCo, Inc......................................................... 20,000 728,750
Household Products -- 5.4%
Estee Lauder Cos., Inc., Class A..................................... 11,000 565,812
Gillette Co.......................................................... 5,000 502,188
Kimberly-Clark Corp.................................................. 14,000 690,375
Procter & Gamble Co.................................................. 8,000 638,500
---------
3,755,313
---------
ENERGY -- 7.2%
Energy Services -- 1.8%
Schlumberger Ltd..................................................... 10,000 805,000
Energy Sources -- 5.4%
Amoco Corp........................................................... 6,000 510,750
Chevron Corp......................................................... 6,000 462,000
Exxon Corp........................................................... 12,000 734,250
Royal Dutch Petroleum Co., NY Registry Shares........................ 13,000 704,438
---------
3,216,438
---------
FINANCE -- 21.6%
Banks -- 7.5%
Citicorp............................................................. 5,000 632,187
First Union Corp..................................................... 18,000 922,500
U.S. Bancorp......................................................... 8,000 895,500
Wachovia Corp........................................................ 11,000 892,375
Financial Services -- 4.4%
American Express Co.................................................. 11,000 981,750
Federal National Mortgage Association................................ 17,000 970,063
Insurance -- 9.7%
Ace Ltd.............................................................. 10,000 965,000
Allstate Corp........................................................ 11,000 999,625
American International Group, Inc.................................... 7,000 761,250
Marsh & McLennan Cos., Inc........................................... 10,000 745,625
Travelers Group, Inc................................................. 15,000 808,125
---------
9,574,000
---------
</TABLE>
---------------------
19
<PAGE> 16
<TABLE>
<CAPTION>
COMMON STOCK (continued) SHARES VALUE
--------------------------------------------------------------------------------------------------------
<S> <C> <C>
HEALTHCARE -- 13.6%
Drugs -- 10.9%
American Home Products Corp.......................................... 7,000 $ 535,500
Bristol-Myers Squibb Co.............................................. 7,000 662,375
Johnson & Johnson Co................................................. 10,000 658,750
Pfizer, Inc.......................................................... 12,000 894,750
Pharmacia & Upjohn, Inc.............................................. 14,000 512,750
Warner-Lambert Co.................................................... 6,500 806,000
Zeneca Group PLC ADR................................................. 7,000 756,000
Health Services -- 0.8%
Columbia/HCA Healthcare Corp......................................... 12,000 355,500
Medical Products -- 1.9%
Abbott Laboratories, Inc............................................. 13,000 852,312
---------
6,033,937
---------
INDUSTRIAL & COMMERCIAL -- 6.7%
Business Services -- 1.2%
Hertz Corp., Class A................................................. 14,000 563,500
Electrical Equipment -- 3.0%
General Electric Co.................................................. 18,000 1,320,750
Machinery -- 1.1%
Caterpillar, Inc..................................................... 10,000 485,625
Transportation -- 1.4%
Union Pacific Corp................................................... 10,000 624,375
---------
2,994,250
---------
INFORMATION & ENTERTAINMENT -- 8.9%
Broadcasting & Media -- 6.2%
Gannett Co., Inc..................................................... 18,000 1,112,625
Scripps (E.W) Co., Class A........................................... 18,000 871,875
Time Warner, Inc..................................................... 12,000 744,000
Leisure & Tourism -- 2.7%
Delta Air Lines, Inc................................................. 5,000 595,000
McDonald's Corp...................................................... 13,000 620,750
---------
3,944,250
---------
INFORMATION TECHNOLOGY -- 14.4%
Communication Equipment -- 3.1%
Cisco Systems, Inc.+................................................. 12,000 669,000
Motorola, Inc........................................................ 12,000 684,750
Computers & Business Equipment -- 4.9%
EMC Corp.+........................................................... 24,000 658,500
International Business Machines Corp................................. 7,400 773,762
Xerox Corp........................................................... 10,000 738,125
Software -- 6.4%
Automatic Data Processing, Inc....................................... 13,000 797,875
BMC Software, Inc.+.................................................. 12,000 787,500
Computer Sciences Corp............................................... 6,000 501,000
Microsoft Corp.+..................................................... 6,000 775,500
---------
6,386,012
---------
</TABLE>
- ---------------------
20
<PAGE> 17
<TABLE>
<CAPTION>
COMMON STOCK (continued) SHARES VALUE
--------------------------------------------------------------------------------------------------------
<S> <C> <C>
MATERIALS -- 3.0%
Chemicals -- 3.0%
Air Products & Chemicals, Inc........................................ 9,000 $ 740,250
du Pont (E.I.) de Nemours & Co....................................... 10,000 600,625
---------
1,340,875
---------
UTILITIES -- 5.2%
Electric Utilities -- 1.2%
Duke Energy Corp..................................................... 10,000 553,750
Gas & Pipeline Utilities -- 1.3%
Columbia Gas Systems, Inc............................................ 5,000 392,812
Peoples Energy Corp.................................................. 4,100 161,438
Telephone -- 2.7%
SBC Communications, Inc.............................................. 10,000 732,500
WorldCom, Inc.+...................................................... 16,000 484,000
---------
2,324,500
---------
TOTAL COMMON STOCK (cost $30,910,724)................................ 42,306,950
---------
<CAPTION>
PRINCIPAL
CONVERTIBLE BONDS -- 2.4% AMOUNT
--------------------------------------------------------------------------------------------------------
<S> <C> <C>
CONSUMER DISCRETIONARY -- 1.2%
Retail -- 1.2%
Home Depot, Inc. 3.25% 2001.......................................... $400,000 525,500
---------
INFORMATION TECHNOLOGY -- 1.2%
Electronics -- 1.2%
Analog Devices, Inc. 3.50% 2000...................................... 400,000 557,000
---------
TOTAL CONVERTIBLE BONDS (cost $994,928).............................. 1,082,500
---------
TOTAL INVESTMENT SECURITIES (cost $31,905,652)....................... 43,389,450
---------
<CAPTION>
REPURCHASE AGREEMENT -- 0.7%
--------------------------------------------------------------------------------------------------------
<S> <C> <C>
Joint Repurchase Agreement Account (Note 3)
(cost $295,000).................................................... 295,000 295,000
---------
TOTAL INVESTMENTS -- (cost $32,200,652) 98.4% 43,684,450
Other assets less liabilities -- 1.6 732,210
------ ---------
NET ASSETS -- 100.0% $ 44,416,660
====== =========
</TABLE>
-----------------------------
+ Non-income producing securities
ADR -- American Depository Receipts
See Notes to Financial Statements
---------------------
21
<PAGE> 18
- ---------------------
ANCHOR SERIES TRUST
FOREIGN SECURITIES
PORTFOLIO INVESTMENT PORTFOLIO -- DECEMBER 31, 1997
<TABLE>
<CAPTION>
COMMON STOCK -- 94.1% SHARES VALUE
----------------------------------------------------------------------------------------------------
<S> <C> <C>
ARGENTINA -- 0.8%
Banco de Galicia y Buenos Aires SA de CV (Finance)....................... 25,000 $ 160,030
Telefonica de Argentina SA ADR (Utilities)............................... 3,700 137,825
-----------
297,855
-----------
AUSTRALIA -- 2.2%
Amcor Ltd. (Materials)................................................... 30,120 132,507
Australia & New Zealand Banking Group Ltd. (Finance)..................... 34,000 224,697
Broken Hill Proprietary Co., Ltd. (Materials)............................ 19,258 178,858
Goodman Fielder Wattie Ltd. (Consumer Staples)........................... 110,492 175,712
News Corp., Ltd. (Information & Entertainment)........................... 14,000 77,285
-----------
789,059
-----------
BRAZIL -- 1.3%
Aracruz Celulose ADR (Materials)......................................... 5,700 81,937
Centrais Eletricas Brasileiras SA ADR (Utilities)+....................... 4,500 111,893
Telecomunicacoes Brasileras SA (Utilities)............................... 2,610,000 265,432
-----------
459,262
-----------
CANADA -- 2.3%
Canadian Imperial Bank Toronto (Finance)................................. 7,800 243,434
Canadian Pacific Ltd. (Industrial & Commercial).......................... 14,400 387,950
CanWest Global Communications Corp. (Information & Entertainment)........ 10,400 187,200
-----------
818,584
-----------
CHILE -- 0.3%
Embotelladora Andina SA, Class B (Consumer Staples)...................... 5,000 97,187
-----------
CHINA -- 0.1%
China Southern Airlines Ltd. ADR (Information & Entertainment)+.......... 3,700 48,794
-----------
DENMARK -- 2.2%
Unidanmark A/S (Finance)................................................. 10,600 778,149
-----------
FINLAND -- 2.5%
Kesko (Consumer Discretionary)........................................... 20,450 323,392
Metsa Serla Oy, Class B (Materials)...................................... 32,500 253,396
Nokia Corp., Class A ADR (Information Technology)........................ 4,900 343,000
-----------
919,788
-----------
FRANCE -- 10.8%
Assurance General de France (Finance)+................................... 7,500 397,400
Banque Nationale de Paris (Finance)...................................... 7,071 375,843
Carrefour SA (Consumer Discretionary).................................... 450 234,776
Compagnie de St. Gobain (Materials)...................................... 2,097 297,904
Credit Commerce France (Finance)......................................... 3,120 213,841
Elf Aquitaine SA (Energy)................................................ 3,720 432,666
Havas SA (Information & Entertainment)................................... 5,702 410,229
Peugeot SA (Consumer Discretionary)...................................... 2,930 369,506
Rhone-Poulenc Ltd. (Healthcare).......................................... 12,585 563,748
</TABLE>
---------------------
22
<PAGE> 19
<TABLE>
<CAPTION>
COMMON STOCK (continued) SHARES VALUE
----------------------------------------------------------------------------------------------------
<S> <C> <C>
FRANCE (continued)
Societe Generale (Finance)............................................... 2,313 $ 315,138
Total SA, Series B (Energy).............................................. 2,656 289,055
-----------
3,900,106
-----------
GERMANY -- 5.8%
Bayer AG (Healthcare).................................................... 17,100 638,773
Degussa AG (Materials)................................................... 3,500 175,102
Karstadt AG (Consumer Discretionary)..................................... 1,050 358,434
Manitoba AG (Industrial & Commercial).................................... 1,300 376,497
Mannesmann AG (Industrial & Commercial).................................. 800 404,236
Metallgesellschaft AG (Industrial & Commercial)+......................... 8,800 160,938
-----------
2,113,980
-----------
HONG KONG -- 1.7%
Hutchison Whampoa Ltd. (Industrial & Commercial)......................... 42,000 263,415
Hysan Development Co., Ltd. (Real Estate)................................ 28,000 55,826
New World Development Co., Ltd. (Real Estate)............................ 15,000 51,878
Sun Hung Kai Properties Ltd. (Real Estate)............................... 25,100 174,913
Tingyi Holding Co. (Consumer Staples).................................... 486,000 63,345
-----------
609,377
-----------
INDIA -- 0.5%
Ranbaxy Laboratories Ltd. (Healthcare)................................... 3,300 85,140
State Bank of India GDR (Finance)*....................................... 4,400 80,080
-----------
165,220
-----------
INDONESIA -- 0.1%
PT Kalbe Farma (Healthcare).............................................. 180,000 31,909
-----------
IRELAND -- 1.9%
Allied Irish Banks PLC (Finance)......................................... 21,696 206,940
Jefferson Smurfit Group (Materials)+..................................... 177,378 492,370
-----------
699,310
-----------
ITALY -- 2.7%
First British Columbia San Paolo (Finance)*.............................. 30,700 293,290
Telecom Italia SpA (Utilities)........................................... 106,000 677,106
-----------
970,396
-----------
JAPAN -- 16.4%
Aisin Seiki Co., Ltd. (Consumer Discretionary)........................... 32,000 330,857
Bank of Tokyo-Mitsubishi Ltd. (Finance).................................. 28,000 386,000
Daiwa Securities Co., Ltd. (Finance)..................................... 20,000 68,928
Eisai Co., Ltd. (Healthcare)............................................. 23,000 350,540
Exedy Corp. (Consumer Discretionary)..................................... 5,000 37,872
Fuji Machine Manufacturing Co. (Industrial & Commercial)................. 9,000 217,125
Fujisawa Pharm Co. (Healthcare).......................................... 10,000 87,309
Fukuda Denshi (Healthcare)............................................... 6,000 61,117
Hitachi Ltd. (Information Technology).................................... 22,000 156,698
JGC Corp. (Industrial & Commercial)...................................... 41,000 86,352
Mabuchi Motor Co., Ltd. (Industrial & Commercial)........................ 3,000 152,332
Maruichi Steel Tube (Materials).......................................... 20,000 243,547
Matsumotokiyoshi (Consumer Discretionary)................................ 9,200 352,301
Matsushita Electric Industrial Co., Ltd. (Information Technology)+....... 31,000 453,473
</TABLE>
---------------------
23
<PAGE> 20
<TABLE>
<CAPTION>
COMMON STOCK (continued) SHARES VALUE
----------------------------------------------------------------------------------------------------
<S> <C> <C>
JAPAN (continued)
Mazda Motor Corp. (Consumer Discretionary)+.............................. 135,000 $ 320,518
Meiwa Estate Co. (Real Estate)+.......................................... 3,800 28,492
Murata Manufacturing Co. Ltd. (Information Technology)................... 5,000 125,603
Namco (Information & Entertainment)...................................... 12,600 365,735
NGK Spark Plug Co., Ltd. (Industrial & Commercial)....................... 21,000 119,017
Nomura Securities International, Inc. (Finance).......................... 6,000 79,957
Okumura Corp. (Consumer Discretionary)................................... 39,000 92,594
Otsuka Kagu (Consumer Staples)........................................... 1,300 46,795
Sakura Bank Ltd. (Finance)............................................... 69,000 197,113
Sanwa Bank Ltd. (Finance)................................................ 14,000 141,533
Shimachu Co. (Consumer Discretionary).................................... 2,500 39,251
Sony Corp. (Information & Entertainment)................................. 3,000 266,524
Sony Music Entertainment, Inc. (Information & Entertainment)............. 13,600 499,962
Square Co., Ltd. (Information Technology)................................ 4,200 116,443
Sumitomo Rubber Industries Ltd. (Consumer Discretionary)................. 56,000 236,318
Yamato Kogyo Co. (Materials)............................................. 42,000 252,508
-----------
5,912,814
-----------
MALAYSIA -- 0.1%
Renong Bhd (Industrial & Commercial)(1).................................. 56,000 25,916
Sime Darby Bhd (Industrial & Commercial)................................. 16,500 15,866
-----------
41,782
-----------
MEXICO -- 1.8%
Grupo Televisa SA de CV (Information & Entertainment).................... 9,100 177,140
Kimberly-Clark de Mexico SA de CV, Class A (Consumer Staples)............ 79,000 386,655
Panamerican Beverages, Inc., Class A ADR (Consumer Staples).............. 2,500 81,563
-----------
645,358
-----------
NETHERLANDS -- 3.2%
Elsevier NV (Information & Entertainment)................................ 13,800 223,234
Internationale Nedederlanden Groep NV (Finance).......................... 12,109 510,003
PolyGram NV (Information & Entertainment)................................ 6,700 320,519
Unilever NV PLC (Consumer Staples)....................................... 1,800 110,966
-----------
1,164,722
-----------
NEW ZEALAND -- 0.6%
Air New Zealand Ltd., Class B (Information & Entertainment).............. 34,561 69,234
Brierley Investments Ltd. (Finance)+..................................... 82,405 58,853
Carter Holt Harvey Ltd. (Materials)...................................... 56,000 86,494
-----------
214,581
-----------
NORWAY -- 1.3%
Saga Petroleum ASA, Series A (Energy).................................... 28,000 481,464
-----------
PHILIPPINES -- 0.2%
Metro Bank & Trust Co. (Finance)......................................... 9,600 64,593
-----------
PORTUGAL -- 0.3%
Manila Electric Co. (Utilities).......................................... 35,000 115,802
-----------
SINGAPORE -- 1.2%
Keppel Corp., Ltd. (Industrial & Commercial)............................. 28,500 81,839
Keppel Fels Ltd. (Energy)................................................ 66,000 184,040
Overseas Union Bank Ltd. alien shares (Finance).......................... 46,000 176,031
-----------
441,910
-----------
</TABLE>
---------------------
24
<PAGE> 21
<TABLE>
<CAPTION>
COMMON STOCK (continued) SHARES VALUE
---------------------------- --------------------------------------------------
<S> <C> <C>
SPAIN -- 2.9%
Banco de Santander SA (Finance).......................................... 8,800 $ 294,007
Banco Popular Espanol SA (Finance)....................................... 4,060 283,814
Endessa Nacional de Electricidad SA (Utilities).......................... 17,200 305,389
Telefonica de Espana SA ADR (Utilities).................................. 1,700 153,106
-----------
1,036,316
-----------
SWEDEN -- 4.7%
Forenings Sparbanken Ser A (Finance)..................................... 4,660 105,937
------- -----------
Hennes & Mauritz AB Class B (Consumer Discretionary)..................... 4,000 176,325
Nordbanken Holding (Finance)+............................................ 133,700 756,071
Pharmacia & Upjohn, Inc. (Healthcare).................................... 18,100 665,651
-----------
1,703,984
-----------
SWITZERLAND -- 6.5%
Ciba Specialty Chemicals AG (Materials)+................................. 1,180 140,515
Holderbank Financiere Glarus (Materials)................................. 650 530,249
Nestle SA (Consumer Staples)............................................. 449 672,640
Roche Holdings AG (Healthcare)........................................... 60 595,606
Schweizerische Bankgesellschaft (Finance)................................ 294 424,944
-----------
2,363,954
-----------
THAILAND -- 0.1%
Siam City Cement PCL alien shares (Materials)............................ 5,070 5,265
Siam Commercial Bank PCL alien shares (Finance).......................... 1,167 1,333
Thai Farmers Bank alien shares (Finance)................................. 18,400 33,437
-----------
40,035
-----------
UNITED KINGDOM -- 19.6%
Associated British Foods PLC (Consumer Staples).......................... 33,000 287,273
Bass PLC (Consumer Staples).............................................. 28,700 446,432
Billiton PLC (Materials)+*............................................... 50,300 128,884
BOC Group PLC (Materials)................................................ 23,028 378,613
British Petroleum Co. PLC (Energy)....................................... 35,000 462,999
BTR Ltd. PLC (Industrial & Commercial)................................... 110,000 332,442
Burmah Castrol PLC (Energy).............................................. 26,000 453,527
Carlton Communications PLC (Information & Entertainment)................. 53,000 409,147
Cookson Group PLC (Information Technology)............................... 106,307 343,980
Guinness PLC (Consumer Staples).......................................... 37,000 338,503
HSBC Holdings PLC (Finance).............................................. 15,200 374,989
Johnson Matthey PLC (Materials).......................................... 37,000 331,210
PowerGen PLC (Utilities)................................................. 26,914 350,113
Rank Group PLC (Information & Entertainment)............................. 66,000 367,493
Reckitt & Colman PLC (Consumer Staples).................................. 25,200 395,284
Royal & Sun Alliance Insurance Group PLC (Finance)....................... 33,181 334,084
Royal Bank of Scotland Group PLC (Finance)............................... 29,000 369,719
Zeneca Group PLC (Healthcare)............................................ 27,400 970,545
-----------
7,075,237
-----------
TOTAL COMMON STOCK (cost $33,687,700).................................... 34,001,528
-----------
</TABLE>
<TABLE>
<CAPTION>
PREFERRED STOCK -- 3.1%
----------------------------------------------------------------------------------------------------
<S> <C> <C>
BRAZIL -- 1.2%
Cemig Cia Energy MG (Utilities).......................................... 2,589,900 $ 112,525
Centrais Electricas Brasileiras SA, Series B (Utilities)................. 50,000 2,554
Cia Riograndense Telecomunicacoes (Utilities)............................ 67,600 83,285
Petroleo Brasileiros SA (Energy)......................................... 659,000 154,114
Telecomunicacoes de Sao Paulo SA (Information & Entertainment)........... 286,000 76,107
-----------
428,585
-----------
</TABLE>
---------------------
25
<PAGE> 22
<TABLE>
<CAPTION>
PREFERRED STOCK (continued) SHARES VALUE
----------------------------------------------------------------------------------------------------
<S> <C> <C>
GERMANY -- 1.9%
Hornbach Holding AG (Consumer Discretionary)............................. 3,600 $ 249,145
Prosieben Media AG (Information & Entertainment)+*....................... 9,710 453,398
-----------
702,543
-----------
TOTAL PREFERRED STOCK (cost $1,163,165).................................. 1,131,128
-----------
PRINCIPAL
BONDS & NOTES -- 0.0% AMOUNT
----------------------------------------------------------------------------------------------------
BRAZIL -- 0.0%
Vale Rio Doce Cia zero coupon 1999 (Materials)(1)
(cost $0).............................................................. $ 5,500 1
-----------
WARRANTS -- 0.0%+ SHARES
----------------------------------------------------------------------------------------------------
THAILAND -- 0.0%
Siam Commercial Bank 12/31/02 (Finance)(1)
(cost $0).............................................................. 1,167 0
-----------
PRINCIPAL
OPTIONS -- 0.0%+ AMOUNT
----------------------------------------------------------------------------------------------------
FOREIGN CURRENCY PUT OPTIONS
Brazilian Real Option Jan. 16, 1998/1.17(1)
(cost $2,920).......................................................... $ 4,950 1,040
-----------
TOTAL INVESTMENT SECURITIES (cost $34,853,785)........................... 35,133,697
-----------
SHORT-TERM SECURITIES -- 0.1%
----------------------------------------------------------------------------------------------------
United States Treasury Bills 5.29% due 2/12/98 (cost $49,700)............ 50,000 49,700
-----------
REPURCHASE AGREEMENT -- 2.1%
----------------------------------------------------------------------------------------------------
Joint Repurchase Agreement Account (Note 3) (cost $765,000)............ 765,000 765,000
-----------
TOTAL SHORT-TERM SECURITIES (cost $814,700).............................. 814,700
-----------
TOTAL INVESTMENTS -- (cost $35,668,485) 99.4% 35,948,397
Other assets less liabilities -- 0.6 199,859
----- -----------
NET ASSETS -- 100.0% $36,148,256
===== ===========
</TABLE>
-----------------------------
+ Non-income producing securities
* Resale restricted to qualified institutional buyers
ADR -- American Depository Receipt
GDR -- Global Depository Receipt
(1) Fair valued security; See Note 2
See Notes to Financial Statements
- ---------------------
26
<PAGE> 23
- ---------------------
ANCHOR SERIES TRUST
GROWTH PORTFOLIO INVESTMENT PORTFOLIO -- DECEMBER 31, 1997
<TABLE>
<CAPTION>
COMMON STOCK -- 96.1% SHARES VALUE
----------------------------------------------------------------------------------------------------
<S> <C> <C>
CONSUMER DISCRETIONARY -- 7.1%
Automotive -- 0.5%
Goodyear Tire & Rubber Co............................................ 38,500 $ 2,449,563
Retail -- 6.6%
Arbor Drugs, Inc..................................................... 137,000 2,534,500
Barnes & Noble, Inc.+................................................ 72,600 2,423,025
CVS Corp............................................................. 33,000 2,114,062
Dayton Hudson Corp................................................... 95,000 6,412,500
Ethan Allen Interiors, Inc........................................... 35,200 1,357,400
Home Depot, Inc...................................................... 129,000 7,594,875
Office Max, Inc.+.................................................... 160,000 2,280,000
Stein Mart, Inc.+.................................................... 36,000 963,000
Wal-Mart Stores, Inc................................................. 160,000 6,310,000
-------------
34,438,925
-------------
CONSUMER STAPLES -- 7.5%
Food, Beverage & Tobacco -- 4.0%
Beringer Wine Estates Holdings, Inc., Class B+....................... 35,000 1,330,000
General Mills, Inc................................................... 45,000 3,223,125
PepsiCo, Inc......................................................... 80,000 2,915,000
Philip Morris Cos., Inc.............................................. 120,000 5,437,500
Sara Lee Corp........................................................ 120,600 6,791,288
Household Products -- 3.5%
Bush Boake Allen, Inc.+.............................................. 65,000 1,702,187
Estee Lauder Cos., Inc., Class A..................................... 37,300 1,918,619
Gillette Co.......................................................... 15,000 1,506,563
Kimberly-Clark Corp.................................................. 82,600 4,073,212
Procter & Gamble Co.................................................. 98,000 7,821,625
-------------
36,719,119
-------------
ENERGY -- 6.0%
Energy Services -- 1.6%
Diamond Offshore Drilling, Inc....................................... 40,000 1,925,000
Schlumberger Ltd..................................................... 75,000 6,037,500
Energy Sources -- 4.4%
Amoco Corp........................................................... 42,000 3,575,250
Anadarko Petroleum Corp.............................................. 26,600 1,614,288
Barrett Resources Corp.+............................................. 15,000 453,750
Chevron Corp......................................................... 75,000 5,775,000
Exxon Corp........................................................... 77,400 4,735,912
Royal Dutch Petroleum Co., NY Registry Shares........................ 60,000 3,251,250
Unocal Corp.......................................................... 45,000 1,746,562
-------------
29,114,512
-------------
FINANCE -- 19.6%
Banks -- 7.2%
Associated Banc Corp................................................. 55,000 3,031,875
Citicorp............................................................. 45,000 5,689,687
Crestar Financial Corp............................................... 30,000 1,710,000
First Commercial Corp................................................ 44,438 2,605,184
First Union Corp..................................................... 136,000 6,970,000
</TABLE>
---------------------
27
<PAGE> 24
<TABLE>
<CAPTION>
COMMON STOCK (continued) SHARES VALUE
----------------------------------------------------------------------------------------------------
<S> <C> <C>
FINANCE (continued)
Banks (continued)
Mercantile Bankshares Corp........................................... 73,000 $ 2,856,125
NationsBank Corp..................................................... 73,000 4,439,313
State Street Corp.................................................... 44,800 2,606,800
U.S. Bancorp......................................................... 22,000 2,462,625
Wilmington Trust Corp................................................ 42,000 2,619,750
Financial Services -- 5.0%
American Express Co.................................................. 81,000 7,229,250
Associates First Capital Corp., Class A.............................. 46,000 3,271,750
Federal National Mortgage Association................................ 144,000 8,217,000
Morgan Stanley, Dean Witter, Discover & Co........................... 92,400 5,463,150
Insurance -- 7.4%
Ace Ltd.............................................................. 57,000 5,500,500
Allstate Corp........................................................ 84,600 7,688,025
American International Group, Inc.................................... 68,250 7,422,187
Frontier Insurance Group, Inc........................................ 100,400 2,296,650
Marsh & McLennan Cos., Inc........................................... 27,000 2,013,188
Reinsurance Group America, Inc....................................... 48,150 2,049,384
Travelers Group, Inc................................................. 165,000 8,889,375
-------------
95,031,818
-------------
HEALTHCARE -- 11.2%
Drugs -- 7.1%
American Home Products Corp.......................................... 24,000 1,836,000
Covance, Inc.+....................................................... 125,000 2,484,375
Genzyme Corp.+....................................................... 80,000 2,220,000
Johnson & Johnson Co................................................. 15,000 988,125
Merck & Co., Inc..................................................... 38,000 4,037,500
Pfizer, Inc.......................................................... 118,000 8,798,375
Pharmacia & Upjohn, Inc.............................................. 121,600 4,453,600
Warner-Lambert Co.................................................... 48,000 5,952,000
Zeneca Group PLC ADR................................................. 34,000 3,672,000
Health Services -- 2.0%
Columbia/HCA Healthcare Corp......................................... 75,000 2,221,875
Shared Medical Systems Corp.......................................... 60,000 3,960,000
Tenet Healthcare Corp.+.............................................. 23,200 768,500
United Healthcare Corp............................................... 58,800 2,921,625
Medical Products -- 2.1%
Abbott Laboratories, Inc............................................. 90,000 5,900,625
Biomet, Inc.......................................................... 75,000 1,921,875
Life Technologies, Inc............................................... 77,000 2,560,250
-------------
54,696,725
-------------
INDUSTRIAL & COMMERCIAL -- 12.8%
Aerospace & Military Technology -- 2.0%
Boeing Co............................................................ 100,000 4,893,750
General Motors Corp., Class H+....................................... 40,000 1,477,500
United Technologies Corp............................................. 44,000 3,203,750
Business Services -- 3.4%
Avnet, Inc........................................................... 25,000 1,650,000
Dames & Moore, Inc................................................... 100,000 1,325,000
Foster Wheeler Corp.................................................. 67,800 1,834,837
G & K Services, Inc., Class A........................................ 79,000 3,318,000
Ionics, Inc.+........................................................ 67,000 2,621,375
</TABLE>
- ---------------------
28
<PAGE> 25
<TABLE>
<CAPTION>
COMMON STOCK (continued) SHARES VALUE
----------------------------------------------------------------------------------------------------
<S> <C> <C>
INDUSTRIAL & COMMERCIAL (continued)
Business Services (continued)
Metromail Corp.+..................................................... 101,000 $ 1,805,375
Tetra Tech, Inc.+.................................................... 92,500 1,850,000
United States Rentals, Inc.+......................................... 96,000 2,256,000
Electrical Equipment -- 3.8%
General Electric Co.................................................. 150,000 11,006,250
Hubbell, Inc., Class B............................................... 94,000 4,635,375
Littelfuse, Inc.+.................................................... 108,000 2,686,500
Machinery -- 1.7%
Caterpillar, Inc..................................................... 56,600 2,748,637
Donaldson Co., Inc................................................... 55,000 2,478,437
MSC Industrial Direct Co., Inc. Class A+............................. 9,000 381,375
Paxar Corp.+......................................................... 87,000 1,288,688
UCAR International, Inc.+............................................ 36,000 1,437,750
Multi-Industry -- 0.8%
Minnesota Mining & Manufacturing Co.................................. 44,000 3,610,750
Transportation -- 1.1%
Air Express International Corp....................................... 91,500 2,790,750
Union Pacific Corp................................................... 43,000 2,684,813
-------------
61,984,912
-------------
INFORMATION & ENTERTAINMENT -- 6.5%
Broadcasting & Media -- 2.9%
ADVO, Inc.+.......................................................... 105,000 2,047,500
Cox Communications, Inc., Class A+................................... 81,000 3,245,063
Disney (Walt) Co..................................................... 22,000 2,179,375
Gannett Co., Inc..................................................... 110,000 6,799,375
Entertainment Products -- 0.5%
Speedway Motorsports, Inc.+.......................................... 90,000 2,233,125
Leisure & Tourism -- 3.1%
Landry's Seafood Restaurants, Inc.+.................................. 50,000 1,200,000
McDonald's Corp...................................................... 98,000 4,679,500
Mirage Resorts, Inc.................................................. 130,000 2,957,500
Southwest Airlines Co................................................ 247,500 6,094,687
-------------
31,436,125
-------------
INFORMATION TECHNOLOGY -- 19.0%
Communication Equipment -- 3.2%
3Com Corp.+.......................................................... 28,000 978,250
Andrew Corp.+........................................................ 54,000 1,296,000
Cisco Systems, Inc.+................................................. 135,000 7,526,250
Lucent Technologies, Inc............................................. 41,167 3,288,214
Motorola, Inc........................................................ 40,000 2,282,500
Computers & Business Equipment -- 3.5%
Adaptec, Inc.+....................................................... 52,600 1,952,775
EMC Corp.+........................................................... 140,000 3,841,250
Hewlett-Packard Co................................................... 77,000 4,812,500
International Business Machines Corp................................. 60,000 6,273,750
Electronics -- 3.8%
AMP, Inc............................................................. 70,000 2,940,000
Analog Devices, Inc.+................................................ 110,000 3,045,625
Dallas Semiconductor Corp............................................ 59,000 2,404,250
Intel Corp........................................................... 70,000 4,917,500
</TABLE>
---------------------
29
<PAGE> 26
<TABLE>
<CAPTION>
COMMON STOCK (continued) SHARES VALUE
----------------------------------------------------------------------------------------------------
<S> <C> <C>
INFORMATION TECHNOLOGY (continued)
Electronics (continued)
Maxim Integrated Products, Inc.+..................................... 42,000 $ 1,449,000
Silicon Valley Group, Inc.+.......................................... 80,000 1,810,000
Texas Instruments, Inc............................................... 40,000 1,800,000
Software -- 8.5%
American Management Systems, Inc.+................................... 123,000 2,398,500
Automatic Data Processing, Inc....................................... 112,000 6,874,000
BISYS Group, Inc.+................................................... 50,000 1,662,500
Cognos, Inc.+........................................................ 90,000 2,070,000
Computer Sciences Corp............................................... 45,000 3,757,500
DST Systems, Inc.+................................................... 59,000 2,518,563
First Data Corp...................................................... 100,000 2,925,000
Microsoft Corp.+..................................................... 60,000 7,755,000
PeopleSoft, Inc.+.................................................... 62,000 2,418,000
Policy Management Systems Corp.+..................................... 52,000 3,617,250
Sterling Software, Inc.+............................................. 78,000 3,198,000
Synopsys, Inc.+...................................................... 49,000 1,751,750
Systems & Computer Technology Corp.+................................. 12,000 595,500
-------------
92,159,427
-------------
MATERIALS -- 3.2%
Chemicals -- 1.5%
du Pont (E.I.) de Nemours & Co....................................... 72,000 4,324,500
Minerals Technologies, Inc........................................... 61,000 2,771,687
Metals & Minerals -- 0.6%
Aluminum Co. of America.............................................. 40,000 2,815,000
Paper Products -- 1.1%
Bemis Co., Inc....................................................... 23,000 1,013,438
Crown, Cork & Seal Co., Inc.......................................... 40,000 2,005,000
International Paper Co............................................... 59,000 2,544,375
-------------
15,474,000
-------------
UTILITIES -- 3.2%
Telephone -- 3.2%
AT&T Corp............................................................ 64,000 3,920,000
Century Telephone Enterprises, Inc................................... 33,000 1,643,813
SBC Communications, Inc.............................................. 87,000 6,372,750
WorldCom, Inc.+...................................................... 120,000 3,630,000
-------------
15,566,563
-------------
TOTAL INVESTMENT SECURITIES (cost $311,550,840)...................... 466,622,126
-------------
<CAPTION>
PRINCIPAL
REPURCHASE AGREEMENT -- 3.8% AMOUNT
----------------------------------------------------------------------------------------------------
<S> <C> <C>
Joint Repurchase Agreement Account (Note 3) (cost $18,295,000)....... $18,295,000 18,295,000
-------------
TOTAL INVESTMENTS --
(cost $329,845,840) 99.9% 484,917,126
Other assets less liabilities -- 0.1 611,134
----- -------------
NET ASSETS -- 100.0% $485,528,260
===== =============
</TABLE>
-----------------------------
+ Non-income producing securities
ADR -- American Depository Receipts
See Notes to Financial Statements
- ---------------------
30
<PAGE> 27
- ---------------------
ANCHOR SERIES TRUST
CAPITAL APPRECIATION
PORTFOLIO INVESTMENT PORTFOLIO -- DECEMBER 31, 1997
<TABLE>
<CAPTION>
COMMON STOCK -- 90.1% SHARES VALUE
----------------------------------------------------------------------------------------------------
<S> <C> <C>
CONSUMER DISCRETIONARY -- 8.8%
Apparel & Textiles -- 0.4%
Tefron Ltd.+......................................................... 150,000 $ 3,450,000
Retail -- 8.4%
Barnes & Noble, Inc.+................................................ 400,000 13,350,000
Bed Bath & Beyond, Inc.+............................................. 400,000 15,400,000
Gadzooks, Inc.+...................................................... 150,000 3,150,000
Gap, Inc............................................................. 400,000 14,175,000
Home Depot, Inc...................................................... 195,000 11,480,625
Hot Topic, Inc.+..................................................... 130,500 2,968,875
Mercantile Stores Co., Inc........................................... 125,000 7,609,375
-------------
71,583,875
-------------
CONSUMER STAPLES -- 1.5%
Food, Beverage & Tobacco -- 1.2%
American Italian Pasta Co., Class A+................................. 175,000 4,375,000
General Cigar Holdings, Inc., Class A+............................... 175,000 3,729,687
International Home Foods, Inc.+...................................... 75,000 2,100,000
Household Products -- 0.3%
Revlon, Inc., Class A+............................................... 70,000 2,471,875
-------------
12,676,562
-------------
ENERGY -- 5.7%
Energy Services -- 5.4%
ENSCO International, Inc............................................. 450,000 15,075,000
Noble Drilling Corp.+................................................ 100,000 3,062,500
Santa Fe International Corp.......................................... 150,900 6,139,744
Transocean Offshore, Inc............................................. 400,000 19,275,000
Energy Sources -- 0.3%
Vastar Resources, Inc................................................ 76,400 2,731,300
-------------
46,283,544
-------------
FINANCE -- 11.4%
Financial Services -- 5.6%
Interra Financial, Inc............................................... 140,000 9,660,000
Legg Mason, Inc...................................................... 186,666 10,441,629
McDonald & Co. Investments, Inc...................................... 170,000 4,823,750
Morgan Keegan, Inc................................................... 330,000 8,353,125
Piper Jaffray Cos., Inc.............................................. 280,000 10,202,500
Raymond James Financial, Inc......................................... 65,000 2,579,688
Insurance -- 5.8%
Ace Ltd.............................................................. 250,000 24,125,000
Allstate Corp........................................................ 200,000 18,175,000
Transatlantic Holdings, Inc.......................................... 67,500 4,826,250
-------------
93,186,942
-------------
</TABLE>
---------------------
31
<PAGE> 28
<TABLE>
<CAPTION>
COMMON STOCK (continued) SHARES VALUE
----------------------------------------------------------------------------------------------------
<S> <C> <C>
HEALTHCARE -- 13.3%
Drugs -- 7.2%
Eisai Co., Ltd....................................................... 575,000 $ 8,763,498
Genzyme Corp.+....................................................... 475,000 13,181,250
Human Genome Sciences, Inc.+......................................... 40,000 1,590,000
Immunex Corp.+....................................................... 210,000 11,340,000
Pharmacia & Upjohn, Inc.............................................. 170,000 6,226,250
Warner-Lambert Co.................................................... 90,000 11,160,000
Zeneca Group PLC ADR................................................. 56,800 6,134,400
Health Services -- 4.6%
Beverly Enterprises, Inc.+........................................... 500,000 6,500,000
Columbia/HCA Healthcare Corp......................................... 280,000 8,295,000
IDX Systems Corp.+................................................... 90,000 3,330,000
Magellan Health Services, Inc.+...................................... 200,000 4,300,000
MedPartners, Inc.+................................................... 400,000 8,950,000
Vencor, Inc.+........................................................ 250,000 6,109,375
Medical Products -- 1.5%
Biomet, Inc.......................................................... 200,000 5,125,000
Perkin-Elmer Corp.................................................... 75,000 5,329,687
Physio-Control International Corp.+.................................. 115,000 1,825,625
-------------
108,160,085
-------------
INDUSTRIAL & COMMERCIAL -- 9.6%
Aerospace & Military Technology -- 2.9%
General Motors Corp., Class H+....................................... 100,000 3,693,750
Gulfstream Aerospace Corp.+.......................................... 290,000 8,482,500
Loral Space & Communications Corp.+.................................. 240,000 5,145,000
Precision Castparts Corp............................................. 100,000 6,031,250
Business Services -- 2.9%
American Residential Services, Inc.+................................. 150,000 2,343,750
Group Maintenance America Corp.+..................................... 186,000 3,127,125
Republic Industries, Inc.+(1)........................................ 320,700 7,476,319
Select Appointments Holdings PLC ADR................................. 210,000 3,832,500
Service Experts, Inc.+............................................... 124,900 3,575,262
West TeleServices Corp.+............................................. 260,000 3,120,000
Electrical Equipment -- 2.4%
General Cable Corp.+................................................. 282,900 10,237,444
Honeywell, Inc....................................................... 140,000 9,590,000
Transportation -- 1.4%
Pittston Burlington Co............................................... 139,400 3,659,250
Werner Enterprises, Inc.............................................. 380,000 7,790,000
-------------
78,104,150
-------------
INFORMATION & ENTERTAINMENT -- 13.5%
Broadcasting & Media -- 12.9%
CanWest Global Communications Corp................................... 197,200 3,549,600
Central European Media Enterprises Ltd., Class A+.................... 140,000 3,535,000
EchoStar Communications Corp., Class A+.............................. 180,000 3,015,000
Jacor Communications, Inc.+.......................................... 225,000 11,953,125
Lamar Advertising Co., Class A....................................... 150,000 5,962,500
LodgeNet Entertainment Corp.+........................................ 181,100 1,992,100
Metro Networks, Inc.+................................................ 145,000 4,748,750
MetroNet Communications Corp., Class B+.............................. 46,200 802,725
NTL, Inc.+........................................................... 146,666 4,088,315
Outdoor Systems, Inc.+............................................... 287,925 11,049,122
Pulitzer Publishing Co............................................... 92,766 5,826,864
Scripps (E.W) Co., Class A........................................... 70,000 3,390,625
</TABLE>
- ---------------------
32
<PAGE> 29
<TABLE>
<CAPTION>
COMMON STOCK (continued) SHARES VALUE
----------------------------------------------------------------------------------------------------
<S> <C> <C>
INFORMATION & ENTERTAINMENT (continued)
Broadcasting & Media (continued)
Tele-Communications Liberty Media Group, Class A+.................... 700,000 $ 25,375,000
Universal Outdoor Holdings, Inc.+.................................... 163,000 8,476,000
Viacom, Inc., Class B+............................................... 170,000 7,044,375
Young Broadcasting, Inc., Class A+................................... 100,000 3,875,000
Leisure & Tourism -- 0.6%
American Skiing Co.+................................................. 200,200 2,977,975
Virgin Express Holdings PLC ADR+..................................... 102,800 2,133,100
-------------
109,795,176
-------------
INFORMATION TECHNOLOGY -- 24.1%
Communication Equipment -- 3.6%
3Com Corp.+.......................................................... 175,000 6,114,063
APT Satellite Holdings Ltd. ADR+..................................... 150,000 1,762,500
CIENA Corp.+......................................................... 67,800 4,144,275
Gilat Satellite Networks Ltd.+....................................... 125,000 3,578,125
Larscom, Inc., Class A+.............................................. 150,000 1,425,000
Natural Microsystems Corp.+.......................................... 90,000 4,185,000
NICE Systems Ltd. ADR+............................................... 160,000 6,720,000
Teledata Communications, Inc.+....................................... 75,000 1,368,750
Computers & Business Equipment -- 3.7%
Adaptec, Inc.+....................................................... 150,000 5,568,750
Discreet Logic, Inc.+................................................ 150,000 3,290,625
EMC Corp.+........................................................... 650,000 17,834,375
Splash Technology Holdings, Inc.+.................................... 150,000 3,375,000
Electronics -- 4.4%
Analog Devices, Inc.+................................................ 267,300 7,400,869
Peak International Ltd.+............................................. 37,500 782,813
Philips Electronics NV-NY Shares..................................... 350,000 21,175,000
Xilinx, Inc.+........................................................ 175,000 6,135,937
Software -- 12.4%
BA Merchants Services, Inc., Class A+................................ 199,400 3,539,350
BISYS Group, Inc.+................................................... 360,000 11,970,000
BMC Software, Inc.................................................... 170,000 11,156,250
Computer Sciences Corp............................................... 190,000 15,865,000
DST Systems, Inc.+................................................... 200,000 8,537,500
Electronic Arts, Inc.+............................................... 200,000 7,562,500
First Data Corp...................................................... 315,000 9,213,750
Omtool Ltd.+......................................................... 170,000 1,742,500
Parametric Technology Corp.+......................................... 225,000 10,659,375
Policy Management Systems Corp.+..................................... 75,000 5,217,187
Rational Software Corp.+............................................. 150,000 1,706,250
Sterling Software, Inc.+............................................. 340,000 13,940,000
-------------
195,970,744
-------------
REAL ESTATE -- 1.0%
Real Estate Companies -- 1.0%
Security Capital Group, Inc., Class B+............................... 254,100 8,258,250
-------------
</TABLE>
---------------------
33
<PAGE> 30
<TABLE>
<CAPTION>
COMMON STOCK (continued) SHARES VALUE
----------------------------------------------------------------------------------------------------
<S> <C> <C>
UTILITIES -- 1.2%
Telephone -- 1.2%
Teleport Communications Group Inc., Class A+......................... 70,000 $ 3,841,250
WorldCom, Inc.+...................................................... 200,000 6,050,000
-------------
9,891,250
-------------
TOTAL COMMON STOCK (cost $559,045,302)............................... 733,910,578
-------------
PREFERRED STOCK -- 0.7%
----------------------------------------------------------------------------------------------------
INFORMATION & ENTERTAINMENT -- 0.7%
Broadcasting & Media -- 0.7%
News Corp., Ltd. ADR (cost $4,691,342)............................... 300,000 5,962,500
-------------
TOTAL INVESTMENT SECURITIES (cost $563,736,644)...................... 739,873,078
-------------
PRINCIPAL
REPURCHASE AGREEMENT -- 10.6% AMOUNT
----------------------------------------------------------------------------------------------------
Joint Repurchase Agreement Account (Note 3)
(cost $86,080,000)................................................. $86,080,000 86,080,000
-------------
TOTAL INVESTMENTS --
(cost $649,816,644) 101.4% 825,953,078
Liabilities in excess of other assets -- (1.4) (11,642,012)
----- -------------
NET ASSETS -- 100.0% $814,311,066
===== =============
</TABLE>
-----------------------------
+ Non-income producing securities
ADR -- American Depository Receipt
(1) At December 31, 1997 the Portfolio held a restricted security
amounting to 0.9% of net assets. The Portfolio will not bear
any costs, including those involved in registration under the
Securities Act of 1933, in connection with the disposition of
the following security:
<TABLE>
<CAPTION>
VALUATION
AS OF
DATE OF UNIT DECEMBER 31,
DESCRIPTION ACQUISITION COST 1997
----------- ----------- ------- ------------
<S> <C> <C> <C>
Republic Industries, Inc. 1/17/97 $33.59 $23.3125
</TABLE>
See Notes to Financial Statements
- ---------------------
34
<PAGE> 31
- ---------------------
ANCHOR SERIES TRUST
NATURAL RESOURCES
PORTFOLIO INVESTMENT PORTFOLIO -- DECEMBER 31, 1997
<TABLE>
<CAPTION>
COMMON STOCK -- 92.4% SHARES VALUE
----------------------------------------------------------------------------------------------------
<S> <C> <C>
ENERGY -- 30.3%
Energy Sources -- 30.3%
Alberta Energy Co., Ltd................................................ 40,000 $ 776,740
Amerada Hess Corp...................................................... 24,390 1,338,401
Anadarko Petroleum Corp................................................ 10,000 606,875
Apex Silver Mines Ltd.+................................................ 17,500 223,125
Barrett Resources Corp.+............................................... 30,000 907,500
Chevron Corp........................................................... 20,000 1,540,000
Enron Oil & Gas Co..................................................... 20,600 436,463
Norsk Hydro ASA ADR.................................................... 30,000 1,530,000
Northstar Energy Corp.+................................................ 30,000 209,930
PanCanadian Petroleum Ltd.............................................. 60,000 955,180
Poco Petroleum Ltd.+................................................... 60,000 529,023
Pogo Producing Co...................................................... 15,000 442,500
Talisman Energy, Inc.+................................................. 27,000 812,428
Total SA ADR........................................................... 23,193 1,287,211
Ultramar Diamond Shamrock Corp.+....................................... 20,200 643,875
Unocal Corp............................................................ 14,020 544,151
Vastar Resources, Inc.................................................. 30,000 1,072,500
YPF Sociedad Anonima ADR............................................... 38,000 1,299,125
-----------
15,155,027
-----------
MATERIALS -- 51.8%
Metals & Minerals -- 41.1%
Alcan Aluminium Ltd.................................................... 15,000 414,375
Alumax, Inc.+.......................................................... 20,200 686,800
Aluminum Co. of America................................................ 17,600 1,238,600
Ashanti Goldfields Co., Ltd. GDR....................................... 111,064 832,980
Barrick Gold Corp...................................................... 80,000 1,490,000
Billiton PLC+*......................................................... 481,400 1,233,491
Carbide/Graphite Group, Inc.+.......................................... 42,100 1,420,875
Companhia Vale do Rio Doce ADR......................................... 51,000 1,033,260
EASCO, Inc............................................................. 59,000 781,750
Freeport-McMoRan Copper & Gold, Inc. Class A........................... 72,900 1,116,281
Freeport-McMoRan Copper & Gold, Inc., Class B.......................... 10,000 157,500
Hecla Mining Co.+...................................................... 17,300 85,419
Newcrest Mining Ltd.................................................... 95,953 104,437
Newmont Gold Co........................................................ 22,600 673,763
Newmont Mining Corp.................................................... 88,150 2,589,406
Normandy Mining Ltd.................................................... 926,155 899,396
Phelps Dodge Corp...................................................... 21,500 1,338,375
Placer Dome, Inc....................................................... 90,000 1,141,875
Rio Tinto PLC+......................................................... 30,083 370,832
Stillwater Mining Co.+................................................. 36,750 615,563
Titanium Metals Corp.+................................................. 38,000 1,097,250
TVX Gold, Inc.+........................................................ 133,000 448,875
UCAR International, Inc.+.............................................. 20,750 828,703
Paper Products -- 10.7%
Bowater, Inc........................................................... 14,000 622,125
International Paper Co................................................. 15,000 646,875
</TABLE>
---------------------
35
<PAGE> 32
<TABLE>
<CAPTION>
COMMON STOCK (continued) SHARES VALUE
----------------------------------------------------------------------------------------------------
<S> <C> <C>
MATERIALS (continued)
Paper Products (continued)
Jefferson Smurfit Corp.+............................................... 40,000 $ 565,000
Temple-Inland, Inc..................................................... 14,500 758,531
Weyerhaeuser Co........................................................ 30,000 1,471,875
Willamette Industries, Inc............................................. 40,000 1,287,500
-----------
25,951,712
-----------
REAL ESTATE -- 10.3%
Real Estate Investment Trusts -- 10.3%
CarrAmerica Realty Corp................................................ 33,300 1,055,194
Security Capital Pacific Trust......................................... 40,000 970,000
Spieker Properties, Inc................................................ 24,000 1,029,000
Starwood Lodging Trust................................................. 18,500 1,070,687
Urban Shopping Centers, Inc............................................ 29,400 1,025,325
-----------
5,150,206
-----------
TOTAL COMMON STOCK (cost $47,274,317).................................. 46,256,945
-----------
<CAPTION>
WARRANTS -- 0.0%+
----------------------------------------------------------------------------------------------------
<S> <C> <C>
REAL ESTATE -- 0.0%
Real Estate Investment Trusts -- 0.0%
Security Capital Group, Inc., Class B 9/18/98 (cost $18,682)........... 2,105 11,051
-----------
TOTAL INVESTMENT SECURITIES (cost $47,292,999)......................... 46,267,996
-----------
<CAPTION>
PRINCIPAL
REPURCHASE AGREEMENT -- 5.6% AMOUNT
----------------------------------------------------------------------------------------------------
<S> <C> <C>
Joint Repurchase Agreement Account (Note 3) (cost $2,800,000).......... $2,800,000 2,800,000
-----------
TOTAL INVESTMENTS --
(cost $50,092,999) 98.0% 49,067,996
Other assets less liabilities -- 2.0 985,936
----- -----------
NET ASSETS -- 100.0% $50,053,932
===== ===========
</TABLE>
-----------------------------
+ Non-income producing securities
* Resale restricted to qualified institutional buyers
ADR -- American Depository Receipt
GDR -- Global Depository Receipt
See Notes to Financial Statements
- ---------------------
36
<PAGE> 33
- ---------------------
ANCHOR SERIES TRUST
MULTI-ASSET PORTFOLIO INVESTMENT PORTFOLIO -- DECEMBER 31, 1997
<TABLE>
<CAPTION>
COMMON STOCK -- 59.5% SHARES VALUE
----------------------------------------------------------------------------------------------------
<S> <C> <C>
CONSUMER DISCRETIONARY -- 4.4%
Retail -- 4.4%
CVS Corp.............................................................. 28,000 $ 1,793,750
Gap, Inc.............................................................. 37,500 1,328,906
Home Depot, Inc....................................................... 25,000 1,471,875
Wal-Mart Stores, Inc.................................................. 45,000 1,774,688
6,369,219
CONSUMER STAPLES -- 5.9%
Food, Beverage & Tobacco -- 2.1%
Coca-Cola Co.......................................................... 15,000 999,375
Nabisco Holdings Corp., Class A....................................... 20,000 968,750
PepsiCo, Inc.......................................................... 30,000 1,093,125
Household Products -- 3.8%
Estee Lauder Cos., Inc., Class A...................................... 24,000 1,234,500
Gillette Co........................................................... 12,000 1,205,250
Kimberly-Clark Corp................................................... 30,000 1,479,375
Procter & Gamble Co................................................... 20,000 1,596,250
8,576,625
ENERGY -- 4.2%
Energy Services -- 1.3%
Schlumberger Ltd...................................................... 24,000 1,932,000
Energy Sources -- 2.9%
Amoco Corp............................................................ 17,000 1,447,125
Chevron Corp.......................................................... 15,000 1,155,000
Exxon Corp............................................................ 27,000 1,652,063
6,186,188
FINANCE -- 13.1%
Banks -- 4.2%
Citicorp.............................................................. 14,000 1,770,125
First Union Corp...................................................... 36,000 1,845,000
U.S. Bancorp.......................................................... 22,000 2,462,625
Financial Services -- 3.8%
American Express Co................................................... 25,000 2,231,250
Federal National Mortgage Association................................. 33,000 1,883,062
Merrill Lynch & Co., Inc.............................................. 20,000 1,458,750
Insurance -- 5.1%
Allstate Corp......................................................... 30,000 2,726,250
American International Group, Inc..................................... 14,500 1,576,875
Marsh & McLennan Cos., Inc............................................ 20,000 1,491,250
Travelers Group, Inc.................................................. 30,000 1,616,250
19,061,437
HEALTHCARE -- 8.7%
Drugs -- 6.1%
American Home Products Corp........................................... 25,000 1,912,500
Bristol-Myers Squibb Co............................................... 10,000 946,250
Johnson & Johnson Co.................................................. 26,000 1,712,750
</TABLE>
---------------------
37
<PAGE> 34
<TABLE>
<CAPTION>
COMMON STOCK (continued) SHARES VALUE
----------------------------------------------------------------------------------------------------
<S> <C> <C>
HEALTHCARE (continued)
Drugs (continued)
Merck & Co., Inc...................................................... 13,000 $ 1,381,250
Pfizer, Inc........................................................... 26,000 1,938,625
Warner-Lambert Co..................................................... 8,000 992,000
Health Services -- 0.6%
Columbia/HCA Healthcare Corp.......................................... 30,000 888,750
Medical Products -- 2.0%
Abbott Laboratories, Inc.............................................. 30,000 1,966,875
Perkin-Elmer Corp..................................................... 14,000 994,875
12,733,875
INDUSTRIAL & COMMERCIAL -- 4.5%
Business Services -- 0.8%
Hertz Corp., Class A.................................................. 30,000 1,207,500
Electrical Equipment -- 2.0%
General Electric Co................................................... 40,000 2,935,000
Machinery -- 0.7%
Caterpillar, Inc...................................................... 22,000 1,068,375
Transportation -- 1.0%
Union Pacific Corp.................................................... 22,000 1,373,625
6,584,500
INFORMATION & ENTERTAINMENT -- 4.5%
Broadcasting & Media -- 2.5%
Disney (Walt) Co...................................................... 12,000 1,188,750
Gannett Co., Inc...................................................... 40,000 2,472,500
Leisure & Tourism -- 2.0%
McDonald's Corp....................................................... 40,000 1,910,000
Mirage Resorts, Inc................................................... 40,000 910,000
6,481,250
INFORMATION TECHNOLOGY -- 10.8%
Communication Equipment -- 2.1%
Cisco Systems, Inc.+.................................................. 18,000 1,003,500
Lucent Technologies, Inc.............................................. 12,315 983,661
Motorola, Inc......................................................... 18,000 1,027,125
Computers & Business Equipment -- 2.9%
EMC Corp.+............................................................ 40,000 1,097,500
International Business Machines Corp.................................. 16,000 1,673,000
Xerox Corp............................................................ 20,000 1,476,250
Electronics -- 1.5%
Analog Devices, Inc.+................................................. 45,000 1,245,937
Intel Corp............................................................ 13,000 913,250
Software -- 4.3%
Automatic Data Processing, Inc........................................ 20,000 1,227,500
Computer Sciences Corp................................................ 20,000 1,670,000
First Data Corp....................................................... 36,000 1,053,000
Microsoft Corp.+...................................................... 12,000 1,551,000
PeopleSoft, Inc.+..................................................... 20,000 780,000
15,701,723
MATERIALS -- 0.8%
Chemicals -- 0.8%
du Pont (E.I.) de Nemours & Co........................................ 20,000 1,201,250
</TABLE>
- ---------------------
38
<PAGE> 35
<TABLE>
<CAPTION>
COMMON STOCK (continued) SHARES VALUE
----------------------------------------------------------------------------------------------------
<S> <C> <C>
UTILITIES -- 2.6%
Electric Utilities -- 0.7%
Duke Energy Corp...................................................... 18,000 $ 996,750
Telephone -- 1.9%
SBC Communications, Inc............................................... 25,000 1,831,250
WorldCom, Inc.+....................................................... 30,000 907,500
3,735,500
TOTAL COMMON STOCK (cost $57,832,342)................................. 86,631,567
PRINCIPAL
BONDS & NOTES -- 37.2% AMOUNT
----------------------------------------------------------------------------------------------------
ASSET-BACKED SECURITIES -- 2.0%
Aesop Funding II LLC 6.22% 2001*...................................... $1,000,000 1,003,660
Honda Auto Receivables Trust 5.95% 2003............................... 923,199 922,977
IBM Credit Receivables Lease Asset Master Trust 4.55% 2000............ 93,444 93,020
Nissan Auto Receivables Grantor 6.15% 2003............................ 930,293 935,758
2,955,415
ENERGY -- 1.0%
Husky Oil Ltd. 7.13% 2006............................................. 1,000,000 1,015,030
Mobil Oil Corp. 9.17% 2000............................................ 390,000 403,997
1,419,027
FINANCE -- 5.4%
Bankers Trust New York Corp. 8.25% 2005............................... 1,000,000 1,092,261
First Financial Caribbean Corp. 7.84% 2006............................ 450,000 473,063
Fleet Mortgage Group, Inc. 6.50% 2000................................. 1,000,000 1,007,010
General Electric Capital Corp. 6.50% 2006............................. 1,000,000 1,016,170
General Motors Acceptance Corp. 5.63% 2001............................ 1,000,000 985,830
Lumbermans Mutual Casualty Co. 9.15% 2026*............................ 1,000,000 1,156,550
Security Benefit Life Co. 8.75% 2016*................................. 1,000,000 1,122,860
United States West Capital Funding, Inc. 7.30% 2007................... 1,000,000 1,035,090
7,888,834
INDUSTRIAL & COMMERCIAL -- 2.2%
Clear Channel Communications, Inc. 7.25% 2027......................... 1,000,000 1,008,880
Northrop Grumman Corp. 8.63% 2004..................................... 1,000,000 1,118,100
TCI Communications, Inc. 6.88% 2006................................... 1,000,000 1,003,680
3,130,660
MORTGAGE-RELATED SECURITIES -- 1.7%
Asset Securitization Corp. 7.49% 2027................................. 1,000,000 1,069,219
CS First Boston Corp. 7.24% 2029(1)................................... 1,000,000 1,047,031
CS First Boston Mortgage 6.40% 2035(1)................................ 425,000 426,195
2,542,445
NON-U.S. GOVERNMENT OBLIGATIONS -- 1.8%
Quebec Province Canada 8.80% 2003..................................... 1,500,000 1,663,140
Republic of Lithuania 7.13% 2002*(1).................................. 1,000,000 947,500
2,610,640
U.S. GOVERNMENT & AGENCIES -- 21.8%
Federal Home Loan Mortgage Corp. 6.50% 2010 - 2026.................... 8,997,476 8,977,256
Federal Home Loan Mortgage Corp. 7.00% 2011........................... 2,397,173 2,441,616
Federal Home Loan Mortgage Corp. 8.50% 2001........................... 1,157,024 1,169,495
Government National Mortgage Association 6.50% 2023................... 4,020,498 3,979,006
United States Treasury Bonds 7.63% 2022............................... 6,000,000 7,224,360
</TABLE>
---------------------
39
<PAGE> 36
<TABLE>
<CAPTION>
PRINCIPAL
BONDS & NOTES (continued) AMOUNT VALUE
----------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. GOVERNMENT & AGENCIES (continued)
United States Treasury Bonds 10.38% 2012.............................. $3,000,000 $ 3,986,250
United States Treasury Notes 6.00% 1999............................... 4,000,000 4,020,000
31,797,983
UTILITIES -- 1.3%
Korea Telecom 7.63% 2007.............................................. 1,000,000 715,070
Niagara Mohawk Power Corp. 5.88% 2002................................. 1,250,000 1,226,367
1,941,437
TOTAL BONDS & NOTES (cost $53,106,923)................................ 54,286,441
TOTAL INVESTMENT SECURITIES (cost $110,939,265)....................... 140,918,008
SHORT-TERM SECURITIES -- 0.2%
----------------------------------------------------------------------------------------------------
U.S. GOVERNMENT -- 0.2%
United States Treasury Bills 5.21% due 6/4/98
(cost $268,877)................................................... 275,000 268,899
REPURCHASE AGREEMENT -- 2.8%
----------------------------------------------------------------------------------------------------
Joint Repurchase Agreement Account@ (Note 3)
(cost $4,045,000)................................................... 4,045,000 4,045,000
TOTAL INVESTMENTS --
(cost $115,253,142) 99.7% 145,231,907
Other assets less liabilities -- 0.3 453,527
------
NET ASSETS -- 100.0% $145,685,434
======
</TABLE>
-----------------------------
+ Non-income producing securities
* Resale restricted to qualified institutional buyers
(1) Fair valued security; see Note 2
@ The security or a portion thereof represents collateral for the
following open futures contracts:
<TABLE>
<CAPTION>
OPEN FUTURES CONTRACTS
-------------------------------------------------------------------------------------------------------------
NUMBER OF EXPIRATION VALUE AT VALUE AS OF UNREALIZED
CONTRACTS DESCRIPTION DATE TRADE DATE DECEMBER 31, 1997 APPRECIATION
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
9 Long Standard & Poor's 500 Index March 1998 $2,161,125 $ 2,202,975 $ 41,850
===========
</TABLE>
See Notes to Financial Statements
- ---------------------
40
<PAGE> 37
- ---------------------
ANCHOR SERIES TRUST
STRATEGIC MULTI-ASSET
PORTFOLIO INVESTMENT PORTFOLIO -- DECEMBER 31, 1997
<TABLE>
<CAPTION>
COMMON STOCK -- 38.6% SHARES VALUE
----------------------------------------------------------------------------------------------------
<S> <C> <C>
CAPITAL APPRECIATION -- 15.9%
Aerospace & Military Technology -- 0.3%
Gulfstream Aerospace Corp.+............................................ 5,500 $ 160,875
Banks -- 0.0%
Metro Bank & Trust Co.................................................. 4,200 28,259
Broadcasting & Media -- 2.9%
Central European Media Enterprises, Ltd., Class A+..................... 3,500 88,375
Jacor Communications, Inc.+............................................ 4,000 212,500
Larscom Inc., Class A.................................................. 5,000 47,500
LodgeNet Entertainment Corp.+.......................................... 7,100 78,100
Metro Networks, Inc.+.................................................. 2,500 81,875
Outdoor Systems, Inc.+................................................. 6,000 230,250
Pulitzer Publishing Co................................................. 2,000 125,625
Scripps (E.W) Co., Class A............................................. 1,500 72,656
Tele-Communications Liberty Media Group, Inc., Series A+............... 8,000 290,000
Universal Outdoor Holdings, Inc.+...................................... 3,000 156,000
Viacom, Inc., Class B+................................................. 2,000 82,875
Young Broadcasting, Inc., Class A+..................................... 2,000 77,500
Business Services -- 0.8%
Republic Industries, Inc.+............................................. 4,000 93,250
Select Appointments Holdings PLC ADR................................... 5,000 91,250
Service Experts, Inc.+................................................. 4,000 114,500
West TeleServices Corp.+............................................... 12,300 147,600
Communication Equipment -- 0.9%
3Com Corp.+............................................................ 2,500 87,344
CIENA Corp.+........................................................... 1,000 61,125
Gilat Satellite Networks Ltd.+......................................... 3,000 85,875
NICE Systems Ltd. ADR+................................................. 3,500 147,000
NTL, Inc.+............................................................. 3,000 83,625
Computers & Business Equipment -- 0.9%
Adaptec, Inc.+......................................................... 1,000 37,125
Discreet Logic, Inc.+.................................................. 11,000 241,312
EMC Corp.+............................................................. 5,000 137,188
Splash Technology Holdings, Inc.+...................................... 2,100 47,250
Drugs -- 1.3%
Eisai Co., Ltd......................................................... 5,999 91,422
Genzyme Corp.+......................................................... 8,500 235,875
Human Genome Sciences, Inc.+........................................... 1,000 39,750
Immunex Corp.+......................................................... 2,400 129,600
Pharmerica Inc......................................................... 1 5
Warner-Lambert Co...................................................... 1,000 124,003
Zeneca Group PLC ADR................................................... 900 97,200
Electric Utilities -- 0.1%
Manila Electric Co..................................................... 15,000 49,630
</TABLE>
---------------------
41
<PAGE> 38
<TABLE>
<CAPTION>
COMMON STOCK (continued) SHARES VALUE
----------------------------------------------------------------------------------------------------
<S> <C> <C>
CAPITAL APPRECIATION (continued)
Electrical Equipment -- 0.3%
General Cable Corp.+................................................... 4,000 $ 144,750
Electronics -- 0.4%
Philips Electronics NV-NY Shares....................................... 3,600 217,800
Energy Services -- 0.8%
ENSCO International, Inc............................................... 6,000 201,000
Santa Fe International Corp............................................ 2,000 81,375
Transocean Offshore, Inc............................................... 3,000 144,562
Energy Sources -- 0.0%
Vastar Resources, Inc.................................................. 300 10,725
Financial Services -- 1.6%
Interra Financial, Inc................................................. 3,000 207,000
Legg Mason, Inc........................................................ 1,333 74,564
McDonald & Co. Investments, Inc........................................ 3,000 85,125
Morgan Keegan, Inc..................................................... 8,000 202,500
Piper Jaffray Cos., Inc................................................ 8,500 309,719
Health Services -- 0.4%
Beverly Enterprises, Inc.+............................................. 5,000 65,000
Columbia/HCA Healthcare Corp........................................... 3,000 88,875
MedPartners, Inc.+..................................................... 3,500 78,313
Insurance -- 1.1%
Ace Ltd................................................................ 3,500 337,750
Allstate Corp. ........................................................ 2,500 227,165
Leisure & Tourism -- 0.1%
Virgin Express Holdings PLC ADR+....................................... 3,700 76,775
Real Estate Companies -- 0.3%
Security Capital Group, Inc., Class B+................................. 4,500 146,250
Retail -- 0.9%
Bed Bath & Beyond, Inc.+............................................... 6,000 231,000
Gap, Inc............................................................... 3,500 124,024
Hot Topic, Inc.+....................................................... 4,500 102,375
Software -- 2.4%
BA Merchants Services, Inc., Class A+.................................. 2,000 35,500
BISYS Group, Inc.+..................................................... 5,000 166,250
BMC Software, Inc.+.................................................... 4,000 262,500
DST Systems, Inc.+..................................................... 3,000 128,062
Electronic Arts, Inc.+................................................. 4,000 151,250
Omtool Ltd.+........................................................... 14,000 143,500
Parametric Technology Corp.+........................................... 2,500 118,438
Policy Management Systems Corp.+....................................... 1,500 104,344
Sterling Software, Inc.+............................................... 4,000 164,000
Telephone -- 0.2%
Teleport Communications Group Inc., Class A+........................... 1,500 82,313
Transportation -- 0.2%
Werner Enterprises, Inc................................................ 6,000 123,000
-----------
8,510,123
-----------
CORE EQUITY -- 22.7%
Banks -- 1.4%
Citicorp............................................................... 2,200 278,163
First Union Corp....................................................... 4,000 205,000
U.S. Bancorp........................................................... 2,300 257,456
</TABLE>
- ---------------------
42
<PAGE> 39
<TABLE>
<CAPTION>
COMMON STOCK (continued) SHARES VALUE
----------------------------------------------------------------------------------------------------
<S> <C> <C>
CORE EQUITY (continued)
Broadcasting & Media -- 1.0%
Disney (Walt) Co....................................................... 1,500 $ 148,594
EchoStar Communications Corp., Class A+................................ 5,500 92,125
Gannett Co., Inc....................................................... 5,000 309,062
Business Services -- 0.3%
Hertz Corp., Class A................................................... 4,000 161,000
Chemicals -- 0.3%
du Pont (E.I.) de Nemours & Co......................................... 3,000 180,188
Communication Equipment -- 0.9%
Cisco Systems, Inc.+................................................... 3,000 167,250
Lucent Technologies, Inc............................................... 2,138 170,773
Motorola, Inc.......................................................... 2,500 142,656
Computers & Business Equipment -- 1.1%
EMC Corp.+............................................................. 5,000 137,188
International Business Machines Corp................................... 2,600 271,862
Xerox Corp............................................................. 2,500 184,531
Drugs -- 2.4%
American Home Products Corp............................................ 3,000 229,500
Bristol-Myers Squibb Co................................................ 1,500 141,937
Johnson & Johnson Co................................................... 4,000 263,500
Merck & Co., Inc....................................................... 2,000 212,500
Pfizer, Inc............................................................ 3,000 223,687
Pharmacia & Upjohn, Inc................................................ 2,500 91,563
Warner-Lambert Co...................................................... 1,100 136,398
Electrical Equipment -- 0.7%
General Electric Co.................................................... 5,400 396,225
Electronics -- 0.5%
Analog Devices, Inc.+.................................................. 5,000 138,438
Intel Corp............................................................. 1,500 105,375
Energy Services -- 0.5%
Schlumberger Ltd....................................................... 3,000 241,500
Energy Sources -- 1.1%
Amoco Corp............................................................. 2,000 170,250
Chevron Corp........................................................... 2,500 192,500
Exxon Corp............................................................. 3,500 214,156
Financial Services -- 1.5%
American Express Co.................................................... 3,500 312,375
Federal National Mortgage Association.................................. 4,500 256,781
Merrill Lynch & Co., Inc............................................... 3,000 218,813
Food, Beverage & Tobacco -- 0.8%
Coca-Cola Co........................................................... 2,000 133,250
Nabisco Holdings Corp., Class A........................................ 3,000 145,312
PepsiCo, Inc........................................................... 4,000 145,750
Health Services -- 0.3%
Columbia/HCA Healthcare Corp........................................... 5,000 148,125
Household Products -- 1.6%
Estee Lauder Cos., Inc., Class A....................................... 4,000 205,750
Gillette Co............................................................ 2,000 200,875
Kimberly-Clark Corp.................................................... 5,000 246,562
Procter & Gamble Co.................................................... 2,400 191,550
</TABLE>
---------------------
43
<PAGE> 40
<TABLE>
<CAPTION>
COMMON STOCK (continued) SHARES VALUE
----------------------------------------------------------------------------------------------------
<S> <C> <C>
CORE EQUITY (continued)
Insurance -- 1.8%
Allstate Corp.......................................................... 3,000 $ 272,648
American International Group, Inc...................................... 2,300 250,125
Marsh & McLennan Cos., Inc............................................. 2,600 193,863
Travelers Group, Inc................................................... 4,500 242,437
Leisure & Tourism -- 0.9%
McDonald's Corp........................................................ 6,000 286,500
Mirage Resorts, Inc.................................................... 8,000 182,000
Machinery -- 0.2%
Caterpillar, Inc....................................................... 2,500 121,406
Medical Products -- 0.9%
Abbott Laboratories, Inc............................................... 4,500 295,031
Perkin-Elmer Corp...................................................... 2,500 177,656
Retail -- 1.7%
CVS Corp............................................................... 4,000 256,250
Gap, Inc............................................................... 6,000 212,632
Home Depot, Inc........................................................ 3,700 217,838
Wal-Mart Stores, Inc................................................... 6,000 236,625
Software -- 1.8%
Automatic Data Processing, Inc......................................... 3,000 184,125
Computer Sciences Corp................................................. 3,200 267,200
First Data Corp........................................................ 6,000 175,500
Microsoft Corp.+....................................................... 1,800 232,650
PeopleSoft, Inc.+...................................................... 2,500 97,500
Telephone -- 0.6%
SBC Communications, Inc................................................ 3,000 219,750
WorldCom, Inc.+........................................................ 3,500 105,875
Transportation -- 0.4%
Union Pacific Corp..................................................... 3,000 187,313
-----------
12,083,444
-----------
TOTAL COMMON STOCK (cost $14,341,996).................................. 20,593,567
-----------
PREFERRED STOCK -- 0.8%
----------------------------------------------------------------------------------------------------
CAPITAL APPRECIATION -- 0.3%
Finance -- 0.3%
Superior National Insurance Group, Inc. 10.75%*(1)..................... 140 143,500
BRAZIL -- 0.3%
Broadcasting & Media -- 0.0%
Telecomunicacoes de Sao Paulo SA....................................... 132,000 35,126
Electric Utilities -- 0.1%
Cemig Cia Energy MG.................................................... 1,063,900 46,224
Energy Sources -- 0.1%
Petroleo Brasileiros SA................................................ 314,000 73,432
Utilities -- 0.1%
Cia Riograndense Telecomunicacoes...................................... 28,900 35,606
-----------
190,388
-----------
</TABLE>
- ---------------------
44
<PAGE> 41
<TABLE>
<CAPTION>
PREFERRED STOCK (continued) SHARES VALUE
----------------------------------------------------------------------------------------------------
<S> <C> <C>
GERMANY -- 0.2%
Retail -- 0.2%
Hornbach Holding AG.................................................... 1,300 $ 89,969
-----------
TOTAL PREFERRED STOCK (cost $405,369).................................. 423,857
-----------
PRINCIPAL
BONDS & NOTES -- 25.2% AMOUNT
----------------------------------------------------------------------------------------------------
AEROSPACE & MILITARY TECHNOLOGY -- 0.3%
Argo-Tech Corp. 8.63% 2007*............................................ $ 50,000 49,875
K & F Industries, Inc. 9.25% 2007*..................................... 50,000 51,250
Moog, Inc., Class B 10.00% 2006........................................ 50,000 55,000
-----------
156,125
-----------
AUTOMOTIVE -- 0.6%
Hayes Wheels International, Inc. 11.00% 2006........................... 25,000 27,875
Johnstown America Industries, Inc. 11.75% 2005......................... 85,000 93,287
Key Plastics, Inc., Class B 10.25% 2007................................ 100,000 106,000
Lear Corp. 9.50% 2006.................................................. 100,000 110,000
-----------
337,162
-----------
CABLE -- 0.5%
Cablevision Systems Corp. 9.25% 2005................................... 100,000 106,000
Rifkin Acquisitions Partners L.P. 11.13% 2006.......................... 50,000 54,875
Tele-Communications, Inc. 9.25% 2023................................... 100,000 110,787
-----------
271,662
-----------
CHEMICALS -- 0.5%
Freedom Chemical Co. 10.63% 2006....................................... 50,000 55,000
Huntsman Polymers Corp. 11.75% 2004.................................... 25,000 28,031
Pioneer Americas Acquisition Corp., Class B 9.25% 2007................. 100,000 100,000
Sovereign Specialty Chemicals, Inc. 9.50% 2007*........................ 50,000 51,375
Texas Petrochemicals Corp. 11.13% 2006................................. 35,000 37,800
-----------
272,206
-----------
COMMUNICATIONS & MEDIA -- 0.6%
EchoStar DBS Corp. 12.50% 2002......................................... 45,000 49,162
Muzak L.P. 10.00% 2003................................................. 100,000 104,250
Young Broadcasting, Inc. 9.00% 2006.................................... 50,000 50,000
Young Broadcasting, Inc. 11.75% 2004................................... 100,000 111,250
-----------
314,662
-----------
CONSUMER DISCRETIONARY -- 0.1%
Standard Pacific Corp. 8.50% 2007...................................... 70,000 69,913
-----------
ENERGY -- 1.4%
Petroleos Mexicanos 8.85% 2007......................................... 250,000 247,670
Phillips Petroleum Co. 9.18% 2021...................................... 250,000 279,742
Plains Resources, Inc., Class B 10.25% 2006............................ 100,000 107,750
Pride Petroleum Services, Inc. 9.38% 2007.............................. 30,000 32,250
Transportadora De Gas 10.25% 2001...................................... 100,000 104,750
-----------
772,162
-----------
FINANCE -- 0.6%
First Nationwide Parent Holdings 12.50% 2003........................... 100,000 113,500
Pindo Deli Finance Mauritius Ltd. 10.75% 2007.......................... 100,000 85,750
Western Financial Savings Bank 8.88% 2007.............................. 150,000 144,750
-----------
344,000
-----------
</TABLE>
---------------------
45
<PAGE> 42
<TABLE>
<CAPTION>
PRINCIPAL
BONDS & NOTES (continued) AMOUNT VALUE
----------------------------------------------------------------------------------------------------
<S> <C> <C>
FOOD & LODGING -- 0.2%
Aurora Foods, Inc. 9.88% 2007.......................................... $ 25,000 $ 26,313
Del Monte Foods Co. zero coupon 2007*(2)............................... 100,000 57,625
-----------
83,938
-----------
GAMING -- 0.3%
Fitzgeralds Gaming Corp. 12.25% 2004*.................................. 35,000 35,263
Hollywood Casino, Inc. 12.75% 2003..................................... 100,000 107,250
-----------
142,513
-----------
HEALTHCARE -- 0.3%
Owens & Minor, Inc. 10.88% 2006........................................ 60,000 66,600
Vencor, Inc. 8.63% 2007................................................ 75,000 74,813
-----------
141,413
-----------
INDUSTRIAL & COMMERCIAL -- 0.7%
Cabot Safety Acquisition Corp. 12.50% 2005............................. 100,000 112,500
Globo Comunicacoes SA 10.50% 2006*..................................... 100,000 95,000
Graphic Controls Corp., Class A 12.00% 2005............................ 50,000 55,813
International Wire Group, Inc., Class B 11.75% 2005.................... 90,000 98,775
Scotsman Group, Inc. 8.63% 2007........................................ 35,000 35,131
-----------
397,219
-----------
INFORMATION & ENTERTAINMENT -- 0.2%
MCI Communications Corp. 7.13% 2000.................................... 90,000 91,604
-----------
INFORMATION TECHNOLOGY -- 0.5%
Decision Holdings Corp. zero coupon 2008(2)............................ 50,000 32,500
Iridium Capital Corp., Class C 11.25% 2005*............................ 100,000 98,500
Iron Mountain Inc. Delaware 8.75% 2009*................................ 35,000 35,875
Pierce Leahy Corp. 9.13% 2007.......................................... 75,000 78,000
-----------
244,875
-----------
MATERIALS -- 1.1%
A.K. Steel Corp. 9.13% 2006............................................ 150,000 153,375
A.K. Steel Corp. 10.75% 2004........................................... 100,000 106,500
Acindar Industria Argentina de Aceros SA 11.25% 2004................... 55,000 54,038
CSN Iron SA 9.13% 2007*................................................ 100,000 83,000
Nortek, Inc., Class B 9.25% 2007....................................... 70,000 71,400
Vale Rio Doce Cia zero coupon 1999(1).................................. 2,000 0
Weirton Steel Corp. 11.38% 2004........................................ 100,000 104,000
-----------
572,313
-----------
NON-U.S. GOVERNMENT OBLIGATIONS -- 0.8%
British Columbia Province Canada 6.50% 2026............................ 150,000 150,457
Republic of Argentina 8.38% 2003....................................... 150,000 143,250
Republic of Argentina 11.00% 2006...................................... 100,000 107,500
-----------
401,207
-----------
PAPER PRODUCTS -- 1.5%
Aracruz Celulose SA 10.38% 2002........................................ 100,000 101,250
Container Corp. of America 10.75% 2002................................. 225,000 246,375
Industrias Klabin de Papel e Celulose SA 11.00% 2004................... 100,000 95,000
S.D. Warren Co., Class B 12.00% 2004................................... 100,000 111,750
Silgan Holdings Corp. 9.00% 2009....................................... 250,000 255,625
-----------
810,000
-----------
RETAIL -- 0.1%
Guitar Center Management Co., Inc. 11.00% 2006*........................ 33,000 36,341
-----------
</TABLE>
- ---------------------
46
<PAGE> 43
<TABLE>
<CAPTION>
PRINCIPAL
BONDS & NOTES (continued) AMOUNT VALUE
----------------------------------------------------------------------------------------------------
<S> <C> <C>
TELECOMMUNICATIONS -- 0.7%
Globalstar L.P. 10.75% 2004*........................................... $ 150,000 $ 147,000
GST Telecommunications, Inc. 12.75% 2007............................... 60,000 62,400
Microcell Telecommunications zero coupon 2007(2)....................... 160,000 62,139
Philippine Long District Telephone Co. Maine 7.85% 2007................ 100,000 86,980
-----------
358,519
-----------
U.S. GOVERNMENT & AGENCIES -- 14.2%
Government National Mortgage Association 6.00% 2009.................... 157,686 156,798
Government National Mortgage Association 6.50% 2008 - 2009............. 1,050,444 1,060,938
Government National Mortgage Association 7.50% 2022 - 2024............. 595,536 611,555
Government National Mortgage Association 8.50% 2024.................... 308,451 324,546
United States Treasury Bonds 5.88% 2004................................ 250,000 252,187
United States Treasury Bonds 6.25% 2023................................ 200,000 206,000
United States Treasury Bonds 9.25% 2016................................ 150,000 203,531
United States Treasury Notes 6.25% 2003................................ 750,000 766,995
United States Treasury Notes 6.50% 2006................................ 500,000 523,515
United States Treasury Notes 7.50% 2001................................ 750,000 795,120
United States Treasury Notes 7.75% 1999................................ 500,000 518,515
United States Treasury Notes 7.88% 1999 - 2004......................... 1,250,000 1,357,697
United States Treasury Notes 8.50% 2000................................ 750,000 791,715
-----------
7,569,112
-----------
TOTAL BONDS & NOTES (cost $12,587,045)................................. 13,386,946
-----------
WARRANTS -- 0.0%+ SHARES
----------------------------------------------------------------------------------------------------
THAILAND -- 0.0%
Siam Commercial Bank 12/31/02 (Finance)(1)
(cost $0)............................................................ 400 0
-----------
<CAPTION>
FOREIGN SECURITIES -- 28.6%
----------------------------------------------------------------------------------------------------
<S> <C> <C>
ARGENTINA -- 0.2%
Banco de Galicia y Buenos Aires SA de CV (Finance)..................... 10,300 65,932
Telefonica de Argentina SA ADR (Utilities)............................. 1,500 55,875
-----------
121,807
-----------
AUSTRALIA -- 0.7%
Amcor Ltd. (Materials)................................................. 12,811 56,360
Australia & New Zealand Banking Group Ltd. (Finance)................... 15,000 99,131
Broken Hill Proprietary Co., Ltd. (Materials).......................... 8,299 77,076
Goodman Fielder Wattie Ltd. (Consumer Staples)......................... 65,072 103,482
News Corp., Ltd. (Information & Entertainment)......................... 6,000 33,122
-----------
369,171
-----------
BRAZIL -- 0.4%
Aracruz Celulose ADR (Materials)....................................... 2,400 34,500
Centrais Eletricas Brasileiras SA-ELECTROBRAS ADR (Utilities)+......... 2,050 50,973
Telecomunicacoes Brasileras SA (Utilities)............................. 1,094,000 111,258
-----------
196,731
-----------
CANADA -- 0.7%
Canadian Imperial Bank of Toronto (Finance)............................ 3,100 96,750
Canadian Pacific Ltd. (Industrial & Commercial)+....................... 6,500 175,116
CanWest Global Communications Corp. (Information & Entertainment)...... 4,400 79,200
-----------
351,066
-----------
CHINA -- 0.0%
China Southern Airlines Ltd. ADR (Information & Entertainment)+........ 1,500 19,781
-----------
</TABLE>
---------------------
47
<PAGE> 44
<TABLE>
<CAPTION>
FOREIGN SECURITIES (continued) SHARES VALUE
----------------------------------------------------------------------------------------------------
<S> <C> <C>
DENMARK -- 0.6%
Unidanmark A/S (Finance)............................................... 4,650 $ 341,358
-----------
FINLAND -- 0.7%
Kesko (Consumer Discretionary)......................................... 8,700 137,580
Metsa Serla Oy, Class B (Materials).................................... 15,500 120,850
Nokia Corp., Class A ADR (Information Technology)...................... 1,800 126,000
-----------
384,430
-----------
FRANCE -- 3.1%
Assurance General de France (Finance)+................................. 3,500 185,453
Banque Nationale de Paris (Finance).................................... 2,639 140,270
Carrefour SA (Consumer Discretionary).................................. 200 104,345
Compagnie de St. Gobain (Materials).................................... 781 110,950
Credit Commerce France (Finance)....................................... 1,180 80,876
Elf Aquitaine SA (Energy).............................................. 1,700 197,724
Havas SA (Information & Entertainment)................................. 2,271 163,387
Peugeot SA (Consumer Discretionary).................................... 1,200 151,333
Rhone-Poulenc Ltd. (Healthcare)........................................ 5,536 247,986
Societe Generale (Finance)............................................. 990 134,884
Total SA, Series B (Energy)............................................ 1,152 125,374
-----------
1,642,582
-----------
GERMANY -- 2.2%
Bayer AG (Healthcare).................................................. 7,900 295,105
Degussa AG (Materials)................................................. 1,500 75,044
Karstadt AG (Consumer Discretionary)................................... 440 150,201
Manitoba AG (Industrial & Commercial).................................. 500 144,807
Mannesmann AG (Industrial & Commercial)................................ 332 167,758
Metallgesellschaft AG (Industrial & Commercial)+....................... 8,050 147,222
Prosieben Media AG (Information & Entertainment)+*..................... 3,940 183,974
-----------
1,164,111
-----------
HONG KONG -- 0.6%
Hutchison Whampoa Ltd. (Industrial & Commercial)....................... 21,000 131,707
Hysan Development Co., Ltd. (Real Estate).............................. 16,000 31,901
Peak International Ltd. (Information Technology)+...................... 2,500 52,187
Sun Hung Kai Properties Ltd. (Real Estate)............................. 9,900 68,990
Tingyi Holding Co. (Consumer Staples).................................. 200,000 26,068
-----------
310,853
-----------
INDIA -- 0.1%
Ranbaxy Laboratories Ltd. (Healthcare)................................. 1,300 33,540
State Bank India of GDR (Finance)*..................................... 1,700 30,940
-----------
64,480
-----------
INDONESIA -- 0.0%
PT Kalbe Farma (Healthcare)............................................ 73,000 12,941
-----------
IRELAND -- 0.5%
Allied Irish Banks PLC (Finance)....................................... 4,669 44,534
Jefferson Smurfit Group (Materials)+................................... 78,612 218,213
-----------
262,747
-----------
ITALY -- 0.9%
First British Columbia San Paolo (Finance)*............................ 14,900 142,346
Telecom Italia SpA (Utilities)......................................... 49,500 316,196
-----------
458,542
-----------
JAPAN -- 4.9%
Aisin Seiki Co., Ltd. (Consumer Discretionary)......................... 14,000 144,750
Bank of Tokyo-Mitsubishi Ltd. (Finance)................................ 12,000 165,429
Daiwa Securities Co., Ltd. (Finance)................................... 9,000 31,018
</TABLE>
- ---------------------
48
<PAGE> 45
<TABLE>
<CAPTION>
FOREIGN SECURITIES (continued) SHARES VALUE
----------------------------------------------------------------------------------------------------
<S> <C> <C>
JAPAN (continued)
Eisai Co. Ltd. (Healthcare)............................................ 9,002 $ 137,191
Exedy Corp. (Consumer Discretionary)................................... 2,100 15,906
Fuji Machine Manufacturing Co. (Industrial & Commercial)............... 5,000 120,625
Fujisawa Pharm Co. (Healthcare)........................................ 4,000 34,924
Fukuda Denshi (Healthcare)............................................. 3,000 30,558
Hitachi Ltd. (Information Technology).................................. 9,000 64,104
JGC Corp. (Industrial & Commercial).................................... 16,000 33,698
Mabuchi Motor Co., Ltd. (Industrial & Commercial)...................... 3,000 152,332
Maruichi Steel Tube (Materials)........................................ 7,000 85,242
Matsumotokiyoshi (Consumer Discretionary).............................. 3,400 130,198
Matsushita Electric Industrial Co., Ltd. (Information Technology)+..... 12,000 175,538
Mazda Motor Corp. (Consumer Discretionary) +........................... 59,000 140,078
Murata Manufacturing Co. Ltd. (Information Technology)................. 2,000 50,241
Namco (Information & Entertainment).................................... 5,000 145,133
NGK Spark Plug Co., Ltd. (Industrial & Commercial)..................... 10,000 56,675
Nomura Securities International, Inc. (Finance)........................ 3,000 39,979
Okumura Corp. (Consumer Discretionary)................................. 16,000 37,987
Otsuka Kagu (Consumer Staples)......................................... 500 17,998
Rohm Co. (Information Technology)...................................... 1,000 101,861
Sakura Bank Ltd. (Finance)............................................. 27,000 77,131
Sanwa Bank Ltd. (Finance).............................................. 5,000 50,548
Shimachu Co. (Consumer Discretionary).................................. 1,200 18,840
Sony Corp. (Information & Entertainment)............................... 1,000 88,841
Sony Music Entertainment, Inc. (Information & Entertainment)........... 5,600 205,867
Square Co., Ltd. (Information Technology).............................. 2,000 55,449
Sumitomo Rubber Industries Ltd. (Consumer Discretionary)............... 24,000 101,279
Yamato Kogyo Co. (Materials)........................................... 14,000 84,169
-----------
2,593,589
-----------
MALAYSIA -- 0.0%
Renong Bhd (Industrial & Commercial)(1)................................ 19,000 8,793
Sime Darby Bhd (Industrial & Commercial)............................... 6,250 6,010
-----------
14,803
-----------
MEXICO -- 0.5%
Grupo Televisa SA de CV (Information & Entertainment).................. 4,300 83,703
Kimberly-Clark de Mexico SA de CV, Class A (Consumer Staples).......... 32,000 156,620
Panamerican Beverages, Inc., Class A ADR (Consumer Staples)............ 1,000 32,625
-----------
272,948
-----------
NETHERLANDS -- 1.2%
Akzo Nobel NV (Healthcare)............................................. 810 139,657
Elsevier NV (Information & Entertainment).............................. 6,100 98,676
Internationale Nedederlanden Groep NV (Finance)........................ 5,371 226,214
PolyGram NV (Information & Entertainment).............................. 2,867 137,154
Unilever NV PLC (Consumer Staples)..................................... 800 49,318
-----------
651,019
-----------
NEW ZEALAND -- 0.2%
Air New Zealand Ltd., Class B (Information & Entertainment)............ 13,366 26,776
Brierley Investments Ltd. (Finance)+................................... 32,833 23,449
Carter Holt Harvey Ltd. (Materials).................................... 23,000 35,524
-----------
85,749
-----------
NORWAY -- 0.4%
Saga Petroleum ASA, Series A (Energy).................................. 11,400 196,025
-----------
</TABLE>
---------------------
49
<PAGE> 46
<TABLE>
<CAPTION>
FOREIGN SECURITIES (continued) SHARES VALUE
----------------------------------------------------------------------------------------------------
<S> <C> <C>
SINGAPORE -- 0.3%
Keppel Corp., Ltd. (Industrial & Commercial)........................... 11,000 $ 31,587
Keppel Fels Ltd. (Energy).............................................. 20,000 55,770
Overseas Union Bank Ltd. alien shares (Finance)........................ 20,000 76,535
-----------
163,892
-----------
SPAIN -- 1.0%
Banco de Santander SA (Finance)........................................ 3,900 130,298
Banco Popular Espanol SA (Finance)..................................... 2,700 188,743
Empresa Nacional de Electricidad SA (Utilities)........................ 7,500 133,164
Telefonica de Espana SA ADR (Utilities)................................ 700 63,044
-----------
515,249
-----------
SWEDEN -- 1.3%
Hennes & Mauritz AB Class B (Consumer Discretionary)................... 1,800 79,346
Nordbanken Holding (Finance)+.......................................... 58,100 328,554
Pharmacia & Upjohn, Inc. (Healthcare).................................. 6,700 246,401
Sparbanken Sverige AB (Finance)........................................ 1,820 41,375
-----------
695,676
-----------
SWITZERLAND -- 2.1%
Ciba Specialty Chemicals AG (Materials)+............................... 620 73,830
Holderbank Financiere Glarus (Materials)............................... 280 228,415
Nestle SA (Consumer Staples)........................................... 181 271,153
Roche Holdings AG (Healthcare)......................................... 37 367,290
Schweizerische Bankgesellschaft (Finance).............................. 131 189,346
-----------
1,130,034
-----------
THAILAND -- 0.0%
Siam City Cement PCL alien shares (Materials).......................... 563 585
Siam Commercial Bank PCL alien shares (Finance)........................ 400 457
Thai Farmers Bank alien shares (Finance)............................... 7,800 14,174
-----------
15,216
-----------
UNITED KINGDOM -- 6.0%
Associated British Foods PLC (Consumer Staples)........................ 19,000 165,400
Bank of Scotland (Finance)............................................. 12,400 112,629
Bass PLC (Consumer Staples)............................................ 11,500 178,884
Billiton PLC (Materials)+*............................................. 20,300 52,015
BOC Group PLC (Materials).............................................. 9,637 158,446
British Petroleum Co. PLC (Energy)..................................... 14,000 185,199
BTR Ltd. PLC (Industrial & Commercial)................................. 43,000 129,955
Burmah Castrol PLC (Energy)............................................ 11,600 202,343
Carlton Communications PLC (Information & Entertainment)............... 22,500 173,694
Cookson Group PLC (Information Technology)............................. 44,461 143,864
Guinness PLC (Consumer Staples)........................................ 24,000 219,569
HSBC Holdings PLC (Finance)............................................ 6,600 162,824
Johnson Matthey PLC (Materials)........................................ 16,000 143,226
PowerGen PLC (Utilities)............................................... 11,253 146,386
Rank Group PLC (Information & Entertainment)........................... 26,000 144,770
Reckitt & Colman PLC (Consumer Staples)................................ 10,800 169,407
Royal & Sun Alliance Insurance Group PLC (Finance)..................... 16,254 163,654
Royal Bank of Scotland Group PLC (Finance)............................. 12,000 152,987
Zeneca Group PLC (Healthcare).......................................... 11,700 414,430
-----------
3,219,682
-----------
TOTAL FOREIGN SECURITIES (cost $14,685,240)............................ 15,254,482
-----------
</TABLE>
- ---------------------
50
<PAGE> 47
<TABLE>
<CAPTION>
PRINCIPAL
OPTIONS -- 0.0% AMOUNT VALUE
----------------------------------------------------------------------------------------------------
<S> <C> <C>
FOREIGN CURRENCY PUT OPTIONS
Brazilian Real Option Jan. 16, 1998/1.17(1)
(cost $1,168)........................................................ $ 1,980 416
-----------
TOTAL INVESTMENT SECURITIES (cost $42,021,818)......................... 49,659,268
-----------
<CAPTION>
SHORT-TERM SECURITIES -- 0.5%
----------------------------------------------------------------------------------------------------
<S> <C> <C>
United States Treasury Bills 5.21% due 6/04/98......................... 175,000 171,117
United States Treasury Bills 5.35% due 4/30/98@........................ 75,000 73,722
-----------
TOTAL SHORT-TERM SECURITIES (cost $244,829)............................ 244,839
-----------
<CAPTION>
REPURCHASE AGREEMENT -- 6.5%
----------------------------------------------------------------------------------------------------
<S> <C> <C>
Joint Repurchase Agreement Account (Note 3)
(cost $3,485,000).................................................... 3,485,000 3,485,000
-----------
TOTAL INVESTMENTS --
(cost $45,751,647) 100.2% 53,389,107
Liabilities in excess of other assets -- (0.2) (99,957)
------ -----------
NET ASSETS -- 100.0% $53,289,150
====== ===========
</TABLE>
-----------------------------
+ Non-income producing securities
* Resale restricted to qualified institutional buyers
ADR -- American Depository Receipts
GDR -- Global Depository Receipts
(1) Fair valued security; see Note 2
(2) Represents a zero-coupon bond which will convert to an
interest-bearing security at a later date
@ The security or a portion thereof represents collateral for the
following open futures contracts:
<TABLE>
<CAPTION>
OPEN FUTURES CONTRACTS
-----------------------------------------------------------------------------------------------------------------
NUMBER VALUE AT
OF EXPIRATION TRADE VALUE AS OF UNREALIZED
CONTRACTS DESCRIPTION DATE DATE DECEMBER 31, 1997 APPRECIATION
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
15 Long All ordinaries share price Stock March 1998 $618,206 $ 644,107 $ 25,901
Index Future -- Sydney Futures
Exchange
3 Long Deutsche Terminboerse -- Dax Stock March 1998 703,187 713,837 10,650
Index Future
7 Long Hang Seng Index Future -- Hong January 1998 460,217 484,222 24,005
Kong Futures Exchange
6 Long Marche A Terme International de March 1998 592,252 603,489 11,237
France -- CAC 40 Stock Index
Future
------------
Net Unrealized Appreciation.................................. $ 71,793
=========
</TABLE>
---------------------
51
<PAGE> 48
<TABLE>
<CAPTION>
OPEN FORWARD FOREIGN CURRENCY CONTRACTS
--------------------------------------------------------------------
CONTRACT IN DELIVERY GROSS UNREALIZED
TO DELIVER EXCHANGE FOR DATE APPRECIATION
--------------------------------------------------------------------
<S> <C> <C> <C>
CAD 91,200 USD 66,207 10/16/98 $ 1,996
DEM 29,250 USD 16,541 3/19/98 208
----------------
2,204
----------------
<CAPTION>
GROSS UNREALIZED
DEPRECIATION
--------------------------------------------------------------------
<S> <C> <C> <C>
USD 640,848 AUD 972,750 3/31/98 $ (5,545)
USD 592,594 FRF 3,509,400 3/31/98 (6,497)
USD 706,860 DEM 1,251,000 3/19/98 (8,285)
----------------
(20,327)
----------------
Net Unrealized Depreciation........... $(18,123)
================
AUD -- Australian Dollar
CAD -- Canadian Dollar
DEM -- Deutsche Mark
FRF -- French Franc
USD -- United States Dollar
</TABLE>
See Notes to Financial Statements
- ---------------------
52
<PAGE> 49
(This page intentionally left blank)
---------------------
53
<PAGE> 50
- ---------------------
ANCHOR SERIES TRUST
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
<TABLE>
<CAPTION>
MONEY FIXED GOVERNMENT &
MARKET INCOME QUALITY BOND HIGH YIELD
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS:
Investment securities, at value*............................. $ -- $18,015,289 $222,701,883 $ 37,738,299
Short-term securities*....................................... 69,594,514 -- -- --
Repurchase agreements (cost equals market)................... 540,000 -- 9,760,000 3,010,000
Cash......................................................... 2,305 -- 389 2,508
Foreign currency............................................. -- -- -- --
Receivables for --
Fund shares sold........................................... 48,457 12,902 884,599 46,399
Dividends and accrued interest............................. 195,839 370,513 1,978,249 930,127
Sales of investments....................................... -- -- -- --
Variation margin on futures contracts...................... -- -- -- --
Foreign currency contracts................................. -- -- -- --
Prepaid expenses............................................. 19,289 8,554 44,473 9,319
Unrealized appreciation on forward foreign currency
contracts.................................................. -- -- -- 2,745
----------------------------------------------------------
70,400,404 18,407,258 235,369,593 41,739,397
----------------------------------------------------------
LIABILITIES:
Payables for --
Fund shares redeemed....................................... 524,394 9,692 525,433 827,043
Management fees............................................ 31,062 9,739 120,063 23,762
Purchases of investments................................... -- -- -- 652,031
Foreign currency contracts................................. -- -- -- --
Variation margin on futures contracts...................... -- -- -- --
Other accrued expenses....................................... 40,767 27,668 101,150 43,300
Unrealized depreciation on forward foreign currency
contracts.................................................. -- -- -- --
Due to custodian bank........................................ -- 44,937 -- --
----------------------------------------------------------
596,223 92,036 746,646 1,546,136
----------------------------------------------------------
NET ASSETS:.................................................. $69,804,181 $18,315,222 $234,622,947 $ 40,193,261
==========================================================
Shares of beneficial interest outstanding (unlimited shares
authorized)................................................ 69,804,181 1,379,083 16,803,116 4,798,650
Net asset value per share.................................... $ 1.00 $ 13.28 $ 13.96 $ 8.38
==========================================================
COMPOSITION OF NET ASSETS:
Capital paid in.............................................. $69,804,181 $18,301,157 $215,745,068 $ 45,337,237
Accumulated undistributed net investment income.............. 632 1,372,518 13,552,555 3,705,994
Accumulated undistributed net realized gain (loss) on
investments, futures contracts and foreign currency........ (632) (1,695,246) (547,474) (9,486,051)
Unrealized appreciation (depreciation) of investments........ -- 336,793 5,872,798 633,336
Unrealized foreign exchange gain (loss) on other assets and
liabilities................................................ -- -- -- 2,745
Unrealized appreciation on futures contracts................. -- -- -- --
----------------------------------------------------------
$69,804,181 $18,315,222 $234,622,947 $ 40,193,261
==========================================================
---------------
*Cost
Investment securities....................................... $ -- $17,678,496 $216,829,085 $ 37,104,963
==========================================================
Short-term securities....................................... $69,594,514 $ -- -- $ --
==========================================================
</TABLE>
See Notes to Financial Statements
- ---------------------
54
<PAGE> 51
<TABLE>
<CAPTION>
GROWTH AND FOREIGN CAPITAL NATURAL STRATEGIC
TARGET '98 INCOME SECURITIES GROWTH APPRECIATION RESOURCES MULTI-ASSET MULTI-ASSET
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$7,058,270 $43,389,450 $35,133,697 $466,622,126 $739,873,078 $46,267,996 $140,918,008 $49,659,268
-- -- 49,700 -- -- -- 268,899 244,839
370,000 295,000 765,000 18,295,000 86,080,000 2,800,000 4,045,000 3,485,000
4,763 4,927 3,028 205 570 2,781 1,566 4,842
-- -- 29,826 -- 37,432 3,569 -- 12,617
3,927 65,978 60,701 588,820 2,256,230 1,080,015 50,397 11,937
2,411 48,588 116,355 450,048 255,082 65,638 631,139 302,387
-- 1,237,889 438,262 883,348 4,714,653 -- -- 286,928
-- -- -- -- -- -- -- 5,558
-- -- 394,654 -- 37,538 -- -- 114,775
804 3,567 4,270 45,950 25,075 2,811 29,881 14,164
-- -- -- -- -- -- -- 2,204
---------------------------------------------------------------------------------------------------------------------------
7,440,175 45,045,399 36,995,493 486,885,497 833,279,658 50,222,810 145,944,890 54,144,519
---------------------------------------------------------------------------------------------------------------------------
1,977 19,269 23,474 593,369 1,206,589 101,457 50,246 42,242
4,069 26,363 28,217 291,265 426,076 30,693 124,240 45,004
-- 551,364 297,059 350,150 17,110,640 -- -- 527,668
-- -- 394,757 -- 37,432 -- -- 115,054
-- -- -- -- -- -- 450 --
21,651 31,743 103,730 122,453 187,855 36,728 84,520 105,074
-- -- -- -- -- -- -- 20,327
-- -- -- -- -- -- -- --
---------------------------------------------------------------------------------------------------------------------------
27,697 628,739 847,237 1,357,237 18,968,592 168,878 259,456 855,369
---------------------------------------------------------------------------------------------------------------------------
$7,412,478 $44,416,660 $36,148,256 $485,528,260 $814,311,066 $50,053,932 $145,685,434 $53,289,150
===========================================================================================================================
669,420 2,591,557 3,170,352 17,953,297 25,278,342 3,470,928 10,774,534 4,723,650
$ 11.07 $ 17.14 $ 11.40 $ 27.04 $ 32.21 $ 14.42 $ 13.52 $ 11.28
===========================================================================================================================
$6,961,259 $30,764,229 $33,479,349 $296,867,213 $564,921,133 $50,083,441 $ 89,396,384 $36,928,266
593,334 377,994 440,430 2,514,747 443,996 591,715 3,631,038 1,039,089
(270,582) 1,790,639 1,950,233 31,075,014 72,817,047 406,552 22,637,397 7,631,528
128,467 11,483,798 279,912 155,071,286 176,136,434 (1,025,003) 29,978,765 7,637,460
-- -- (1,668) -- (7,544) (2,773) -- (18,986)
-- -- -- -- -- -- 41,850 71,793
---------------------------------------------------------------------------------------------------------------------------
$7,412,478 $44,416,660 $36,148,256 $485,528,260 $814,311,066 $50,053,932 $145,685,434 $53,289,150
===========================================================================================================================
$6,929,803 $31,905,652 $34,853,785 $311,550,840 $563,736,644 $47,292,999 $110,939,265 $42,021,818
===========================================================================================================================
$ -- $ -- $ 49,700 $ -- $ -- $ -- $ 268,877 $ 244,829
===========================================================================================================================
</TABLE>
---------------------
55
<PAGE> 52
- ---------------------
ANCHOR SERIES TRUST
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
GOVERNMENT &
MONEY MARKET FIXED INCOME QUALITY BOND HIGH YIELD
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET INVESTMENT INCOME:
Income:
Interest........................................................ $4,312,171 $ 1,540,711 $ 14,895,280 $ 3,844,704
Dividends....................................................... -- -- -- 103,508
---------------------------------------------------------
Total income*............................................ 4,312,171 1,540,711 14,895,280 3,948,212
---------------------------------------------------------
Expenses:
Investment management fees...................................... 383,800 124,001 1,364,101 286,254
Custodian fees.................................................. 25,075 40,725 120,350 52,875
Audit and tax consulting fees................................... 15,850 10,325 24,550 13,350
Trustees' fees.................................................. 5,819 1,147 15,350 2,859
Reports to investors............................................ 4,800 1,200 16,325 2,400
Legal fees...................................................... 3,025 1,200 6,050 --
Insurance expense............................................... 1,248 305 2,995 616
Other expenses.................................................. 2,545 858 5,435 1,860
---------------------------------------------------------
Total expenses........................................... 442,162 179,761 1,555,156 360,214
---------------------------------------------------------
Net investment income............................................. 3,870,009 1,360,950 13,340,124 3,587,998
---------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN
CURRENCIES:
Net realized gain (loss) on investments........................... -- 2,846 (164,068) 1,614,047
Net realized foreign exchange gain (loss) on other assets and
liabilities..................................................... -- -- -- --
Net realized gain on futures contracts............................ -- -- -- --
Change in unrealized appreciation/depreciation of investments..... -- 379,729 6,917,378 (803,941)
Change in unrealized foreign exchange gain/loss on other assets
and liabilities................................................. -- -- -- 2,745
Change in unrealized appreciation/depreciation on futures
contracts....................................................... -- -- -- --
---------------------------------------------------------
Net realized and unrealized gain (loss) on investments and foreign
currencies...................................................... -- 382,575 6,753,310 812,851
---------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS... $3,870,009 $ 1,743,525 $ 20,093,434 $ 4,400,849
========================================================
---------------
* Net of foreign withholding taxes on interest and dividends
of:............................................................. $ -- $ 64 $ -- $ 1,132
========================================================
</TABLE>
See Notes to Financial Statements
- ---------------------
56
<PAGE> 53
<TABLE>
<CAPTION>
TARGET GROWTH AND FOREIGN CAPITAL NATURAL STRATEGIC
'98 INCOME SECURITIES GROWTH APPRECIATION RESOURCES MULTI-ASSET MULTI-ASSET
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 691,476 $ 118,435 $ 111,267 $ 621,638 $ 3,164,654 $ 263,359 $ 4,001,965 $1,219,182
-- 596,506 898,246 5,210,878 2,063,531 785,993 1,242,698 604,796
------------------------------------------------------------------------------------------------------------------
691,476 714,941 1,009,513 5,832,516 5,228,185 1,049,352 5,244,663 1,823,978
------------------------------------------------------------------------------------------------------------------
55,542 280,911 404,182 3,049,207 4,366,046 380,856 1,501,407 563,207
20,700 30,500 192,900 128,075 217,675 44,525 75,550 203,675
10,275 12,725 11,000 41,550 64,175 13,975 18,400 13,975
714 1,872 3,539 25,397 37,627 2,845 9,560 4,341
1,200 625 625 9,075 15,125 1,825 3,650 1,825
-- -- 3,600 28,375 40,775 2,500 10,800 4,800
148 423 640 4,508 6,666 577 2,043 776
658 1,938 3,803 6,222 12,235 1,200 4,252 3,983
------------------------------------------------------------------------------------------------------------------
89,237 328,994 620,289 3,292,409 4,760,324 448,303 1,625,662 796,582
------------------------------------------------------------------------------------------------------------------
602,239 385,947 389,224 2,540,107 467,861 601,049 3,619,001 1,027,396
------------------------------------------------------------------------------------------------------------------
(17,879) 1,874,021 1,955,084 31,187,271 71,694,746 417,576 22,517,840 7,616,407
-- -- (207,950) -- (3,171) (328) 58 (11,793)
-- -- 274,991 -- 1,527,540 -- 157,744 67,891
(137,546) 7,471,248 (2,293,078) 75,254,383 78,026,936 (5,760,825) 2,368,322 (1,149,205)
-- -- (14,202) -- (7,316) (2,530) 14 (19,409)
-- -- (28,021) -- (393,750) -- 41,850 71,793
------------------------------------------------------------------------------------------------------------------
(155,425) 9,345,269 (313,176) 106,441,654 150,844,985 (5,346,107) 25,085,828 6,575,684
------------------------------------------------------------------------------------------------------------------
$ 446,814 $9,731,216 $ 76,048 $108,981,761 $151,312,846 $(4,745,058) $28,704,829 $7,603,080
==================================================================================================================
$ -- $ 4,602 $ 131,245 $ 15,798 $ 35,594 $ 31,970 $ -- $ 55,387
==================================================================================================================
</TABLE>
---------------------
57
<PAGE> 54
- ---------------------
ANCHOR SERIES TRUST
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
GOVERNMENT &
MONEY MARKET FIXED INCOME QUALITY BOND HIGH YIELD
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income..................................... $ 3,870,009 $ 1,360,950 $ 13,340,124 $ 3,587,998
Net realized gain (loss) on investments................... -- 2,846 (164,068) 1,614,047
Net realized foreign exchange gain (loss) on other assets
and liabilities......................................... -- -- -- --
Net realized gain on futures contracts.................... -- -- -- --
Change in unrealized appreciation/depreciation of
investments ............................................ -- 379,729 6,917,378 (803,941)
Change in unrealized foreign exchange gain/loss on other
assets and liabilities.................................. -- -- -- 2,745
Change in unrealized appreciation/depreciation on futures
contracts............................................... -- -- -- --
--------------------------------------------------------------
Net increase in net assets resulting from operations...... 3,870,009 1,743,525 20,093,434 4,400,849
--------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
Distributions from capital gains.......................... -- -- (790,000) --
Dividends from net investment income...................... (3,870,009) (1,670,000) (13,980,000) (4,025,000)
--------------------------------------------------------------
Total dividends and distributions to shareholders......... (3,870,009) (1,670,000) (14,770,000) (4,025,000)
--------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold................................. 179,789,798 1,882,041 84,629,814 25,080,588
Proceeds from shares issued for reinvestment of dividends
and distributions....................................... 3,870,009 1,670,000 14,770,000 4,025,000
Cost of shares repurchased................................ (187,856,279) (8,053,346) (91,703,378) (34,974,896)
--------------------------------------------------------------
Net increase (decrease) in net assets resulting from
capital share transactions.............................. (4,196,472) (4,501,305) 7,696,436 (5,869,308)
--------------------------------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS................... (4,196,472) (4,427,780) 13,019,870 (5,493,459)
NET ASSETS:
Beginning of period....................................... 74,000,653 22,743,002 221,603,077 45,686,720
--------------------------------------------------------------
End of period............................................. $ 69,804,181 $ 18,315,222 $234,622,947 $ 40,193,261
==============================================================
---------------
Accumulated undistributed net investment income........... $ 632 $ 1,372,518 $ 13,552,555 $ 3,705,994
==============================================================
Shares issued and repurchased:
Sold...................................................... 179,789,798 140,887 6,117,786 2,936,419
Issued in reinvestment of dividends and distributions..... 3,870,009 130,367 1,100,596 492,656
Repurchased............................................... (187,856,279) (601,742) (6,625,026) (4,080,564)
--------------------------------------------------------------
Net increase (decrease)................................... (4,196,472) (330,488) 593,356 (651,489)
==============================================================
</TABLE>
See Notes to Financial Statements
- ---------------------
58
<PAGE> 55
<TABLE>
<CAPTION>
GROWTH AND FOREIGN CAPITAL NATURAL STRATEGIC
TARGET '98 INCOME SECURITIES GROWTH APPRECIATION RESOURCES MULTI-ASSET MULTI-ASSET
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 602,239 $ 385,947 $ 389,224 $ 2,540,107 $ 467,861 $ 601,049 $ 3,619,001 $ 1,027,396
(17,879) 1,874,021 1,955,084 31,187,271 71,694,746 417,576 22,517,840 7,616,407
-- -- (207,950) -- (3,171) (328) 58 (11,793)
-- -- 274,991 -- 1,527,540 -- 157,744 67,891
(137,546) 7,471,248 (2,293,078) 75,254,383 78,026,936 (5,760,825) 2,368,322 (1,149,205)
-- -- (14,202) -- (7,316) (2,530) 14 (19,409)
-- -- (28,021) -- (393,750) -- 41,850 71,793
- ----------------------------------------------------------------------------------------------------------------------------------
446,814 9,731,216 76,048 108,981,761 151,312,846 (4,745,058) 28,704,829 7,603,080
- ----------------------------------------------------------------------------------------------------------------------------------
-- (3,000) (3,775,000) (44,990,000) (63,555,000) (3,075,000) (20,195,000) (9,430,000)
(825,000) (865,000) (985,000) (3,085,000) (1,055,000) (535,000) (4,135,000) (1,270,000)
- ----------------------------------------------------------------------------------------------------------------------------------
(825,000) (868,000) (4,760,000) (48,075,000) (64,610,000) (3,610,000) (24,330,000) (10,700,000)
- ----------------------------------------------------------------------------------------------------------------------------------
488,918 17,209,143 14,889,890 172,256,188 594,961,738 33,911,861 15,771,917 5,143,306
825,000 868,000 4,760,000 48,075,000 64,610,000 3,610,000 24,330,000 10,700,000
(3,694,795) (15,988,972) (26,853,371) (162,312,016) (499,635,823) (24,442,072) (49,410,173) (17,201,470)
- ----------------------------------------------------------------------------------------------------------------------------------
(2,380,877) 2,088,171 (7,203,481) 58,019,172 159,935,915 13,079,789 (9,308,256) (1,358,164)
- ----------------------------------------------------------------------------------------------------------------------------------
(2,759,063) 10,951,387 (11,887,433) 118,925,933 246,638,761 4,724,731 (4,933,427) (4,455,084)
10,171,541 33,465,273 48,035,689 366,602,327 567,672,305 45,329,201 150,618,861 57,744,234
- ----------------------------------------------------------------------------------------------------------------------------------
$ 7,412,478 $ 44,416,660 $ 36,148,256 $ 485,528,260 $ 814,311,066 $ 50,053,932 $145,685,434 $53,289,150
==================================================================================================================================
$ 593,334 $ 377,994 $ 440,430 $ 2,514,747 $ 443,996 $ 591,715 $ 3,631,038 $ 1,039,089
==================================================================================================================================
41,786 1,098,773 1,175,585 6,579,872 19,642,838 2,040,810 1,110,108 410,357
75,619 53,713 389,844 1,855,461 2,046,563 215,909 1,886,047 960,503
(319,495) (1,023,740) (2,107,426) (6,287,471) (16,686,320) (1,473,329) (3,503,935) (1,380,080)
- ----------------------------------------------------------------------------------------------------------------------------------
(202,090) 128,746 (541,997) 2,147,862 5,003,081 783,390 (507,780) (9,220)
==================================================================================================================================
</TABLE>
---------------------
59
<PAGE> 56
- ---------------------
ANCHOR SERIES TRUST
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
GOVERNMENT &
MONEY MARKET FIXED INCOME QUALITY BOND HIGH YIELD
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income..................................... $ 4,225,419 $ 1,655,779 $ 14,041,082 $ 3,933,675
Net realized gain on investments.......................... -- 462,470 585,700 696,575
Net realized foreign exchange gain (loss) on other assets
and liabilities......................................... -- -- -- --
Net realized gain (loss) on futures contracts............. -- -- -- --
Change in unrealized appreciation/depreciation
on investments.......................................... -- (1,654,211) (7,904,999) 392,992
Change in unrealized foreign exchange gain/loss on other
assets and liabilities.................................. -- -- -- --
Change in unrealized appreciation/depreciation on futures
contracts............................................... -- -- -- --
--------------------------------------------------------------
Net increase in net assets resulting from operations...... 4,225,419 464,038 6,721,783 5,023,242
--------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS PAID TO SHAREHOLDERS:
Distributions from capital gains.......................... -- -- (460,000) --
Dividends from net investment income...................... (4,225,419) (1,900,000) (14,120,000) (4,670,000)
--------------------------------------------------------------
Total dividends........................................... (4,225,419) (1,900,000) (14,580,000) (4,670,000)
--------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold................................. 159,314,533 2,345,220 101,230,555 27,871,250
Proceeds from shares issued for reinvestment of dividends
and distributions....................................... 4,225,419 1,900,000 14,580,000 4,670,000
Cost of shares repurchased................................ (183,230,982) (8,041,058) (111,927,989) (34,024,510)
--------------------------------------------------------------
Net increase (decrease) in net assets resulting from
capital share transactions.............................. (19,691,030) (3,795,838) 3,882,566 (1,483,260)
--------------------------------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS................... (19,691,030) (5,231,800) (3,975,651) (1,130,018)
NET ASSETS:
Beginning of period....................................... 93,691,683 27,974,802 225,578,728 46,816,738
--------------------------------------------------------------
End of period............................................. $ 74,000,653 $ 22,743,002 $221,603,077 $ 45,686,720
==============================================================
---------------
Accumulated undistributed net investment income........... $ 2,155 $ 1,661,104 $ 13,956,938 $ 4,006,818
==============================================================
Shares issued and repurchased:
Sold...................................................... 159,314,533 171,519 7,327,912 3,270,396
Issued in reinvestment of dividends and distributions..... 4,225,419 149,137 1,115,532 586,683
Repurchased............................................... (183,230,982) (587,362) (8,086,708) (4,025,306)
--------------------------------------------------------------
Net increase (decrease)................................... (19,691,030) (266,706) 356,736 (168,227)
==============================================================
</TABLE>
See Notes to Financial Statements
- ---------------------
60
<PAGE> 57
<TABLE>
<CAPTION>
GROWTH AND FOREIGN CAPITAL NATURAL
TARGET '98 INCOME SECURITIES GROWTH APPRECIATION RESOURCES MULTI-ASSET
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 754,372 $ 797,787 $ 609,646 $ 3,079,449 $ 1,049,647 $ 539,303 $ 4,073,653
70,306 1,459,904 6,115,742 44,948,751 63,266,968 3,314,738 20,265,945
-- -- (43,558) -- 2,560 1,145 (44)
-- -- 414,564 -- (34,322) -- --
(419,896) 3,455,775 (1,580,975) 24,747,361 29,785,509 901,030 (4,163,250)
-- (19) (17,987) -- (860) (512) (6)
-- -- (16,205) -- 393,750 -- --
-------------------------------------------------------------------------------------------------------------------
404,782 5,713,447 5,481,227 72,775,561 94,463,252 4,755,704 20,176,298
-------------------------------------------------------------------------------------------------------------------
-- -- -- (13,940,000) (16,280,000) (585,000) (9,825,000)
(1,210,000) (1,745,000) (810,000) (1,545,000) (935,000) (340,000) (5,330,000)
-------------------------------------------------------------------------------------------------------------------
(1,210,000) (1,745,000) (810,000) (15,485,000) (17,215,000) (925,000) (15,155,000)
-------------------------------------------------------------------------------------------------------------------
997,281 7,391,151 22,606,509 179,335,720 517,761,626 47,430,602 11,595,717
1,210,000 1,745,000 810,000 15,485,000 17,215,000 925,000 15,155,000
(4,004,707) (11,647,598) (33,661,510) (193,366,398) (400,770,612) (35,798,476) (49,395,962)
-------------------------------------------------------------------------------------------------------------------
(1,797,426) (2,511,447) (10,245,001) 1,454,322 134,206,014 12,557,126 (22,645,245)
-------------------------------------------------------------------------------------------------------------------
(2,602,644) 1,457,000 (5,573,774) 58,744,883 211,454,266 16,387,830 (17,623,947)
12,774,185 32,008,273 53,609,463 307,857,444 356,218,039 28,941,371 168,242,808
-------------------------------------------------------------------------------------------------------------------
$10,171,541 $ 33,465,273 $ 48,035,689 $ 366,602,327 $ 567,672,305 $ 45,329,201 $150,618,861
===================================================================================================================
$ 816,095 $ 857,047 $ 969,165 $ 3,059,640 $ 1,034,306 $ 525,994 $ 4,119,739
===================================================================================================================
80,381 574,026 1,828,894 8,416,003 19,407,178 2,907,359 874,874
106,327 140,273 66,942 740,555 644,274 58,213 1,220,209
(325,577) (916,670) (2,721,124) (9,155,873) (15,116,927) (2,192,057) (3,714,000)
-------------------------------------------------------------------------------------------------------------------
(138,869) (202,371) (825,288) 685 4,934,525 773,515 (1,618,917)
===================================================================================================================
<CAPTION>
STRATEGIC
MULTI-ASSET
PORTFOLIO
------------
<S> <C>
$ 1,208,923
9,506,288
8,710
--
(2,438,293)
(1,533)
--
------------
8,284,095
------------
(3,785,000)
(1,800,000)
------------
(5,585,000)
------------
4,456,606
5,585,000
(19,022,327)
------------
(8,980,721)
------------
(6,281,626)
64,025,860
------------
$ 57,744,234
============
$ 1,252,720
============
366,240
490,773
(1,560,019)
------------
(703,006)
============
</TABLE>
---------------------
61
<PAGE> 58
- ---------------------
ANCHOR SERIES TRUST
NOTES TO FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION: Anchor Series Trust (the "Trust") was organized as a
business trust under the laws of the Commonwealth of Massachusetts on August 26,
1983. The Trust is registered under the Investment Company Act of 1940, as
amended, as an open-end diversified management investment company. Shares of the
portfolios are issued and redeemed only in connection with investments in and
payments under variable annuity contracts and variable life insurance policies
("Variable Contracts") of Anchor National Life Insurance Company, First
SunAmerica Life Insurance Company, Phoenix Mutual Life Insurance Company and
Presidential Life Insurance Company (the "Life Companies"). Effective February
29, 1996, the Convertible Securities Portfolio changed its name to the Growth
and Income Portfolio.
The investment objectives for each portfolio are as follows:
The Money Market Portfolio seeks current income consistent with stability of
principal through investment in a diversified portfolio of money market
instruments maturing in 397 days or less.
The Fixed Income Portfolio seeks a high level of current income consistent with
preservation of capital and invests primarily in investment grade, fixed income
securities.
The Government & Quality Bond Portfolio seeks relatively high current income,
liquidity and security of principal.
The High Yield Portfolio seeks to produce high current income and secondarily
seeks capital appreciation by investing in high-yielding, high-risk, income
producing corporate bonds.
The Target '98 Portfolio seeks a predictable compounded investment return for
the specified time period, consistent with preservation of capital, by investing
primarily in zero coupon securities and current interest-bearing, investment
grade debt obligations which are issued by the U.S. Government, its agencies and
instrumentalities, and both domestic and foreign companies. These investments
will generally mature no later than November 15, 1998. (Note 9)
The Growth and Income Portfolio seeks to provide high current income and
long-term capital appreciation by investing primarily in securities that provide
the potential for growth and offer income, such as dividend-paying stocks and
securities convertible into common stock.
The Foreign Securities Portfolio seeks long-term capital appreciation through
investment primarily in equity securities issued by foreign companies.
The Growth Portfolio seeks capital appreciation primarily through investments in
growth equity securities.
The Capital Appreciation Portfolio seeks long-term capital appreciation by
investing in growth equity securities which are widely diversified by industry
and company.
The Natural Resources Portfolio seeks a total return through investment
primarily in equity securities of U.S. or foreign companies which are expected
to provide favorable returns in periods of rising inflation.
The Multi-Asset Portfolio seeks long-term total investment return consistent
with moderate investment risk by investing in equity securities, convertible
securities, investment grade fixed income securities and money market
securities.
The Strategic Multi-Asset Portfolio seeks high long-term total investment return
by investing in equity securities, aggressive growth equity securities,
international equity securities, investment grade bonds, high-yield, high-risk
bonds and money market instruments.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES: The preparation of financial
statements in accordance with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts
and disclosures in the financial statements. Actual results could differ from
those estimates. Following is a summary of significant accounting policies
consistently followed by the Trust in the preparation of its financial
statements.
SECURITY VALUATIONS: Stocks are stated at value based upon closing sales prices
reported on recognized securities exchanges or, for listed securities having no
sales reported and for unlisted securities, upon last-reported bid prices.
Bonds, debentures, and other long-term debt securities are valued at prices
obtained for the day of valuation from a bond pricing service of a major dealer
in bonds when such prices are available; however, in circumstances where the
investment adviser deems it appropriate to do so, an over-the-counter or
exchange quotation at the mean of representative bid or asked prices may be
used. Securities traded primarily on securities exchanges outside the United
States are valued at the last sale price on such exchanges on the day of
valuation, or if there is no sale on the day of valuation, at the last reported
bid price. If a security's price is available from more than one foreign
exchange, a portfolio uses the exchange that is the primary market for the
security. Except for the Money Market Portfolio, short-term securities with
original or remaining maturities in excess of 60 days are valued at the mean of
their quoted bid and ask prices. Discounts or premiums on short-term securities
with 60 days or less to maturity are amortized to maturity. Discounts and
premiums are determined based upon the cost of the securities to the Trust if
acquired within 60 days of maturity or, if already held by the
- ---------------------
62
<PAGE> 59
Trust on the 60th day, are amortized to maturity based on the value determined
on the 61st day. Securities for which quotations are not readily available are
valued at fair value as determined in good faith under the direction of the
Trust's Trustees.
For the Money Market Portfolio, securities are valued at amortized cost, which
approximates market value. The amortized cost method involves valuing a security
at its cost on the date of purchase and thereafter assuming a constant
amortization to maturity of any discount or premium.
REPURCHASE AGREEMENTS: The Trust's custodian takes possession of the collateral
pledged for investments in repurchase agreements. The underlying collateral is
valued daily on a mark-to-market basis to assure that the value, including
accrued interest, is at least 102% of the repurchase price. In the event of
default of the obligation to repurchase, the Trust has the right to liquidate
the collateral and apply the proceeds in satisfaction of the obligation. If the
seller defaults and the value of the collateral declines or if bankruptcy
proceedings are commenced with respect to the seller of the security,
realization of the collateral by the Trust may be delayed or limited.
FOREIGN CURRENCY TRANSLATION: The books and records of the Trust are maintained
in U.S. dollars.
Market values of investment securities are translated into U.S. dollars at the
prevailing rate of exchange on the valuation date.
Assets and liabilities denominated in foreign currencies and commitments under
forward foreign currency contracts ("forward contracts") are translated into
U.S. dollars at the mean of the quoted bid and asked prices of such currencies
against the U.S. dollar. Purchases and sales of portfolio securities are
translated at the rate of exchange prevailing when such securities were acquired
or sold. Income and expenses are translated at rates of exchange prevailing when
earned or incurred.
The Trust does not isolate that portion of the results of operations arising
as a result of changes in the foreign exchange rates from the changes in the
market prices of securities held at fiscal year-end. The Trust does not isolate
the effect of changes in foreign exchange rates from the changes in the market
prices of portfolio securities sold during the year.
Realized foreign exchange gain (loss) on other assets and liabilities and
change in unrealized foreign exchange gain (loss) on other assets and
liabilities include realized foreign exchange gains and losses from currency
gains or losses realized between the trade and settlement dates of securities
transactions, the difference between the amounts of interest, dividends,
discount and foreign withholding taxes recorded on the Trust's books and the
U.S. dollar equivalent amounts actually received or paid and changes in the
unrealized foreign exchange gains and losses relating to other assets and
liabilities arising as a result of changes in the exchange rate.
FORWARD FOREIGN CURRENCY CONTRACTS: Certain portfolios may enter into forward
contracts to attempt to protect securities and related receivables and payables
against changes in future foreign exchange rates. A forward contract is an
agreement between two parties to buy or sell currency at a set price on a future
date. The market value of the contract will fluctuate with changes in currency
exchange rates. The contract is marked-to-market daily using the forward rate
and the change in market value is recorded by the portfolio as unrealized gain
or loss. Upon settlement date, the portfolio records either realized gains or
losses when the contract is closed equal to the difference between the value of
the contract at the time it was opened and the value at the time it was closed.
Risks may arise upon entering into these contracts from the potential inability
of counterparties to meet the terms of their contracts and from unanticipated
movements in the value of a foreign currency relative to the U.S. dollar.
Forward contracts involve elements of risk in excess of the amount reflected in
the Statement of Assets and Liabilities. A portfolio bears the risk of an
unfavorable change in the foreign exchange rate underlying the forward contract.
FUTURES CONTRACTS: A futures contract is an agreement between two parties to
buy or sell a financial instrument at a set price on a future date. Upon
entering into such a contract the Trust is required to pledge to the broker an
amount of cash or U.S. government securities equal to the minimum "initial
margin" requirements of the exchange on which the futures contract is traded.
The contract amount reflects the extent of a portfolio's exposure in these
financial instruments. A portfolio's participation in the futures markets
involves certain risks, including imperfect correlation between movements in the
price of futures contracts and movements in the price of the securities hedged
or used for cover. The Trust's activities in futures contracts are conducted
through regulated exchanges which do not result in counterparty credit risks.
Pursuant to a contract the portfolios agree to receive from or pay to the broker
an amount of cash equal to the daily fluctuation in value of the contract. Such
receipts or payments are known as "variation margin" and are recorded by the
portfolios as unrealized appreciation or depreciation. When a contract is
closed, the portfolios record a realized gain or loss equal to the difference
between the value of the contract at the time it was opened and the value at the
time it was closed.
SECURITIES TRANSACTIONS, DIVIDENDS, INVESTMENT INCOME AND EXPENSES: Securities
transactions are accounted for as of the trade date. Interest income is accrued
daily except when collection is not expected. Dividend income is recorded on the
ex-dividend date except for certain dividends from foreign securities which are
recorded as soon as the Trust is informed after the ex-dividend date. The Trust
does not amortize premiums or accrete discounts on fixed income securities,
other than short-term securities, except those original issue discounts for
which amortization is required for federal income tax purposes; gains and losses
realized upon the sale of such securities are based on their identified cost.
Portfolios which earn foreign income and capital gains may be subject to
foreign withholding taxes at various rates.
Common expenses incurred by the Trust are allocated among the portfolios based
upon relative net assets. In all other respects, expenses are charged to each
portfolio as incurred on a specific identification basis.
The Trust records dividends and distributions to its shareholders on the
ex-dividend date.
---------------------
63
<PAGE> 60
The amount of dividends and distributions from net investment income and net
realized capital gains are determined and presented in accordance with federal
income tax regulations, which may differ from generally accepted accounting
principles. These "book/tax" differences are either considered temporary or
permanent in nature. To the extent these differences are permanent in nature,
such amounts are reclassified within the capital accounts based on their federal
tax-basis treatment; temporary differences do not require reclassification.
Dividends and distributions which exceed net investment income and net realized
capital gains for financial reporting purposes but not for tax purposes are
reported as dividends in excess of net investment income or distributions in
excess of net realized capital gains. To the extent distributions exceed current
and accumulated earnings and profits for federal income tax purposes, they are
reported as distributions of paid-in capital. Net investment income/loss, net
realized gain/loss, and net assets are not affected.
For the year ended December 31, 1997, the reclassification arising from
book/tax differences resulted in increases (decreases) to the components of net
assets as follows:
<TABLE>
<CAPTION>
ACCUMULATED ACCUMULATED
UNDISTRIBUTED UNDISTRIBUTED PAID
NET REALIZED NET REALIZED IN
INCOME/LOSS GAIN/LOSS CAPITAL
-------------------------------------------------
<S> <C> <C> <C>
Money Market Portfolio................................................ $ (1,523) $ 1,523 $ --
Fixed Income Portfolio................................................ 20,464 352,074 (372,538)
Government & Quality Bond Portfolio................................... 235,493 (235,493) --
High Yield Portfolio.................................................. 136,178 2,997,806 (3,133,984)
Target '98 Portfolio.................................................. -- -- --
Growth and Income Portfolio........................................... -- -- --
Foreign Securities Portfolio.......................................... 67,041 (67,041) --
Growth Portfolio...................................................... -- -- --
Capital Appreciation Portfolio........................................ (3,171) 3,171 --
Natural Resources Portfolio........................................... (328) 328 --
Multi-Asset Portfolio................................................. 27,298 (27,298) --
Strategic Multi-Asset Portfolio....................................... 28,973 (28,973) --
</TABLE>
Reclassifications are primarily due to differing book and tax treatments for
foreign currency transactions, market discount, paydowns, and expiring capital
loss carryovers.
NOTE 3. JOINT REPURCHASE AGREEMENT ACCOUNT: The Trust along with other
affiliated registered investment companies, transfers uninvested cash balances
into a single joint account, the daily aggregate balance of which is invested in
one or more repurchase agreements collateralized by U.S. Treasury or federal
agency obligations. As of December 31, 1997, each participating portfolio had a
percentage of an undivided interest in the repurchase agreement in the joint
account in which it participates. The balance in the joint repo account at
December 31, 1997 and the related repurchase agreement and collateral is as
follows:
<TABLE>
<CAPTION>
PRINCIPAL
REPURCHASE AGREEMENT DESCRIPTION AMOUNT
---------------------------------------------------------------------------------------- ------------
<S> <C>
Lehman Brothers, Inc. Repurchase Agreement
6.57% dated 12/31/97 repurchase price $131,387,939
due 1/2/98 collateralized by $215,525,000 U.S. Treasury
Strip due 5/15/08, $27,136,000 U.S. Treasury Strip due 5/15/09 and
$6,615,000 U.S. Treasury Strip due 2/15/00, approximate aggregate value $137,939,416.... $131,340,000
=============
</TABLE>
<TABLE>
<CAPTION>
LEHMAN
% OF UNDIVIDED INTEREST OWNED BY EACH PORTFOLIO BROTHERS
----------------------------------------------------------------------------------------------------------------
<S> <C>
Money Market Portfolio............................................................................ 0.4%
Fixed Income Portfolio............................................................................ 0.0%
Government & Quality Bond Portfolio............................................................... 7.4%
High Yield Portfolio.............................................................................. 2.3%
Target '98 Portfolio.............................................................................. 0.3%
Growth and Income Portfolio....................................................................... 0.2%
Foreign Securities Portfolio...................................................................... 0.6%
Growth Portfolio.................................................................................. 13.9%
Capital Appreciation Portfolio.................................................................... 65.5%
Natural Resources Portfolio....................................................................... 2.1%
Multi-Asset Portfolio............................................................................. 3.1%
Strategic Multi-Asset Portfolio................................................................... 2.7%
Other Affiliated Funds............................................................................ 1.5%
-------
100.0%
=======
</TABLE>
NOTE 4. FEDERAL INCOME TAXES: It is each portfolio's policy to meet the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable net income to shareholders.
Therefore, no federal income tax provision is required. Each portfolio is
considered a separate entity for tax purposes.
- ---------------------
64
<PAGE> 61
At December 31, 1997, the cost of investment securities for tax purposes,
including short-term securities and aggregate gross unrealized gain (loss) for
each portfolio were as follows:
<TABLE>
<CAPTION>
AGGREGATE AGGREGATE
GROSS GROSS UNREALIZED CAPITAL
UNREALIZED UNREALIZED GAIN (LOSS) COST OF LOSS
GAIN LOSS NET INVESTMENTS CARRYOVER EXPIRATION
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Money Market Portfolio.......... $ -- $ -- $ -- $ 70,134,514 $ 632 2005
Fixed Income Portfolio.......... 535,215 (198,422) 240,304 17,774,985 1,598,757 1998-2002
Government & Quality Bond
Portfolio..................... 6,380,434 (507,636) 5,872,798 226,589,085 -- --*
High Yield Portfolio............ 1,372,651 (739,314) 633,336 40,114,963 9,486,051 1998-2003
Target '98 Portfolio............ 128,467 -- 128,467 7,299,803 270,582 2002-2005
Growth and Income Portfolio..... 11,834,695 (350,897) 11,483,798 32,200,652 -- --***
Foreign Securities Portfolio.... 4,378,859 (4,227,215) 151,644 35,796,754 -- --
Growth Portfolio................ 160,903,091 (5,923,299) 154,979,792 329,937,334 -- --
Capital Appreciation
Portfolio..................... 199,439,463 (24,906,525) 174,532,938 651,420,140 -- --**
Natural Resources Portfolio..... 5,000,623 (6,025,626) (1,025,003) 50,092,999 -- --**
Multi-Asset Portfolio........... 31,540,440 (1,561,675) 29,978,765 115,253,142 -- --
Strategic Multi-Asset
Portfolio..................... 9,595,673 (1,993,902) 7,601,771 45,787,336 -- --**
</TABLE>
The Fixed Income and High Yield portfolios utilized capital loss carryovers of
$19,266 and $1,477,869, respectively, to partially offset the portfolios' net
taxable gains realized and recognized in the year ended December 31, 1997. In
addition $372,538 and $3,133,984, respectively, of prior year capital loss
carryover for the Fixed Income and High Yield portfolios expired as of December
31, 1997.
* Post 10/31 Capital Loss Deferrals: Government & Quality Bond $1,026,765 and
Foreign Securities $1,610,370.
** Post 10/31 Foreign Exchange Loss Deferrals: Foreign Securities $58,271,
Capital Appreciation $2,749, Natural Resources $16 and Strategic Multi-Asset
$2,841.
NOTE 5. INVESTMENT MANAGEMENT AGREEMENTS: The Trust has entered into an
Investment Advisory and Management Agreement (the "Management Agreement") with
SunAmerica Asset Management Corp. ("SAAMCo") with respect to each portfolio.
SAAMCo serves as manager for each of the portfolios. The Management Agreements
provide that SAAMCo shall act as investment adviser to the Trust; manage the
Trust's investments; administer its business affairs; furnish offices, necessary
facilities and equipment; provide clerical, bookkeeping and administrative
services; and permit any of its officers or employees to serve, without
compensation, as trustees or officers of the Trust, if duly elected to such
positions.
The Trust pays SAAMCo a monthly fee calculated daily at the following annual
percentages of each portfolio's average daily net assets:
<TABLE>
<CAPTION>
AVERAGE DAILY MANAGEMENT
PORTFOLIO NET ASSETS FEE
- --------------------------------------------------------
<S> <C> <C>
Money Market $0-$150 million .500%
> $150 million .475%
> $250 million .450%
> $500 million .425%
Government & Quality
Bond/ $0-$200 million .625%
Fixed Income > $200 million .575%
> $500 million .500%
High Yield $0-$250 million .700%
> $250 million .575%
> $500 million .500%
Target '98 $0-$100 million .625%
> $100 million .570%
> $250 million .525%
> $500 million .500%
Growth and Income $0-$100 million .700%
> $100 million .650%
> $250 million .600%
> $500 million .575%
<CAPTION>
AVERAGE DAILY MANAGEMENT
PORTFOLIO NET ASSETS FEE
- --------------------------------------------------------
<S> <C> <C>
Foreign Securities $0-$100 million .900%
> $100 million .825%
> $250 million .750%
> $500 million .700%
Growth $0-$250 million .750%
> $250 million .675%
> $500 million .600%
Capital Appreciation $0-$100 million .750%
> $100 million .675%
> $250 million .625%
> $500 million .600%
Natural Resources > $0 .750%
Strategic Multi-Asset/ $0-$200 million 1.000%
Multi-Asset > $200 million .875%
> $500 million .800%
</TABLE>
---------------------
65
<PAGE> 62
SAAMCO has entered into Subadvisory Agreements (the "Subadvisory Agreement")
with Wellington Management Company ("WMC") to manage the investments of each
portfolio.
The portion of the investment advisory fees received by SAAMCo which are paid
to WMC are as follows:
<TABLE>
<CAPTION>
AVERAGE DAILY WMC
PORTFOLIO NET ASSETS ALLOCATION
- --------------------------------------------------------
<S> <C> <C>
Money Market $0-$500 million .075%
> $500 million .020%
Government & Quality
Bond/ $0-$ 50 million .225%
Fixed Income > $ 50 million .125%
> $100 million .100%
High Yield $0-$ 50 million .300%
> $ 50 million .225%
> $150 million .175%
> $500 million .150%
Target '98 $0-$ 50 million .225%
> $ 50 million .150%
> $100 million .100%
> $500 million .050%
Growth/ $0-$ 50 million .325%
Growth and Income > $ 50 million .225%
> $150 million .200%
> $500 million .150%
<CAPTION>
AVERAGE DAILY WMC
PORTFOLIO NET ASSETS ALLOCATION
- --------------------------------------------------------
<S> <C> <C>
Foreign Securities $0-$ 50 million .400%
> $ 50 million .275%
> $150 million .200%
> $500 million .150%
Capital Appreciation $0-$ 50 million .375%
> $ 50 million .275%
> $150 million .200%
> $500 million .150%
Natural Resources $0-$ 50 million .350%
> $ 50 million .250%
> $150 million .200%
> $500 million .150%
Multi-Asset $0-$ 50 million .250%
> $ 50 million .175%
> $150 million .150%
Strategic Multi-Asset $0-$ 50 million .300%
> $ 50 million .200%
> $150 million .175%
> $500 million .150%
</TABLE>
For the year ended December 31, 1997, SAAMCo received fees of $12,759,514 from
the Trust, of which SAAMCo informed the Trust that $8,931,972 was retained and
$3,827,542 was allocated to WMC.
NOTE 6. SECURITIES TRANSACTIONS: The portfolios had the following purchases and
sales of long-term securities for the year ended December 31, 1997:
<TABLE>
<CAPTION>
MONEY GOVERNMENT & GROWTH
MARKET FIXED INCOME QUALITY BOND HIGH YIELD TARGET '98 AND INCOME
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Purchases of portfolio securities
(excluding U.S. government
securities).......................... $ -- $ 6,278,268 $ 16,185,077 $39,239,457 $ -- $20,493,720
Sales of portfolio securities
(excluding U.S. government
securities).......................... -- 4,895,117 54,770,142 45,192,672 1,129,743 19,195,055
U.S. Government Securities excluded
above were as follows:
Purchases of U.S. government
securities........................... -- 4,932,437 180,328,824 -- -- --
Sales of U.S. government securities.... -- 10,441,595 103,056,993 -- 2,151,398 --
<CAPTION>
FOREIGN CAPITAL NATURAL STRATEGIC
SECURITIES GROWTH APPRECIATION RESOURCES MULTI-ASSET MULTI-ASSET
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Purchases of portfolio securities
(excluding U.S. government
securities).......................... $33,638,246 $132,223,890 $484,332,732 $24,371,018 $ 46,658,591 $32,390,574
Sales of portfolio securities
(excluding U.S. government
securities).......................... 41,276,573 132,612,631 370,121,871 12,810,603 81,746,353 43,833,718
U.S. Government Securities excluded
above were as follows:
Purchases of U.S. government
securities........................... -- -- -- -- 34,216,555 --
Sales of U.S. government securities.... -- -- -- -- 27,548,425 371,474
</TABLE>
- ---------------------
66
<PAGE> 63
NOTE 7. TRANSACTIONS WITH AFFILIATES: The Trust has executed purchases and
sales of securities through Royal Alliance Associates, Inc., SunAmerica
Securities, Inc., and Advantage Capital Corp., which are broker/dealers
affiliated with SAAMCo. For the year ended December 31, 1997, the following
portfolios of the Trust paid brokerage commissions to these affiliate companies:
<TABLE>
<CAPTION>
AMOUNT
-------
<S> <C>
Growth Portfolio............................................................... $ 250
Capital Appreciation Portfolio................................................. 20,400
Strategic Multi-Asset Portfolio................................................ 420
</TABLE>
NOTE 8. TRUSTEES RETIREMENT PLAN: The Trustees (and Directors) of the
SunAmerica Family of Mutual Funds have adopted the SunAmerica Disinterested
Trustees' and Directors' Retirement Plan (the "Retirement Plan") effective
January 1, 1993 for the unaffiliated Trustees. The Retirement Plan provides
generally that if an unaffiliated Trustee who has at least 10 years of
consecutive service as a Disinterested Trustee of any of the SunAmerica mutual
funds (an "Eligible Trustee") retires after reaching age 60 but before age 70 or
dies while a Trustee, such person will be eligible to receive a retirement or
death benefit from each SunAmerica mutual fund with respect to which he or she
is an Eligible Trustee. As of each birthday, prior to the 70th birthday, but in
no event for a period greater than 10 years, each Eligible Trustee will be
credited with an amount equal to 50% of his or her regular fees (excluding
committee fees) for services as a Disinterested Trustee of each SunAmerica
mutual fund for the calendar year in which such birthday occurs. In addition, an
amount equal to 8.5% of any amounts credited under the preceding clause during
prior years, is added to each Eligible Trustee's account until such Eligible
Trustee reaches his or her 70th birthday. An Eligible Trustee may receive
benefits payable under the Retirement Plan, at his or her election, either in
one lump sum or in up to fifteen annual installments. As of December 31, 1997,
the Trust had accrued $123,405 for the Retirement Plan, which is included in
accrued expenses on the Statement of Assets and Liabilities and for the year
ended December 31, 1997, expensed $37,305 for the Retirement Plan, which is
included in Trustee fees and expenses on the Statement of Operations.
NOTE 9. SUBSEQUENT EVENTS: In January 1998, investors will be notified
regarding the forthcoming maturity and liquidation of the Target '98 Portfolio.
To facilitate an orderly liquidation, the shareholder will be requested to
provide instructions for the reallocation of investments by November 15, 1998.
Instructions not received by the aforementioned date will result in the
reallocation of the investment into the Money Market Portfolio.
---------------------
67
<PAGE> 64
- ---------------------
ANCHOR SERIES TRUST
FINANCIAL HIGHLIGHTS*
<TABLE>
- ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
NET DIVIDENDS DIVIDENDS
REALIZED TOTAL DECLARED FROM NET
NET ASSET NET & UNREALIZED FROM FROM NET REALIZED NET ASSET
VALUE INVEST- GAIN (LOSS) INVEST- INVEST- GAIN ON VALUE
PERIOD BEGINNING MENT ON MENT MENT INVEST- END OF TOTAL
ENDED OF PERIOD INCOME INVESTMENTS OPERATIONS INCOME MENTS PERIOD RETURN**
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Money Market Portfolio
12/31/93 $ 1.00 $ 0.02 $ -- $ 0.02 $ (0.02) $ -- $ 1.00 2.0%
12/31/94 1.00 0.04 -- 0.04 (0.04) -- 1.00 3.8
12/31/95 1.00 0.05 -- 0.05 (0.05) -- 1.00 5.6
12/31/96 1.00 0.05 -- 0.05 (0.05) -- 1.00 5.0
12/31/97 1.00 0.05 -- 0.05 (0.05) -- 1.00 5.1
Fixed Income Portfolio
12/31/93 14.31 0.95 0.19 1.14 (0.91) -- 14.54 8.0
12/31/94 14.54 0.89 (1.36) (0.47) (1.17) -- 12.90 (3.2)
12/31/95 12.90 0.90 1.52 2.42 (1.16) -- 14.16 19.2
12/31/96 14.16 0.93 (0.64) 0.29 (1.15) -- 13.30 2.4
12/31/97 13.30 0.91 0.30 1.21 (1.23) -- 13.28 9.4
Government & Quality Bond Portfolio
12/31/93 13.93 0.90 0.25 1.15 (0.86) -- 14.22 8.3
12/31/94 14.22 0.86 (1.30) (0.44) (0.73) (0.19) 12.86 (3.1)
12/31/95 12.86 0.90 1.55 2.45 (1.08) -- 14.23 19.4
12/31/96 14.23 0.87 (0.50) 0.37 (0.90) (0.03) 13.67 2.9
12/31/97 13.67 0.84 0.42 1.26 (0.92) (0.05) 13.96 9.5
High Yield Portfolio
12/31/93 8.39 0.79 0.79 1.58 (0.54) -- 9.43 19.1
12/31/94 9.43 0.15 (0.56) (0.41) (1.15) -- 7.87 (4.5)
12/31/95 7.87 0.77 0.67 1.44 (0.98) -- 8.33 18.8
12/31/96 8.33 0.74 0.19 0.93 (0.88) -- 8.38 11.7
12/31/97 8.38 0.75 0.18 0.93 (0.93) -- 8.38 11.4
Target '98 Portfolio
12/31/93 13.57 0.82 0.71 1.53 (0.93) (0.23) 13.94 11.2
12/31/94 13.94 0.83 (1.39) (0.56) (1.11) (0.07) 12.20 (4.1)
12/31/95 12.20 0.86 0.88 1.74 (1.30) -- 12.64 14.6
12/31/96 12.64 0.81 (0.37) 0.44 (1.41) -- 11.67 3.7
12/31/97 11.67 0.78 (0.19) 0.59 (1.19) -- 11.07 5.2
Growth and Income Portfolio
12/31/93 12.49 0.61 2.11 2.72 (0.55) (0.08) 14.58 22.0
12/31/94 14.58 0.66 (1.96) (1.30) (0.52) (1.20) 11.56 (9.7)
12/31/95 11.56 0.61 1.29 1.90 (0.83) (0.62) 12.01 16.6
12/31/96+ 12.01 0.33 2.02 2.35 (0.77) -- 13.59 20.2
12/31/97 13.59 0.15 3.74 3.89 (0.34) -- 17.14 28.8
<CAPTION>
NET RATIO OF NET
ASSETS RATIO OF INVESTMENT
END OF EXPENSES INCOME PORTFOLIO AVERAGE
PERIOD PERIOD TO AVERAGE TO AVERAGE TURNOVER COMMISSION
ENDED (000'S) NET ASSETS NET ASSETS RATE PER SHARE@
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Money Mark
12/31/93 $ 99,309 0.6% 2.7% %-- $ NA
12/31/94 126,004 0.6 3.8 -- NA
12/31/95 93,692 0.6 5.5 -- NA
12/31/96 74,001 0.6 4.9 -- NA
12/31/97 69,804 0.6 5.0 -- NA
Fixed Inco
12/31/93 41,116 0.8 6.3 45.9 NA
12/31/94 28,582 0.8 6.5 56.5 NA
12/31/95 27,975 0.8 6.5 76.7 NA
12/31/96 22,743 0.8 6.8 77.9 NA
12/31/97 18,315 0.9 6.9 58.0 .0500
Government
12/31/93 264,660 0.7 6.2 93.2 NA
12/31/94 232,530 0.7 6.4 117.6 NA
12/31/95 225,579 0.7 6.5 135.2 NA
12/31/96 221,603 0.7 6.3 106.7 NA
12/31/97 234,623 0.7 6.1 75.7 NA
High Yield
12/31/93 79,303 0.9 8.5 121.1 NA
12/31/94 48,057 0.9 9.0 97.9 NA
12/31/95 46,817 0.9 9.2 68.1 NA
12/31/96 45,687 0.9 8.8 58.0 NA
12/31/97 40,193 0.9 8.8 101.4 .0600
Target '98
12/31/93 20,500 0.9 5.7 20.8 NA
12/31/94 19,194 0.8 6.5 9.2 NA
12/31/95 12,774 0.9 6.7 38.6 NA
12/31/96 10,172 0.9 6.5 -- NA
12/31/97 7,412 1.0 6.8 -- NA
Growth and
12/31/93 41,555 0.9 4.4 86.2 NA
12/31/94 34,995 0.9 4.9 50.7 NA
12/31/95 32,008 0.9 5.2 88.8 NA
12/31/96+ 33,465 0.9 2.5 108.5 .0477
12/31/97 44,417 0.8 1.0 49.4 .0522
</TABLE>
- ---------------
* Selected data for a share of beneficial interest outstanding throughout each
period (calculated based upon average shares outstanding)
** Does not reflect expenses that apply to the separate accounts of Anchor
National Life Insurance Company, First SunAmerica Life Insurance Company,
Phoenix Mutual Life Insurance Company and Presidential Life Insurance
Company. If such expenses had been included, total return would have been
lower for each period presented.
@ The average commission per share is derived by taking the commissions paid on
equity securities trades and dividing by the number of shares purchased and
sold. This information was not required to be disclosed prior to 1996.
+ Prior to March 1, 1996, the portfolio was invested primarily in convertible
debt securities. After that date, the portfolio primarily invests in common
stock.
- ---------------------
68
<PAGE> 65
- ---------------------
ANCHOR SERIES TRUST
FINANCIAL HIGHLIGHTS* -- (CONTINUED)
<TABLE>
- -----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
NET DIVIDENDS DIVIDENDS
REALIZED TOTAL DECLARED FROM NET
NET ASSET NET & UNREALIZED FROM FROM NET REALIZED NET ASSET
VALUE INVEST- GAIN (LOSS) INVEST- INVEST- GAIN ON VALUE
PERIOD BEGINNING MENT ON MENT MENT INVEST- END OF TOTAL
ENDED OF PERIOD INCOME INVESTMENTS OPERATIONS INCOME MENTS PERIOD RETURN**
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Foreign Securities Portfolio
12/31/93 $ 8.47 $ 0.05 $ 2.50 $ 2.55 $ (0.09) $ -- $ 10.93 30.2%
12/31/94 10.93 0.11 (0.46) (0.35) (0.03) -- 10.55 (3.2)
12/31/95 10.55 0.13 1.19 1.32 (0.05) (0.01) 11.81 12.6
12/31/96 11.81 0.15 1.19 1.34 (0.21) -- 12.94 11.5
12/31/97 12.94 0.11 (0.14) (0.03) (0.31) (1.20) 11.40 (1.0)
Growth Portfolio
12/31/93 21.67 0.05 1.60 1.65 (0.08) (0.92) 22.32 7.8
12/31/94 22.32 0.05 (1.03) (0.98) (0.05) (3.11) 18.18 (4.7)
12/31/95 18.18 0.11 4.62 4.73 (0.05) (3.38) 19.48 26.3
12/31/96 19.48 0.20 4.57 4.77 (0.11) (0.95) 23.19 25.0
12/31/97 23.19 0.16 6.76 6.92 (0.20) (2.87) 27.04 30.4
Capital Appreciation Portfolio
12/31/93 17.75 (0.03) 3.73 3.70 (0.01) (1.16) 20.28 21.1
12/31/94 20.28 (0.02) (0.71) (0.73) -- (2.04) 17.51 (3.8)
12/31/95 17.51 0.06 6.00 6.06 (0.15) (0.20) 23.22 34.6
12/31/96 23.22 0.06 5.73 5.79 (0.06) (0.95) 28.00 25.1
12/31/97 28.00 0.02 7.05 7.07 (0.05) (2.81) 32.21 25.4
Natural Resources Portfolio
12/31/93 9.93 0.15 3.42 3.57 (0.17) -- 13.33 36.2
12/31/94 13.33 0.23 (0.09) 0.14 (0.09) (0.09) 13.29 1.0
12/31/95 13.29 0.18 2.15 2.33 (0.21) (0.29) 15.12 17.5
12/31/96 15.12 0.22 1.89 2.11 (0.13) (0.23) 16.87 14.1
12/31/97 16.87 0.20 (1.49) (1.29) (0.17) (0.99) 14.42 (8.6)
Multi-Asset Portfolio
12/31/93 13.79 0.36 0.63 0.99 (0.44) (0.46) 13.88 7.3
12/31/94 13.88 0.39 (0.60) (0.21) (0.47) (1.49) 11.71 (1.7)
12/31/95 11.71 0.40 2.47 2.87 (0.49) (1.05) 13.04 24.9
12/31/96 13.04 0.35 1.36 1.71 (0.49) (0.91) 13.35 13.9
12/31/97 13.35 0.34 2.36 2.70 (0.43) (2.10) 13.52 21.1
Strategic Multi-Asset Portfolio
12/31/93 12.45 0.21 1.68 1.89 (0.28) -- 14.06 15.3
12/31/94 14.06 0.24 (0.53) (0.29) (0.20) (2.28) 11.29 (2.6)
12/31/95 11.29 0.32 2.18 2.50 (0.23) (1.78) 11.78 22.8
12/31/96 11.78 0.25 1.41 1.66 (0.40) (0.84) 12.20 14.8
12/31/97 12.20 0.23 1.48 1.71 (0.31) (2.32) 11.28 14.3
<CAPTION>
NET RATIO OF NET
ASSETS RATIO OF INVESTMENT
END OF EXPENSES INCOME (LOSS) PORTFOLIO AVERAGE
PERIOD PERIOD TO AVERAGE TO AVERAGE TURNOVER COMMISSION
ENDED (000'S) NET ASSETS NET ASSETS RATE PER SHARE@
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Foreign Securities Portfolio
12/31/93 $ 72,579 1.3% 0.5% 47.7% $ NA
12/31/94 68,641 1.2 1.0 73.9 NA
12/31/95 53,609 1.2 1.2 33.0 NA
12/31/96 48,036 1.4 1.2 74.3 .0062
12/31/97 36,148 1.4 0.9 79.9 .0056
Growth Portfolio
12/31/93 311,050 0.9 0.2 66.3 NA
12/31/94 246,149 0.8 0.2 74.8 NA
12/31/95 307,857 0.9 0.6 92.1 NA
12/31/96 366,602 0.8 0.9 51.7 .0515
12/31/97 485,528 0.8 0.6 32.2 .0538
Capital Appreciation Portfolio
12/31/93 182,515 0.9 (0.2) 111.2 NA
12/31/94 229,544 0.8 (0.1) 64.0 NA
12/31/95 356,218 0.8 0.3 60.1 NA
12/31/96 567,672 0.8 0.2 69.2 .0517
12/31/97 814,311 0.7 0.1 60.1 .0548
Natural Resources Portfolio
12/31/93 18,255 1.1 1.3 34.5 NA
12/31/94 21,230 1.0 1.7 36.0 NA
12/31/95 28,941 1.0 1.3 32.0 NA
12/31/96 45,329 0.9 1.3 52.5 .0409
12/31/97 50,054 0.9 1.2 27.9 .0319
Multi-Asset Portfolio
12/31/93 208,900 1.1 2.6 48.2 NA
12/31/94 164,159 1.1 3.0 82.5 NA
12/31/95 168,243 1.1 3.2 85.9 NA
12/31/96 150,619 1.1 2.6 64.1 .0517
12/31/97 145,685 1.1 2.4 56.5 .0546
Strategic Multi-Asset Portfolio
12/31/93 76,466 1.3 1.2 73.9 NA
12/31/94 65,357 1.3 1.8 63.7 NA
12/31/95 64,026 1.3 2.7 36.9 NA
12/31/96 57,744 1.4 2.0 51.3 .0064
12/31/97 53,289 1.4 1.8 59.7 .0070
</TABLE>
- ---------------
* Selected data for a share of beneficial interest outstanding throughout each
period (calculated based upon average shares outstanding)
** Does not reflect expenses that apply to the separate accounts of Anchor
National Life Insurance Company, First SunAmerica Life Insurance Company,
Phoenix Mutual Life Insurance Company and Presidential Life Insurance
Company. If such expenses had been included, total return would have been
lower for each period presented.
@ The average commission per share is derived by taking the commissions paid on
equity securities trades and dividing by the number of shares purchased and
sold. This information was not required to be disclosed prior to 1996.
---------------------
69
<PAGE> 66
- ---------------------
ANCHOR SERIES TRUST
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE TRUSTEES AND SHAREHOLDERS OF ANCHOR SERIES TRUST
In our opinion, the accompanying statement of assets and liabilities, including
the investment portfolios, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Money Market Portfolio, Fixed
Income Portfolio, Government & Quality Bond Portfolio, High Yield Portfolio,
Target '98 Portfolio, Growth and Income Portfolio, Foreign Securities Portfolio,
Growth Portfolio, Capital Appreciation Portfolio, Natural Resources Portfolio,
Multi-Asset Portfolio and Strategic Multi-Asset Portfolio (constituting the 12
portfolios of Anchor Series Trust, hereafter referred to as the "Trust") at
December 31, 1997, the results of each of their operations for the year then
ended, the changes in each of their net assets for each of the two years in the
period then ended and the financial highlights for each of the five years in the
period then ended, in conformity with generally accepted accounting principles.
These financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Trust's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
December 31, 1997 by correspondence with the custodian and brokers and the
application of alternative auditing procedures where confirmations from brokers
were not received, provide a reasonable basis for the opinion expressed above.
As stated in Note 9 to the financial statements, Target '98 Portfolio was
designed with the expectation that it will terminate on or about November 1998.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
February 13, 1998
- ---------------------
70
<PAGE> 67
- ---------------------
ANCHOR SERIES TRUST
SHAREHOLDERS TAX INFORMATION (UNAUDITED)
Certain tax information regarding the Anchor Series Trust is required to be
provided to shareholders based upon each Portfolio's income and distributions
for the taxable year ended December 31, 1997. The information and distributions
reported herein may differ from the information and distributions taxable to the
shareholders for the calendar year ending December 31, 1997. The information
necessary to complete your income tax returns will be included with your Form
1099-DIV which will be sent to you under separate cover in January 1998.
During the year ended December 31, 1997 the Portfolios paid the following
dividends per share along with the percentage of ordinary income dividends that
qualified for the 70% dividends received deductions for corporations:
<TABLE>
<CAPTION>
NET NET NET QUALIFYING % FOR THE
TOTAL INVESTMENT SHORT-TERM LONG-TERM 70% DIVIDENDS
DIVIDENDS INCOME CAPITAL GAINS CAPITAL GAINS RECEIVED DEDUCTION
--------- ---------- ------------- ------------- --------------------
<S> <C> <C> <C> <C> <C>
Money Market Portfolio....................... $ -- $ -- $ -- $ -- --%
Fixed Income Portfolio....................... 1.23 1.23 -- -- --
Government & Quality Bond Portfolio.......... 0.97 0.92 0.02 0.03 --
High Yield Portfolio......................... 0.93 0.93 -- -- 2.66
Target '98 Portfolio......................... 1.19 1.19 -- -- --
Growth and Income Portfolio.................. 0.34 0.34 -- -- 80.95
Foreign Securities Portfolio................. 1.51 0.31 -- 1.20 --
Growth Portfolio............................. 3.07 0.20 0.69 2.18 36.60
Capital Appreciation Portfolio............... 2.85 0.05 1.25 1.55 30.33
Natural Resources Portfolio.................. 1.16 0.17 0.05 0.94 55.38
Multi-Asset Portfolio........................ 2.53 0.43 0.14 1.96 29.44
Strategic Multi-Asset Portfolio.............. 2.63 0.31 0.50 1.82 7.92
</TABLE>
---------------------
71
<PAGE> 85
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements
The following financial statements are included in Part A of the
Registration Statement:
Condensed Financial Information
The following financial statements are included in Part B of the
Registration Statement.
Financial Statements for Anchor Series Trust -- with respect
to Registrant's fiscal year ended December 31, 1997.
(b) Exhibits
<TABLE>
<CAPTION>
<S> <C>
( 1) Declaration of Trust, as Amended Previously Filed
( 2) By-Laws Previously Filed
( 3) Voting Trust Agreement Not Applicable
( 4) Share of Beneficial Interest Not Applicable
( 5) (a)Investment Advisory and Previously Filed
Management Agreements
(b)Sub-Advisory Agreement Previously Filed
( 6) Distribution Agreement Not Applicable
( 7) Bonus, Profit Sharing, Not Applicable
Pension or Similar Contracts
( 8) Custodian Agreement Previously Filed
( 9) Form of Fund Participation Agreement Previously Filed
(10) Opinion and Consent of Counsel Not Applicable
(11) Consent of Accountants Filed Herewith
(12) Financial Statements Omitted from Item 23 Not Applicable
(13) Initial Capitalization Agreement Not Applicable
(14) Model Plan Not Applicable
(15) Rule 12b-1 Plan Not Applicable
(16) Persons under Common Control with Filed Herewith
Registrant
(17) Performance Computations Not Applicable
(18) Powers of Attorney Previously Filed
(27) Financial Data Schedule Filed Herewith
</TABLE>
All previously filed exhibits are specifically incorporated herein by
reference.
Item 25. Persons Controlled by or Under Common Control with
Registrant
Previously Filed.
<PAGE> 86
Item 26. Number of Holders of Securities
As of February 26, 1998, the number of record holders of Anchor Series
Trust was as follows:
<TABLE>
<CAPTION>
Title of Class Number of Record Holders
<S> <C> <C>
Shares of Beneficial Interest 5*
</TABLE>
* Held by Variable Separate Account of Anchor National Life Insurance
Company, FS Variable Separate Account of First SunAmerica Life
Insurance Company, Variable Annuity Account Four of Anchor National
Life Insurance Company, Variable Annuity Account One of Anchor National
Life Insurance Company and Variable Annuity Account One of First
SunAmerica Life Insurance Company.
Item 27. Indemnification
The Declaration of Trust (Section 5.3) provides that "each officer,
Trustee or agent of the Trust shall be indemnified by the Trust to the
full extent permitted under the General Laws of the State of
Massachusetts and the Investment Company Act of 1940, as amended,
except that such indemnity shall not protect any such person against
any liability to the Trust or any shareholder thereof to which such
person would otherwise be subject by reason of willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in
the conduct of his office ("disabling conduct")."
The Investment Advisory and Management Agreements and Sub-Advisory
Agreements each provide in essence that under certain circumstances the
Investment Adviser or the Sub-Adviser (and their officers, directors,
agents, employees, controlling persons, shareholders and any other
person or entity affiliated with the Investment Adviser or Sub-Adviser
to perform or assist in the performance of its obligations under each
Agreement) shall not be subject to liability to the Trust or to any
shareholder of the Trust for any act or omission in the course of, or
connected with, rendering services, including without limitation, any
error of judgment or mistake of law or for any loss suffered by any of
them in connection with the matters to which each Agreement relates,
except to the extent specified in Section 36(b) of the Investment
Company Act of 1940 concerning loss resulting from a breach of
fiduciary duty with respect to the receipt of compensation for
services.
SunAmerica Inc., the parent of Anchor National Life Insurance Company,
provides, without cost to the Fund, indemnification of individual
trustees. By individual letter agreement, SunAmerica Inc. indemnifies
each trustee to the fullest extent permitted by law against expenses
and liabilities (including damages, judgments, settlements, costs,
attorney's fees,
2
<PAGE> 87
charges and expenses) actually and reasonably incurred in connection
with any action which is the subject of any threatened, asserted,
pending or completed action, suit or proceeding, whether civil,
criminal, administrative, investigative or otherwise and whether formal
or informal to which any trustee was, is or is threatened to be made a
party by reason of facts which include his being or having been a
trustee, but only to the extent such expenses and liabilities are not
covered by insurance.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Act and is therefore
unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit or proceeding)
is asserted against the Registrant by such director, officer or
controlling person in connection with the securities being registered,
the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
Item 28. Business and other Connections of Investment Adviser
Information concerning the business and other connections of SAAMCo is
incorporated herein by reference from SAAMCo's Form ADV (File No. 801-19813) and
information concerning the business and other connections of Wellington is
incorporated herein by reference from Wellington's Form ADV (File No.
801-15908), which are currently on file with the Securities and Exchange
Commission.
Item 29. Principal Underwriters
There is no Principal Underwriter for the Registrant.
Item 30. Location of Accounts and Records
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, acts as Custodian, Transfer Agent and Dividend
Paying Agent. It maintains books, records and accounts pursuant to the
instructions of the Fund.
3
<PAGE> 88
SunAmerica Asset Management Corp., the Investment Adviser, is located
at 733 Third Avenue, New York, New York 10017-3204. It maintains the
books, accounts and records required to be maintained pursuant to
Section 31(a) of the Investment Company Act of 1940 and the rules
promulgated thereunder.
Wellington Management Company, the Sub-Adviser, is located at 75 State
Street, Boston, Massachusetts 02109. It maintains the books, accounts
and records required to be maintained pursuant to Section 31(a) of the
Investment Company Act of 1940 and the rules promulgated thereunder.
Item 31. Management Services
None.
Item 32. Undertakings
(c) Registrant hereby undertakes to furnish an investor to whom a
prospectus is delivered with a copy of Registrant's latest annual
report to shareholders, upon request and without charge.
4
<PAGE> 89
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Post-Effective Amendment No. 28 to
the Registration Statement pursuant to Rule 485(b) under the Securities Act of
1933 and has duly caused this Post-Effective Amendment No. 28 to the
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of New York, and State of New York, on the 27th day
of March 27, 1998.
ANCHOR SERIES TRUST
By:/s/Peter A. Harbeck
Peter A. Harbeck
President
Pursuant to the requirements of the Securities Act of 1933 this
Post-Effective Amendment No. 28 to the Registration Statement has been signed
below by the following persons in the capacities
and on the date indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
/s/Peter A. Harbeck President and Trustee March 27, 1998
Peter A. Harbeck (Principal Executive
Officer)
* Treasurer March 27, 1998
Peter C. Sutton (Principal Financial
and Accounting Officer)
* Trustee March 27, 1998
S. James Coppersmith
* Trustee March 27, 1998
Samuel M. Eisenstat
* Trustee March 27, 1998
Stephen J. Gutman
*By:/s/Robert M. Zakem
Attorney-in-Fact
Robert M. Zakem
</TABLE>
<PAGE> 90
ANCHOR SERIES TRUST
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Name
<S> <C>
11 Consent of Accountants
27 Financial Data Schedule
</TABLE>
<PAGE> 1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 28 to the registration
statement on Form N-1A (the "Registration Statement") of our report dated
February 13, 1998, relating to the financial statements and financial highlights
of Anchor Series Trust, which appears in such Statement of Additional
Information. We also consent to the references to us under the heading
"Independent Accountants" in such Statement of Additional Information and to the
references to us under the headings "Financial Highlights" and "Reports and
Independent Accountants" in such Prospectus.
/s/Price Waterhouse
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York
March 20, 1998
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<NUMBER-OF-SHARES-REDEEMED> (1,380,000)
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