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As filed pursuant to rule 497
SEC File Number 2-86188
PROSPECTUS -- APRIL 1, 1998
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ANCHOR SERIES TRUST
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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. This Prospectus includes three of the
twelve portfolios of the Trust.
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 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 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.
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.
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TABLE OF CONTENTS
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<TABLE>
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ITEM PAGE
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FINANCIAL HIGHLIGHTS..................... 2
THE TRUST................................ 3
INVESTMENT OBJECTIVES AND POLICIES.......
3
INVESTMENT PORTFOLIOS.................... 3
Capital Appreciation Portfolio..... 3
Growth Portfolio................... 4
Government and Quality Bond
Portfolio........................ 4
REPURCHASE AGREEMENTS.................... 5
ILLIQUID SECURITIES...................... 6
HEDGING AND INCOME ENHANCEMENT
STRATEGIES............................. 6
Options Transactions............... 6
Futures Contracts and Options
Thereon.......................... 7
Foreign Currency Hedging or Income
Enhancement Strategies........... 7
Special Risks of Hedging and Income
Enhancement Strategies........... 7
Forward Commitments................ 7
INVESTMENT RESTRICTIONS.................. 8
SPECIAL CONSIDERATIONS................... 8
MANAGEMENT OF THE TRUST.................. 9
The Trustees....................... 9
SunAmerica Asset Management
Corp. ........................... 9
Wellington Management Company,
LLP.............................. 9
Portfolio Management............... 10
Custodian, Transfer and Dividend
Paying Agent..................... 10
PORTFOLIO TRANSACTIONS................... 10
NET ASSET VALUE.......................... 10
DIVIDENDS, DISTRIBUTIONS AND TAXES.......
11
DESCRIPTION OF THE TRUST................. 11
REPORTS AND INDEPENDENT ACCOUNTANTS......
11
DISTRIBUTION AND REDEMPTION OF SHARES;
INQUIRIES.............................. 11
GENERAL INFORMATION...................... 12
Year 2000 Compliance............... 12
APPENDIX A
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FINANCIAL HIGHLIGHTS*
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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
DECLARED DIVIDENDS NET
NET ASSET NET NET REALIZED TOTAL FROM FROM NET FROM NET ASSET NET ASSETS RATIO OF
VALUE INVEST- & UNREALIZED INVEST- INVEST- REALIZED VALUE END OF EXPENSES
YEAR BEGINNING MENT GAIN (LOSS) ON MENT MENT GAIN ON END OF TOTAL PERIOD TO AVERAGE
ENDED OF PERIOD INCOME INVESTMENTS OPERATIONS INCOME INVESTMENTS PERIOD RETURN** (000'S) NET ASSETS
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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Capital Appreciation Portfolio
12/31/88 $ 7.95 $ 0.09+ $ 1.64 $ 1.73 $(0.05) $-- $ 9.63 21.1% $ 19,976 1.1%
12/31/89 9.63 0.18 2.23 2.41 (0.01) -- 12.03 25.0 35,951 1.0
12/31/90 12.03 0.13 (2.04) (1.91) (0.29) (0.02) 9.81 (16.2) 27,568 1.0
12/31/91 9.81 0.09 5.41 5.50 (0.01) (0.07) 15.23 56.1 45,976 1.0
12/31/92 15.23 0.01 3.70 3.71 (0.07) (1.12) 17.75 25.9 83,414 0.9
12/31/93 17.75 (0.03) 3.73 3.70 (0.01) (1.16) 20.28 21.1 182,515 0.9
12/31/94 20.28 (0.02) (0.71) (0.73) -- (2.04) 17.51 (3.8) 229,544 0.8
12/31/95 17.51 0.06 6.00 6.06 (0.15) (0.20) 23.22 34.6 356,218 0.8
12/31/96 23.22 0.06 5.73 5.79 (0.06) (0.95) 28.00 25.1 567,672 0.8
12/31/97 28.00 0.02 7.05 7.07 (0.05) (2.81) 32.21 25.4 814,311 0.7
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Growth Portfolio
12/31/88 12.45 0.22 1.37 1.59 -- -- 14.04 12.8 195,105 1.0
12/31/89 14.04 0.31 3.91 4.22 (0.29) -- 17.97 30.1 171,593 1.0
12/31/90 17.97 0.27 (0.50) (0.23) (0.56) (1.72) 15.46 (1.6) 151,527 0.9
12/31/91 15.46 0.22 6.05 6.27 (0.12) (0.21) 21.40 40.8 231,857 0.9
12/31/92 21.40 0.09 0.99 1.08 (0.19) (0.62) 21.67 5.4 279,291 0.9
12/31/93 21.67 0.05 1.60 1.65 (0.08) (0.92) 22.32 7.8 311,050 0.9
12/31/94 22.32 0.05 (1.03) (0.98) (0.05) (3.11) 18.18 (4.7) 246,149 0.8
12/31/95 18.18 0.11 4.62 4.73 (0.05) (3.38) 19.48 26.3 307,857 0.9
12/31/96 19.48 0.20 4.57 4.77 (0.11) (0.95) 23.19 25.0 366,602 0.8
12/31/97 23.19 0.16 6.76 6.92 (0.20) (2.87) 27.04 30.4 485,528 0.8
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Government and Quality Bond Portfolio
12/31/88 11.97 1.13 (0.08) 1.05 (1.43) -- 11.59 8.8 195,984 0.8
12/31/89 11.59 1.10 0.71 1.81 -- -- 13.40 15.6 163,082 0.8
12/31/90 13.40 1.05 (0.09) 0.96 (2.30) -- 12.06 7.8 155,522 0.8
12/31/91 12.06 1.00 1.08 2.08 (0.11) -- 14.03 17.3 197,463 0.8
12/31/92 14.03 1.02 (0.05) 0.97 (1.07) -- 13.93 6.9 207,860 0.8
12/31/93 13.93 0.90 0.25 1.15 (0.86) -- 14.22 8.3 264,660 0.7
12/31/94 14.22 0.86 (1.30) (0.44) (0.73) (0.19) 12.86 (3.1) 232,530 0.7
12/31/95 12.86 0.90 1.55 2.45 (1.08) -- 14.23 19.4 225,579 0.7
12/31/96 14.23 0.87 (0.50) 0.37 (0.90) (0.03) 13.67 2.9 221,603 0.7
12/31/97 13.67 0.84 0.42 1.26 (0.92) (0.05) 13.96 9.5 234,623 0.7
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<CAPTION>
RATIO OF NET
INVESTMENT
INCOME TO PORTFOLIO AVERAGE
YEAR AVERAGE NET TURNOVER COMMISSION
ENDED ASSETS RATE PER SHARE @
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Capital Appreciation Portfolio
12/31/88 1.0%+ 30.3% $ N/A
12/31/89 1.6 30.9 N/A
12/31/90 1.2 37.2 N/A
12/31/91 0.7 72.9 N/A
12/31/92 0.1 92.9 N/A
12/31/93 (0.2) 111.2 N/A
12/31/94 (0.1) 64.0 N/A
12/31/95 0.3 60.1 N/A
12/31/96 0.2 69.2 0.0517
12/31/97 0.1 60.1 0.0548
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Growth Portfolio
12/31/88 1.6 37.6 N/A
12/31/89 1.8 26.9 N/A
12/31/90 1.6 22.2 N/A
12/31/91 1.2 36.9 N/A
12/31/92 0.5 37.9 N/A
12/31/93 0.2 66.3 N/A
12/31/94 0.2 74.8 N/A
12/31/95 0.6 92.1 N/A
12/31/96 0.9 51.7 0.0515
12/31/97 0.6 32.2 0.0538
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Government and Quality Bond Portfolio
12/31/88 8.9 120.5 N/A
12/31/89 8.6 71.8 N/A
12/31/90 8.5 63.3 N/A
12/31/91 7.8 87.5 N/A
12/31/92 7.3 76.4 N/A
12/31/93 6.2 93.2 N/A
12/31/94 6.4 117.6 N/A
12/31/95 6.5 135.2 N/A
12/31/96 6.3 106.7 N/A
12/31/97 6.1 75.7 N/A
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</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.
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THE TRUST
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ANCHOR SERIES TRUST (the "Trust") is an open-end diversified management
investment company. This Prospectus describes three of the twelve separate
portfolios of the Trust which are the: Capital Appreciation Portfolio, Growth
Portfolio, and Government and Quality Bond 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.
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INVESTMENT OBJECTIVES AND POLICIES
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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.
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INVESTMENT PORTFOLIOS
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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
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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
contracts with respect to these investments. (See the discussion under "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. (See "Government and Quality Bond 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 "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. (See "Repurchase Agreements.") In addition, the Portfolio
may purchase when-issued securities. (See "When-Issued Securities" in the
Statement of Additional Information.)
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
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securities rated Aa or 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. (See "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.")
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REPURCHASE AGREEMENTS
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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
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the Investment Company Act of 1940, as amended, 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
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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 Securities Act of 1933, as amended, 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.
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HEDGING AND INCOME ENHANCEMENT STRATEGIES
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Each 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
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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 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.
FOREIGN CURRENCY HEDGING OR INCOME ENHANCEMENT STRATEGIES
Each 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,
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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. 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:
Capital Appreciation Portfolio pays a fee of .75% of Assets per annum; Growth
Portfolio pays a fee of .75% of Assets per annum; and Government and Quality
Bond Portfolio pays a fee of .625% 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 relating to the
Portfolios equal to the following percentages of Assets: Capital Appreciation
Portfolio, 0.65%; Growth Portfolio, 0.72%; and Government and Quality Bond
Portfolio, 0.62%.
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:
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; and Government and Quality
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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.
For the year ended December 31, 1997, SAAMCo informed the Trust that WMC
received fees equal to the following percentages of daily net assets: Capital
Appreciation Portfolio, 0.21%; Growth Portfolio, 0.21%; and Government and
Quality Bond Portfolio, 0.13%.
PORTFOLIO MANAGEMENT
The following individuals are primarily responsible for the day-to-day
management of the particular portfolios as indicated below.
Robert D. Rands has served as the portfolio manager for the CAPITAL APPRECIATION
PORTFOLIO since its inception in 1987. 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.
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.
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.
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NET ASSET VALUE
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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.
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DIVIDENDS, DISTRIBUTIONS AND TAXES
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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 and distributions consisting of substantially all net investment
income and net realized capital gains from the Growth, Capital Appreciation and
Government and Quality Bond Portfolios will be declared and reinvested at least
annually in additional full and fractional shares of the respective Portfolios.
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DESCRIPTION OF THE TRUST
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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.
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REPORTS AND INDEPENDENT ACCOUNTANTS
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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.
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DISTRIBUTION AND REDEMPTION OF SHARES; INQUIRIES
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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
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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.
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GENERAL INFORMATION
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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.
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APPENDIX A
DESCRIPTION OF CORPORATE BOND RATINGS
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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.
