<PAGE> 1
As filed with the Securities and Exchange Commission on January 29, 1999
Securities Act File No. 2-86188
Investment Company File Act No. 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. 29 /X/
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 / /
AMENDMENT NO. 29 /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, New York 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 for 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 to paragraph (b) of Rule 485
/ / on (date) pursuant to paragraph (b) of Rule 485
/X/ 60 days after filing pursuant to paragraph (a)(1) of Rule 485
/ / on (date) pursuant to paragraph (a)(1) of Rule 485
/ / 75 days after filing pursuant to paragraph (a)(2) of Rule 485
/ / on (date) pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
/ / This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
<PAGE> 2
, 1999 PROSPECTUS
ANCHOR SERIES TRUST
- - GROWTH AND INCOME PORTFOLIO
- - GROWTH PORTFOLIO
- - CAPITAL APPRECIATION PORTFOLIO
- - FOREIGN SECURITIES PORTFOLIO
- - NATURAL RESOURCES PORTFOLIO
- - MULTI-ASSET PORTFOLIO
- - STRATEGIC MULTI-ASSET PORTFOLIO
- - MONEY MARKET PORTFOLIO
- - GOVERNMENT AND QUALITY BOND PORTFOLIO
- - FIXED INCOME PORTFOLIO
- - HIGH YIELD PORTFOLIO
The Securities and Exchange Commission
has not approved or disapproved these
securities or passed upon the adequacy
of this prospectus. Any representation
to the contrary is a criminal offense.
[LOGO] ANCHOR NATIONAL
A SUNAMERICA COMPANY
<PAGE> 3
TABLE OF CONTENTS
TRUST HIGHLIGHTS............................................................. 1
FINANCIAL HIGHLIGHTS......................................................... 18
ACCOUNT INFORMATION.......................................................... 18
Transaction Policies.............................................. 19
Taxes and Dividend Policies ...................................... 19
MORE INFORMATION ABOUT THE PORTFOLIOS........................................ 20
Investment Strategies............................................. 20
Glossary ........................................................ 30
Investment Terminology.................................. 30
Risk Terminology........................................ 32
MANAGEMENT .................................................................. 35
Investment Adviser .............................................. 35
Subadviser ....................................................... 36
Portfolio Management.............................................. 36
Custodian, Transfer and Dividend Paying Agent..................... 39
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TRUST HIGHLIGHTS
The following questions and answers are designed to give you an overview of the
Trust and to provide you information about the Trust's eleven investment
Portfolios and their investment goals and primary strategies. More complete
investment information is provided in the chart, under "More Information About
the Portfolios," which is on page __, and the glossary that follows on page ___.
Q: What are the Portfolios' investment goals and strategies?
A: Each Portfolio operates as a separate mutual fund and has its own
investment goal and a strategy for pursuing it. There can be no
assurance that any Portfolio's investment goal will be met or that
the net return on an investment in a Portfolio will exceed what could
have been obtained through other investment or savings vehicles. The
investment goal may not be changed without shareholder vote.
<TABLE>
<CAPTION>
Principal
Portfolio Investment Goal Investment Strategies
--------- --------------- ---------------------
<S> <C> <C>
Growth and high current income invests primarily in equity securities
Income Portfolio and long-term capital that provide the potential for growth
appreciation and offer income, such as dividend-
paying stocks
Growth Portfolio long-term capital invests primarily in core equity
appreciation securities that are widely diversified by
industry and company
[Margin note: "growth" companies are considered to have a historical
record of above-average growth rate; to have significant growth
potential; to have above-average earnings growth or value or the
ability to sustain earnings growth; to offer proven or unusual
products or services; or to operate in industries experiencing
increasing demand.]
Capital long-term capital invests primarily in growth equity
Appreciation appreciation securities across a wide range of
Portfolio industries and companies, using an
eclectic stock picking approach; may be
concentrated and will generally have
lower weight in large cap [securities
than the] Growth Portfolio.
</TABLE>
1
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<TABLE>
<CAPTION>
Principal
Portfolio Investment Goal Investment Strategies
--------- --------------- ---------------------
<S> <C> <C>
Foreign Securities long-term capital invests in core equity securities issued
Portfolio appreciation by foreign companies; opportunistically
invests in emerging markets and smaller
companies
Natural Resources total return in excess of invests primarily in equity securities of
Portfolio the U.S. rate of U.S. or foreign companies that are
inflation as represented expected to provide favorable returns
by the Consumer Price in periods of rising inflation, at least
Index 65% related to natural resources, such
as energy, metals, mining and forest
products using a value approach
[Margin note: The "value" oriented philosophy - that of investing
principally in securities believed to be undervalued in the market -
often reflects a contrarian approach, in that the potential for
superior relative performance is believed to be highest when stocks
of fundamentally solid companies are out of favor. The Sub-Advisor
seeks to identify stocks of large, well-known companies with solid
financial strength and generous dividend yields that have low
price-earnings ratios and have been generally overlooked by the
market.
Multi-Asset long-term total allocates the Portfolio's assets among
Portfolio investment return with equity securities, investment grade
less risk than the fixed income securities and cash
Strategic Multi-Asset
Portfolio
Strategic Multi- long-term total actively allocates the Portfolio's assets
Asset Portfolio investment return with among equity securities of U.S. and
more risk than the foreign companies, mid- and smaller
Multi-Asset Portfolio equity securities, global fixed income
securities (including high-yield,
high-risk bonds), cash. Each of these
areas is more concentrated because of the
benefits of diversification found in a
multi-asset portfolio.
</TABLE>
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<TABLE>
<CAPTION>
Principal
Portfolio Investment Goal Investment Strategies
--------- --------------- ---------------------
<S> <C> <C>
Money Market current income invests in a diversified portfolio of
Portfolio consistent with money market instruments maturing in
stability of principal 397 days or less and maintains a dollar-
weighed average portfolio maturity of
not more than 90 days
Government and relatively high current invests in obligations issued,
Quality Bond income, liquidity and guaranteed or insured by the U.S.
Portfolio security of principal government, its agencies or
instrumentalities and in high quality
corporate fixed income securities
Fixed Income high level of current invests primarily in investment grade
Portfolio income consistent with bonds and other fixed income
preservation of capital securities
High Yield high current income invests in high-yielding, high-risk,
Portfolio with a secondary income producing bonds and other
investment objective of fixed income securities, also known as
capital appreciation "junk bonds"
</TABLE>
[Margin Note] Investment Selection: Each Portfolio buys and sells securities
based on bottom-up investment analysis and individual security selection, with
an aim to uncover opportunities with potential for price appreciation. Each
Portfolio is managed using proprietary fundamental analysis in order to select
securities which are deemed to be consistent with the Portfolio's investment
objective and are priced attractively. Fundamental analysis of a company
involves the assessment of such factors as its business environment, management,
balance sheet, income statement, anticipated earnings, revenues, dividends, and
other related measures of value. Securities are sold when the investment has
achieved its intended purpose, or because it is no longer considered attractive.
[Margin Note] Credit Quality of Bonds: Bonds are considered high quality if
rated within the two highest grades assigned by one of the independent
bond-rating organizations, such as Moody's Investors Service or Standard &
Poor's Corporation. Bonds rated within the four highest grades are considered
investment grade. Securities rated below investment grade are sometimes referred
to as high yield/high risk or junk bonds. A bond's credit quality depends on the
issuer's ability to pay interest on the bond and, ultimately, to repay the debt.
The lower the rating by Moody's or Standard & Poor's, the greater the change
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(in the rating agency's opinion) that the bond issuer will default, or fail to
meet its payment obligations. All things being equal, the lower a bond's credit
rating, the higher the yield the bond must pay (as compensation for the greater
risks an investor must take.) From time to time each Portfolio (other than the
Money Market Portfolio) may invest some on all of its assets in high quality
money market securities for temporary defensive purposes in response to adverse
market, economic or political conditions. To the extent a Portfolio is in a
defensive position, the Portfolio may lose the benefit of upswings and limit its
ability to meet its investment objective.
At times each Portfolio (other than the Money Market Portfolio) may engage in
short-term trading, which could produce higher brokerage expenses for a fund and
higher taxable distributions to the Portfolio's shareholders.
Q: What are the principal risks of investing in the Portfolios?
A: The following section describes the principal risks of each Portfolio,
while the chart on page __ describes various additional risks.
Risks of Investing in Equity Securities
The Growth And Income, Growth, Capital Appreciation and Foreign
Securities Portfolios invest primarily in equities. In addition, the
Multi-Asset and Strategic Multi-Asset Portfolios invest significantly
in equities. As with any equity fund, the value of your investment in
any of these Portfolios may fluctuate in response to stock market
movements. In addition, individual stocks selected for any of these
Portfolios may underperform the market generally. To the extent a
Portfolio is invested in the bond market, movements in the bond market
in addition to the stock market may affect its performance.
Risks of Investing in Bonds
The Government And Quality Bond Portfolios, Fixed Income and High Yield
invest primarily in bonds. In addition, the Multi-Asset and Strategic
Multi-Asset Portfolios invest significantly in bonds. As a result, as
with any bond fund, the value of your investment in these Portfolios
may go up or down in response to changes in interest rates or defaults
(or even the potential for future default) by bond issuers.
Risks of Investing in Money Market Securities
While an investment in the Money Market Portfolio should present the
least market risk of any of the Portfolios, since it invests only in
high-quality short-term debt obligations ("money market securities"),
you should be aware that an investment in the Money
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Market Portfolio is subject to the risk that the value of its
investments may be subject to changes in interest rates. You should
also be aware that the return on an investment in the Money Market
Portfolio should not be the same as a return on an investment in a
money market fund available directly to the public, even where gross
yields are equivalent, due to fees at the contract level. Furthermore,
although the Portfolio seeks to maintain a stable 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. As a result, it is
possible to lose money by investing in the Portfolios.
Risks of Investing in Foreign Securities
All of the Portfolios except the Money Market Portfolio may, and the
Foreign Securities Portfolio will, invest in foreign securities. These
securities may be denominated in currencies other than U.S. dollars.
Foreign investing presents special risks, particularly in certain
developing countries. While investing internationally may reduce your
risk by increasing the diversification of your investment, the value of
your investment may be affected by fluctuating currency values,
changing local and regional economic, political and social conditions,
and greater market volatility. In addition, foreign securities may not
be as liquid as domestic securities.
Risks of Investing in Small Company Stocks
Stocks of smaller companies may be more volatile than, and not as
liquid as those of larger companies. This will particularly affect the
Growth And Income, Growth, and Capital Appreciation Portfolios.
Risks of Investing in Junk Bonds
The High Yield Portfolio invests primarily in high yield, high risk
bonds commonly known as "junk bonds," which are considered speculative.
The Growth And Income, Strategic Multi-Asset and Fixed Income
Portfolios may also invest in junk bonds. While the Subadviser tries to
diversify each Portfolio and to engage in a credit analysis of each
junk bond issuer in which it invests, junk bonds carry a substantial
risk of default or of changes in the issuer's creditworthiness, or they
may already be in default. A junk bond's market price may fluctuate
more than higher-quality securities and may decline significantly. In
addition, it may be more difficult for the Portfolios to dispose of
junk bonds or to determine their value. Junk bonds may contain
redemption or call provisions that, if exercised during a period of
declining interest rates, may force a Portfolio to replace the security
with a lower yielding security. If this occurs, it will result in a
decreased return for you.
Risks of Investing in Natural Resources
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The Natural Resources Portfolio will be subject to certain risks
specific to investing in the natural resources industry. [Investments
in securities related to gold or other precious metals and minerals are
considered speculative. 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.] [should this gold information be
deleted?] The Portfolio's investments in natural resources securities
exposes it to greater risk than a portfolio less concentrated in a
group of related industries.
In addition, the market price of securities that are tied into the
market price of a natural resource will fluctuate on the basis of the
natural resource. However, there may not be a perfect correlation
between the movements of the asset-based security and the underlying
natural resource asset. Further, these securities typically bear
interest or pay dividends at below market rates, and in certain cases
at nominal rates.
Additional Principal Risks
Shares of Portfolios are not bank deposits and are not guaranteed or
insured by any bank, government entity or the Federal Deposit Insurance
Corporation. As with any mutual fund, there is no guarantee that a
Portfolio will be able to achieve its investment goals. If the value of
the assets of a Portfolio goes down, you could lose money.
Q: How have the Portfolios performed historically?
A: The following Risk/Return Bar Charts and Tables illustrate the risks of
investing in the Portfolios by showing changes in the Portfolios'
performance from year to year, and compare the Portfolios' average
annual returns to those of an appropriate market index. Of course, past
performance is not necessarily an indication of how a Portfolio will
perform in the future.
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GROWTH AND INCOME PORTFOLIO
To be filed by amendment
[BAR GRAPH OMITTED]
FIGURE 1
(Class ___)
During the 10-year period shown in the bar chart, the highest return
for a quarter was ____% (quarter ended _______) and the lowest return for a
quarter was -_____% (quarter ended _______).
<TABLE>
<CAPTION>
Average Annual Total Returns (as of Return
the calendar year ended December 31, Past One Past Five Past Ten Since
1998) Year Years Years Inception*
- ----- ---- ----- ----- ----------
<S> <C> <C> <C> <C>
Growth and Income Portfolio ______% ______% ______% ______%
Index** ______% ______% ______% ______%
</TABLE>
* Inception Date is _______________.
** Index to be filed by amendment.
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GROWTH PORTFOLIO
To be filed by amendment
[BAR GRAPH OMITTED]
FIGURE 2
(Class ___)
During the 10-year period shown in the bar chart, the highest return
for a quarter was ____% (quarter ended _______) and the lowest return for a
quarter was -_____% (quarter ended _______).
<TABLE>
<CAPTION>
Average Annual Total Returns (as of Return
the calendar year ended December 31, Past One Past Five Past Ten Since
1998) Year Years Years Inception*
- ----- ---- ----- ----- ----------
<S> <C> <C> <C> <C>
Growth Portfolio ______% ______% ______% ______%
Index** ______% ______% ______% ______%
</TABLE>
* Inception Date is _______________.
** Index to be filed by amendment.
8
<PAGE> 12
CAPITAL APPRECIATION PORTFOLIO
To be filed by amendment
[BAR GRAPH OMITTED]
FIGURE 3
(Class ___)
During the 10-year period shown in the bar chart, the highest return
for a quarter was ____% (quarter ended _______) and the lowest return for a
quarter was -_____% (quarter ended _______).
<TABLE>
<CAPTION>
Average Annual Total Returns (as of Return
the calendar year ended December 31, Past One Past Five Past Ten Since
1998) Year Years Years Inception*
- ----- ---- ----- ----- ----------
<S> <C> <C> <C> <C>
Capital Appreciation Portfolio ______% ______% ______% ______%
Index** ______% ______% ______% ______%
</TABLE>
* Inception Date is _______________.
** Index to be filed by amendment.
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<PAGE> 13
FOREIGN SECURITIES PORTFOLIO
To be filed by amendment
[BAR GRAPH OMITTED]
FIGURE 4
(Class ___)
During the 10-year period shown in the bar chart, the highest return
for a quarter was ____% (quarter ended _______) and the lowest return for a
quarter was -_____% (quarter ended _______).
<TABLE>
<CAPTION>
Average Annual Total Returns (as of Return
the calendar year ended December 31, Past One Past Five Past Ten Since
1998) Year Years Years Inception*
- ----- ---- ----- ----- ----------
<S> <C> <C> <C> <C>
Foreign Securities Portfolio ______% ______% ______% ______%
Index** ______% ______% ______% ______%
</TABLE>
* Inception Date is _______________.
** Index to be filed by amendment.
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<PAGE> 14
NATURAL RESOURCES PORTFOLIO
To be filed by amendment
[BAR GRAPH OMITTED]
FIGURE 5
(Class ___)
During the 10-year period shown in the bar chart, the highest return
for a quarter was ____% (quarter ended _______) and the lowest return for a
quarter was -_____% (quarter ended _______).
<TABLE>
<CAPTION>
Average Annual Total Returns (as of Return
the calendar year ended December 31, Past One Past Five Past Ten Since
1998) Year Years Years Inception*
- ----- ---- ----- ----- ----------
<S> <C> <C> <C> <C>
Natural Resources Portfolio ______% ______% ______% ______%
Index** ______% ______% ______% ______%
</TABLE>
* Inception Date is _______________.
** Index to be filed by amendment.
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MULTI-ASSET PORTFOLIO
To be filed by amendment
[BAR GRAPH OMITTED]
FIGURE 6
(Class ___)
During the 10-year period shown in the bar chart, the highest return
for a quarter was ____% (quarter ended _______) and the lowest return for a
quarter was -_____% (quarter ended _______).
<TABLE>
<CAPTION>
Average Annual Total Returns (as of Return
the calendar year ended December 31, Past One Past Five Past Ten Since
1998) Year Years Years Inception*
- ----- ---- ----- ----- ----------
<S> <C> <C> <C> <C>
Multi-Asset Portfolio ______% ______% ______% ______%
Index** ______% ______% ______% ______%
</TABLE>
* Inception Date is _______________.
** Index to be filed by amendment.
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STRATEGIC MULTI-ASSET PORTFOLIO
To be filed by amendment.
[BAR GRAPH OMITTED]
FIGURE 7
(Class ___)
During the 10-year period shown in the bar chart, the highest return
for a quarter was ____% (quarter ended _______) and the lowest return for a
quarter was -_____% (quarter ended _______).
<TABLE>
<CAPTION>
Average Annual Total Returns (as of Return
the calendar year ended December 31, Past One Past Five Past Ten Since
1998) Year Years Years Inception*
<S> <C> <C> <C> <C>
Strategic Multi-Asset Portfolio ______% ______% ______% ______%
Index** ______% ______% ______% ______%
</TABLE>
* Inception Date is _______________.
** Index to be filed by amendment.
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MONEY MARKET PORTFOLIO
To be filed by amendment.
[BAR GRAPH OMITTED]
(Class ___)
During the 10-year period shown in the bar chart, the highest return
for a quarter was ____% (quarter ended _______) and the lowest return for a
quarter was -_____% (quarter ended ______).
<TABLE>
<CAPTION>
Average Annual Total Returns (as of Return
the calendar year ended December 31, Past One Past Five Past Ten Since
1998) Year Years Years Inception*
<S> <C> <C> <C> <C>
Money Market Portfolio ______% ______% ______% ______%
Index** ______% ______% ______% ______%
</TABLE>
* Inception Date is _______________.
** Index to be filed by amendment.
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GOVERNMENT AND QUALITY BOND PORTFOLIO
To be filed by amendment.
[BAR GRAPH OMITTED]
FIGURE 9
(Class ___)
During the 10-year period shown in the bar chart, the highest return
for a quarter was ____% (quarter ended _______) and the lowest return for a
quarter was -_____% (quarter ended _______).
<TABLE>
<CAPTION>
Average Annual Total Returns (as of Return
the calendar year ended December 31, Past One Past Five Past Ten Since
1998) Year Years Years Inception*
<S> <C> <C> <C> <C>
Government and Quality Bond ______% ______% ______% ______%
Portfolio
Index** ______% ______% ______% ______%
</TABLE>
* Inception Date is _______________.
** Index to be filed by amendment.
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FIXED INCOME PORTFOLIO
To be filed by amendment.
[BAR GRAPH OMITTED]
FIGURE 10
(Class ___)
During the 10-year period shown in the bar chart, the highest return
for a quarter was ____% (quarter ended ______) and the lowest return for a
quarter was -_____% (quarter ended ______).
<TABLE>
<CAPTION>
Average Annual Total Returns (as of Return
the calendar year ended December 31, Past One Past Five Past Ten Since
1998) Year Years Years Inception*
<S> <C> <C> <C> <C>
Fixed Income Portfolio ______% ______% ______% ______%
Index** ______% ______% ______% ______%
</TABLE>
* Inception Date is _______________.
** Index to be filed by amendment.
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HIGH YIELD PORTFOLIO
TO BE FILED BY AMENDMENT
[BAR GRAPH OMITTED]
FIGURE 11
(Class ___)
During the 10-year period shown in the bar chart, the highest return
for a quarter was ____% (quarter ended ______) and the lowest return for a
quarter was -_____% (quarter ended _______).
<TABLE>
<CAPTION>
Average Annual Total Returns (as of Return
the calendar year ended December 31, Past One Past Five Past Ten Since
1998) Year Years Years Inception*
<S> <C> <C> <C> <C>
High Yield Portfolio ______% ______% ______% ______%
Index** ______% ______% ______% ______%
</TABLE>
* Inception Date is _______________.
** Index to be filed by amendment.
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FINANCIAL HIGHLIGHTS
The Financial Highlights table for each Portfolio is intended to help
you understand the Portfolio's financial performance for the past 5 years.
Certain information reflects financial results for a single Portfolio share. The
total returns in each table represent the rate that an investor would have
earned on an investment in the Portfolio (assuming reinvestment of all dividends
and distributions). This information has been audited by PricewaterhouseCoopers
LLP, whose report, along with each Portfolio's financial statements, are
included in the Statement of Additional Information (SAI), which is available
upon request.
ACCOUNT INFORMATION
Shares of each Portfolio are not offered directly to the public.
Instead, shares are currently 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"). All
shares of the Trust are owned by "Separate Accounts" of the Life Companies. So
if you would like to invest in a Portfolio, you must purchase a Variable
Contract. You should be aware that the contracts involve fees and expenses that
are not described in this Prospectus, and that the contracts also may involve
certain restrictions and limitations. Certain Portfolios 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, SunAmerica. Phoenix Mutual Life Insurance Company
and Presidential Life Insurance Company are not affiliates of SunAmerica. 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 SunAmerica. Nevertheless, the
Trust's Board of Trustees intends to monitor events in order to identify any
material irreconcilable conflicts that may possibly arise and to determine what
action, if any, should be taken in response. 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. You will find information about purchasing a Variable
Contract in the prospectus that offers such contracts, which accompanies this
Prospectus.
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TRANSACTION POLICIES
VALUATION OF SHARES The net asset value per share (NAV) for each Portfolio,
other than the Money Market Portfolio, is determined each business day at the
close of regular trading on the New York Stock Exchange (generally 4:00 p.m.,
Eastern time) by dividing its net assets by the number of its shares
outstanding. Investments for which market quotations are readily available are
valued at market. All other securities and assets of the Portfolios, except for
the Money Market Portfolio, are valued at "fair value" following procedures
approved by the Trustees, Securities held by the Money Market Portfolio are
valued on an amortized cost method.
The FOREIGN SECURITIES, NATURAL RESOURCES and STRATEGIC MULTI-ASSET PORTFOLIOS
may invest to a large extent in securities that are primarily listed on foreign
exchanges that trade on weekends or other days when the Trust does not price its
shares. As a result, the value of these Portfolios' shares may change on days
when you will not be able to purchase or redeem your shares.
BUY AND SELL PRICES The Separate Accounts buy and sells shares of a Portfolio
for NAV, without any sales or other charges.
EXECUTION OF REQUESTS The Trust is open on those days when the New York Stock
Exchange is open for regular trading. Buy and sell requests are executed at the
next NAV to be calculated after the request is accepted by the Trust. If the
order is received by the Trust before the Trust's close of business, it will
receive that day's closing price. If the order is received after that time, it
will receive the next business day's closing price.
During periods of extreme volatility or market crisis, a Portfolio may
temporarily suspend the processing of sell requests, or may postpone payment of
proceeds for up to seven business days or longer, as allowed by federal
securities laws.
DIVIDEND POLICIES AND TAXES
Each Portfolio declares and distributes, at least annually, substantially all of
its net investment income in the form of dividends and capital gains
distributions. Dividends, if any, on the Money Market Portfolio will be declared
daily and reinvested monthly in additional full and fractional shares of the
Portfolio. Dividends, if any, from the Growth and Income, Growth, Capital
Appreciation, Foreign Securities, Natural Resources, Multi-Asset, Strategic
Multi-Asset, Fixed Income and High Yield 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.
DIVIDEND REINVESTMENTS The dividends and distributions, if any, will be
automatically reinvested in additional shares of the same Portfolios on which
they were paid.
TAXABILITY OF A PORTFOLIO Each Portfolio intends to continue to qualify as a
regulated investment company under the Internal Revenue Code of 1986, as
amended. As long as each
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Portfolio is qualified as a regulated investment company, it will not be subject
to federal income tax on the earnings that it distributes to its shareholders.
MORE INFORMATION ABOUT THE PORTFOLIOS
INVESTMENT STRATEGIES
Each Portfolio has its own investment goal and a strategy for pursuing
it. The chart summarizes information about each Portfolio's investment approach.
We have included a glossary to define the investment and risk terminology used
in the chart and throughout this Prospectus.
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<TABLE>
<CAPTION>
CAPITAL
GROWTH & INCOME GROWTH APPRECIATION FOREIGN SECURITIES
---------------------- ---------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C>
What is the Portfolio's high current long-term capital long-term capital long-term capital
investment goal? income and long- appreciation appreciation appreciation
term capital
appreciation
What are the equity securities core equity growth equity core equity
Portfolio's principal that provide the securities that are securities across a securities issued by
investments (under potential for growth widely diversified wide range of foreign companies;
normal market and offer income, by industry and industries and opportunistically
conditions)? such as dividend- company companies, using invests in emerging
paying stocks an eclectic stock- markets and
picking approach smaller companies
</TABLE>
<TABLE>
<CAPTION>
NATURAL RESOURCES MULTI-ASSET
---------------------- ---------------------
<S> <C> <C>
What is the Portfolio's a total return in long-term total
investment goal? excess of the U.S. investment return
rate of inflation as with less risk than
represented by the Strategic Multi-
Consumer Price Asset Portfolio
Index
What are the equity securities of allocates the
Portfolio's principal U.S. or foreign Portfolio's assets
investments (under companies expected among equity
normal market to provide favorable securities,
conditions)? returns in periods investment grade
of rising inflation, fixed income
at least 65% securities and cash
related to
natural resources
such as energy,
metals, mining and
forest products
</TABLE>
21
<PAGE> 25
<TABLE>
<CAPTION>
CAPITAL
GROWTH & INCOME GROWTH APPRECIATION FOREIGN SECURITIES
---------------------- ---------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C>
What are the - stock and bond - stock market - stock market - foreign exposure
Portfolio's principal market volatility volatility volatility - emerging markets
risks? - securities - stock selection - stock selection - stock market
selection - small market - growth stocks volatility
- interest rate capitalization - small market - securities
fluctuations capitalization selection
- small market
capitalization
What other
investment strategies
can the Portfolio use?
- - Large company Yes Yes Yes Yes
stocks
- - Medium-sized Yes Yes Yes Yes
company stocks
- - Small company Yes Yes Yes Yes
stocks
</TABLE>
<TABLE>
<CAPTION>
NATURAL RESOURCES MULTI-ASSET
---------------------- ---------------------
<S> <C> <C>
What are the - foreign exposure - stock and bond
Portfolio's principal - emerging markets market volatility
risks? - stock market - stock selection
volatility - securities
- small market selection
capitalization - interest rate
- natural resources fluctuations
sectors - credit quality
- small market
capitalization
What other
investment strategies
can the Portfolio use?
- - Large company Yes Yes
stocks
- - Medium-sized Yes Yes
company stocks
- - Small company Yes Yes
stocks
</TABLE>
22
<PAGE> 26
<TABLE>
<CAPTION>
CAPITAL
GROWTH & INCOME GROWTH APPRECIATION FOREIGN SECURITIES
---------------------- ---------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C>
- - Warrants Yes Yes Yes Yes
- - Fixed income Yes (up to 35%) Yes Yes Yes (up to 20%)
securities
- - Investment grade Yes Yes Yes Yes
- - Junk bonds Yes (up to 20%) No No No
- - U.S. government Yes Yes Yes Yes
securities
- - Pass-through Yes -- -- --
securities
- - Short-term money Yes Yes Yes Yes
market instruments
- - Non-convertible -- -- -- --
preferred stocks
- - Convertible Yes Yes (up to 20%) Yes --
securities
- - Borrowing for Yes (up to 10%) Yes (up to 10%) Yes (up to 10%) Yes (up to 10%)
temporary or
emergency
purposes
- - Defensive Yes Yes Yes Yes
investments
- - Foreign securities Yes (up to 20%) Yes Yes (up to 25%) See principal
instruments above
ADRs/EDRs/GDRs Yes Yes Yes Yes
</TABLE>
<TABLE>
<CAPTION>
NATURAL RESOURCES MULTI-ASSET
---------------------- ---------------------
<S> <C> <C>
- - Warrants Yes Yes
- - Fixed income Yes
securities
Investment grade Yes See principal
investments above
- - Junk bonds No No
- - U.S. government Yes Yes
securities
- - Pass-through -- Yes
securities
- - Short-term money Yes Yes
market instruments
- - Non-convertible Yes --
preferred stocks
- - Convertible -- --
securities
- - Borrowing for Yes (up to 10%) Yes (up to 10%)
temporary or
emergency
purposes
- - Defensive Yes Yes
investments
- - Foreign securities Yes Yes
ADRs/EDRs/GDRs Yes Yes
</TABLE>
23
<PAGE> 27
<TABLE>
<CAPTION>
CAPITAL
GROWTH & INCOME GROWTH APPRECIATION FOREIGN SECURITIES
---------------------- ------------------- -------------------- --------------------
<S> <C> <C> <C> <C>
- - Currency Yes Yes Yes Yes
transactions
- - Illiquid securities Yes (up to 15%) Yes (up to 15%) Yes (up to 15%) Yes (up to 15%)
- - Options and futures Yes Yes Yes Yes
- - Forward Yes Yes Yes Yes
commitments
- - When-issued Yes Yes Yes Yes
/delayed delivery
transactions
- - Securities lending Yes (up to 33 1/3%) No No No
- - Special situations Yes Yes Yes Yes
- - Active trading Yes Yes Yes Yes
- - REITs Yes Yes Yes Yes
- - Other investment No No No No
companies
</TABLE>
<TABLE>
<CAPTION>
NATURAL RESOURCES MULTI-ASSET
------------------- -----------------
<S> <C> <C>
- - Currency Yes Yes
transactions
- - Illiquid securities Yes (up to 15%) Yes (up to 15%)
- - Options and futures Yes Yes
- - Forward Yes Yes
commitments
- - When-issued Yes Yes
/delayed delivery
transactions
- - Securities lending No No
- - Special situations Yes --
- - Active trading Yes Yes
- - REITs Yes --
- - Other investment Yes --
companies
</TABLE>
24
<PAGE> 28
<TABLE>
<CAPTION>
CAPITAL FOREIGN
GROWTH & INCOME GROWTH APPRECIATION SECURITIES
---------------------- ---------------------- ---------------------- -------------------
<S> <C> <C> <C> <C>
What other potential - foreign exposure - foreign exposure - foreign exposure - credit quality
risks can affect the - junk bonds - emerging markets - emerging markets - illiquidity
Portfolio? - credit quality - credit quality - credit quality - prepayment
- illiquidity - illiquidity - illiquidity - derivatives
- prepayment - prepayment - prepayment - hedging
- derivatives - derivatives - derivatives - small market
- hedging - hedging - hedging capitalization
- interest rate - interest rate - interest rate
fluctuations fluctuations fluctuations
</TABLE>
<TABLE>
<CAPTION>
NATURAL RESOURCES MULTI-ASSET
---------------------- ---------------------
<S> <C> <C>
What other potential - credit quality - foreign exposure
risks can affect the - illiquidity - emerging markets
Portfolio? - prepayment - illiquidity
- derivatives - prepayment
- hedging - derivatives
- hedging
- small market
capitalization
</TABLE>
25
<PAGE> 29
<TABLE>
<CAPTION>
STRATEGIC MULTI- GOVERNMENT AND
ASSET MONEY MARKET QUALITY BOND
---------------------- ------------------------- -----------------------
<S> <C> <C> <C>
What is the Portfolio's long-term total current income relatively high
investment goal? investment return consistent with current income,
stability of principal liquidity and security
of principal
What are the actively allocates a diversified portfolio obligations issued,
Portfolio's principal the Portfolio's of money market guaranteed or
investments (under assets among equity instruments maturing insured by the U.S.
normal market securities of U.S. in 397 days or less government, its
conditions)? and foreign and maintaining a agencies or
companies, mid- dollar-weighed instrumentalities and
and smaller equity average portfolio high quality
securities, global maturity of not more corporate fixed income
fixed income than 90 days securities
securities (including
high-yield, high-
risk bonds) and
cash. Each of these
areas is more
concentrated
because of the
benefits of
diversification
found in a multi-
asset portfolio.
</TABLE>
<TABLE>
<CAPTION>
FIXED INCOME HIGH YIELD
--------------------- -----------------------
<S> <C> <C>
What is the Portfolio's high level of high current income
investment goal? current income and secondarily
consistent with capital appreciation
preservation of
capital
What are the investment grade, high-yielding, high-
Portfolio's principal fixed income risk income
investments (under securities producing ("junk")
normal market bonds and other fixed
conditions)? income securities
</TABLE>
26
<PAGE> 30
<TABLE>
<CAPTION>
STRATEGIC MULTI- GOVERNMENT AND
ASSET MONEY MARKET QUALITY BOND
---------------------- ------------------------- -----------------------
<S> <C> <C> <C>
What are the - foreign exposure - bond market - bond market
Portfolio's principal - emerging volatility volatility
risks? markets - securities selection - securities
- stock and bond - interest rate selection
market volatility fluctuations - interest rate
- stock selection - credit quality fluctuations
- securities - credit quality
selection
- interest rate
fluctuations
- junk bonds
- credit quality
- small market
capitalization
What other
investment strategies
can the Portfolio use?
- - Large company Yes Yes Yes
stocks
- - Medium-sized Yes Yes Yes
company stocks
- - Small company Yes Yes Yes
stocks
- - Warrants Yes No Yes
- - Fixed income See principal
securities investments above -- --
</TABLE>
<TABLE>
<CAPTION>
FIXED INCOME HIGH YIELD
--------------------- -----------------------
<S> <C> <C>
What are the - bond market - bond market
Portfolio's principal volatility volatility
risks? - securities - securities
selection selection
- interest rate - interest rate
fluctuations fluctuations
- credit quality - junk bonds
- credit quality
What other
investment strategies
can the Portfolio use?
- - Large company Yes Yes
stocks
- - Medium-sized Yes Yes
company stocks
- - Small company Yes Yes
stocks
- - Warrants Yes (up to 10%) Yes
- - Fixed income
securities:
</TABLE>
27
<PAGE> 31
<TABLE>
<CAPTION>
Strategic Government and
Multi-Asset Money Market Quality bond Fixed Income High Yield
----------- ------------ ------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
Investment grade Yes See principal See principal
investments above investments above
Junk bonds See principal No No Yes (up to 20%) See principal
investments above investments above
U.S. government Yes Yes See principal Yes Yes
securities investments above
Pass-through Yes Yes Yes Yes Yes
securities
Short-term money Yes See principal Yes Yes Yes
market instruments investments above
Non-convertible Yes Yes Yes
preferred stocks
Convertible Yes Yes (up to 20%) Yes
securities
- - Borrowing for Yes (up to 10%) Yes (up to 10%) Yes (up to 10%) Yes (up to 10%) Yes (up to 10%)
temporary or
emergency
purposes
- - Defensive Yes No Yes Yes Yes
investments
- - Foreign securities See principal No Yes Yes Yes
investments above
ADRs/EDRs/GDR Yes No
</TABLE>
28
<PAGE> 32
<TABLE>
<CAPTION>
Strategic Government and
Multi-Asset Money Market Quality bond Fixed Income
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
- - Currency Yes No -- --
transactions
- - Illiquid securities Yes (up to 15%) Yes (up to 10%) Yes (up to 15%) Yes (up to 15%)
- - Options and futures Yes No Yes Yes
- - Forward Yes Yes Yes Yes
commitments
- - Zero-coupon bonds -- -- Yes Yes
- - When-issued Yes Yes Yes Yes
/delayed delivery
transactions
- - Securities lending No No No No
- - Special situations Yes -- -- --
- - Active trading Yes Yes Yes Yes
- - Reits Yes -- -- --
- - Other Investment
Companies -- -- -- --
What other potential - illiquidity - illiquidity - foreign exposure - foreign
risks can affect the - prepayment - prepayment - emerging markets exposure
Portfolio? - derivatives - illiquidity - emerging
- hedging - prepayment markets
- derivatives - illiquidity
- hedging - prepayment
- small market - derivatives
capitalization - hedging
- stock market - small market
volatility capitalization
- stock market
volatility
</TABLE>
<TABLE>
<CAPTION>
High Yield
----------
<S> <C> <C>
- - Currency
transactions Yes
- - Illiquid securities Yes (up to 15%)
- - Options and futures Yes
- - Forward Yes
commitments
- - Zero-coupon bonds Yes
- - When-issued Yes
/delayed delivery
transactions Yes
- - Securities lending No
- - Special situations --
- - Active trading Yes
What other potential
risks can affect the
Portfolio?
- foreign exposure
- emerging markets
- illiquidity
- prepayment
- derivatives
- hedging
- small market
capitalization
- stock market
volatility
</TABLE>
29
<PAGE> 33
Glossary
Investment Terminology
Large companies have market capitalizations of over $5 billion.
Medium-sized companies have market capitalizations ranging from $1 billion to $5
billion.
Small companies have market capitalizations of $1 billion or less.
Warrants are rights to buy common stock of a company at a specified price during
the life of the warrant.
Fixed income securities provide consistent interest or dividend payments. They
include corporate bonds, notes, debentures, preferred stocks, convertible
securities, U.S. Government securities and mortgage-backed and asset-backed
securities. The issuer of a senior fixed income security is obligated to make
payments on this security ahead of other payments to security holders.
An investment grade fixed income security is rated in one of the top four
ratings categories by a debt rating agency (or is considered of comparable
quality by SunAmerica). A "junk bond" is a high yield, high risk bond that does
not meet the credit quality standards of investment grade securities.
[Margin note: The two best-known debt rating agencies are Standard & Poor's
Rating Services, a Division of The McGraw-Hill Companies, Inc. and Moody's
Investors Service, Inc. "Investment grade" refers to any security rated "BBB" or
above by Standard & Poor's or "Baa" or above by Moody's.]
U.S. government securities are issued or guaranteed by the U.S. government, its
agencies and instrumentalities. Some U.S. government securities are issued or
unconditionally guaranteed by the U.S. Treasury. They are of the highest
possible credit quality. While these securities are subject to variations in
market value due to fluctuations in interest rates, they will be paid in full if
held to maturity. Other U.S. government securities are neither direct
obligations of, nor guaranteed by, the U.S. Treasury. However, they involve
federal sponsorship in one way or another. For example some are backed by
specific types of collateral; some are supported by the issuer's right to borrow
from the Treasury; some are supported by the discretionary authority of the
Treasury to purchase certain obligations of the issuer; and others are supported
only by the credit of the issuing government agency or instrumentality.
Pass-through securities involve various debt obligations that are backed by a
pool of mortgages or other assets. Principal and interest payments made on the
underlying asset pools are typically passed through to investors. Types of
pass-through securities include "mortgage-backed
30
<PAGE> 34
securities," "collateralized mortgage obligations," "commercial mortgage-backed
securities," and "asset-backed securities."
Short-term money market securities include money market securities such as
short-term U.S. government obligations, repurchase agreements, commercial paper,
bankers' acceptances and certificates of deposit. These securities provide a
Portfolio with sufficient liquidity to meet redemptions and cover expenses.
The Trust may borrow for temporary or emergency purposes including to meet
redemptions. Borrowing will cost the Trust interest expense and other fees.
Defensive investments include high quality fixed income securities and money
market instruments. A Portfolio will make temporary defensive investments in
response to adverse market, economic, political or other conditions. When a
Portfolio takes a defensive position, it may miss out on investment
opportunities that could have resulted from investing in accordance with its
principal investment strategy. As a result, a Portfolio may not achieve its
investment goal.
Foreign securities are issued by companies located outside of the United States,
including emerging markets. Foreign securities may include American Depositary
Receipts (ADRs), European Depositary Receipts (EDRs) and Global Depositary
Receipts (GDRs). ADRs are securities that trade in U.S. markets but represent
ownership interests in a foreign security. EDRs are receipts issued in Europe
that evidence ownership of either foreign or domestic underlying securities.
GDRs are issued globally and evidence a similar ownership arrangement.
Currency transactions include the purchase and sale of currencies to facilitate
securities transactions, and forward currency contracts, which are used to hedge
against changes in currency exchange rates.
Illiquid securities are subject to legal or contractual restrictions that may
make them difficult to sell. A security that cannot easily be sold within seven
days will generally be considered illiquid. Certain restricted securities (such
as Rule 144A securities) are not generally considered illiquid because of their
established trading market.
Options and futures are contracts involving the right to receive or obligation
to deliver assets or money depending on the performance of one or more
underlying assets or a market or economic index.
Forward commitments are commitments to purchase or sell securities at a future
date. A Portfolio purchasing a forward commitment assumes the risk of any
decline in value of the securities beginning on the date of the agreement.
31
<PAGE> 35
Zero coupon securities are non-interest bearing debt obligations payable in full
at maturity that 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. However, the value of zero coupon securities 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.
When-issued or delayed-delivery transactions call for the purchase or sale of
securities at an agreed-upon price on a specified future date. At the time of
delivery of the securities, the value may be more or less than the purchase
price.
Securities lending involves a loan of securities by a Portfolio in exchange for
cash or collateral. The Portfolio earns interest on the loan while retaining
ownership of the security.
A special situation arises when, in the opinion of the Subadviser, the
securities of a particular issuer will be recognized and appreciated in value
due to a specific development with respect to that issuer. Developments creating
a special situation might include, among others, a new product or process, a
technological breakthrough, a management change or other extraordinary corporate
event, or differences in market supply of and demand for the security.
Investments in special situations may carry an additional risk of loss in the
event that the anticipated development does not occur or does not attract the
expected attention.
Active trading means that a Portfolio may engage in frequent trading of
portfolio securities to achieve its investment goal. In addition, because a
Portfolio may sell a security without regard to how long it has held the
security, active trading may have tax consequences for certain shareholders,
involving a possible increase in short-term capital gains or losses. Active
trading may result in high portfolio turnover and correspondingly greater
brokerage commissions and other transaction costs, which will be borne directly
by a Portfolio. During periods of increased market volatility, active trading
may be more pronounced.
REITs (real estate investment trusts) are trusts that invest primarily in
commercial real estate or real estate related loans. The value of an interest in
a REIT may be affected by the value and the cash flows of the properties owned
or the quality of the mortgages held by the trust.
A Portfolio may invest in the securities of other investment companies
(including foreign investment companies) that make investments expected to
provide a hedge against anticipated inflation.
Risk Terminology
Market volatility: The stock and/or bond markets as a whole could go up or down
(sometimes dramatically). This could affect the value of the securities in a
Portfolio's portfolio.
32
<PAGE> 36
Securities selection: A strategy used by a Portfolio, or securities selected by
its portfolio manager, may fail to produce the intended return.
Growth stocks: Growth stocks can be volatile for several reasons. Since the
issuers usually reinvest a high portion of earnings in their own businesses,
growth stocks may lack the comfortable dividend yield associated with value
stocks that can cushion total return in a bear market. Also, growth stocks
normally carry a higher price/earnings ratio than many other stocks.
Consequently, if earnings expectations are not met, the market price of growth
stocks will often go down more than other stocks. However, the market frequently
rewards growth stocks with price increases when expectations are met or
exceeded.
Interest rate fluctuations: Volatility of the bond market is due principally to
changes in interest rates. As interest rates rise, bond prices typically fall;
and as interest rates fall, bond prices typically rise. Longer-term and lower
coupon bonds tend to be more sensitive to changes in interest rates.
Credit quality: The creditworthiness of the issuer is always a factor in
analyzing fixed income securities. An issuer with a lower credit rating will be
more likely than a higher rated issuer to default or otherwise become unable to
honor its financial obligations. This type of issuer will typically issue junk
bonds. In addition to the risk of default, junk bonds may be more volatile, less
liquid, more difficult to value and more susceptible to adverse economic
conditions or investor perceptions than other bonds.
Foreign exposure: Investors in foreign countries are subject to a number of
risks. A principal risk is that fluctuations in the exchange rates between the
U.S. dollar and foreign currencies may negatively affect an investment. In
addition, there may be less publicly available information about a foreign
company and it may not be subject to the same uniform accounting, auditing and
financial reporting standards as U.S. companies. Foreign governments may not
regulate securities markets and companies to the same degree as in the U.S.
Foreign investments will also be affected by local political or economic
developments and governmental actions. Consequently, foreign securities may be
less liquid, more volatile and more difficult to price than U.S. securities.
These risks are heightened when the issuer is in an emerging market. An emerging
market country is one that the World Bank, the International Finance
Corporation, or the United Nations or its authorities has determined to have a
low or middle income economy.
Illiquidity: Certain securities may be difficult or impossible to sell at the
time and the price that the seller would like.
Prepayment: Prepayment risk is the possibility that the principal of the loans
underlying pass-through securities such as mortgage-backed or other asset-backed
securities may be prepaid at any time. As a general rule, prepayments increase
during a period of falling interest rates and decrease during a period of rising
interest rates. As a result of prepayments, in periods of declining interest
rates a Portfolio may be required to reinvest its assets in securities with
lower interest rates. In periods of increasing interest rates, prepayments
generally may
33
<PAGE> 37
decline, with the effect that the securities subject to prepayment
risk held by a Portfolio may exhibit price characteristics of longer-term debt
securities.
Derivatives: A derivative is any financial instrument whose value is based on,
and determined by, another security, index or benchmark (i.e., stock options,
futures, caps, floors, etc.). In recent years, derivative securities have become
increasingly important in the field of finance. Futures and options are now
actively traded on many different exchanges. Forward contracts, swaps, and many
different types of options are regularly traded outside of exchanges by
financial institutions in what are termed "over the counter" markets. Other more
specialized derivative securities often form part of a bond or stock issue. To
the extent a contract is used to hedge another position in the portfolio, there
is a risk that changes in the value of the contract will not match those of the
hedged position. Moreover, while hedging can reduce or eliminate losses, it can
also reduce or eliminate gains. To the extent an option or futures contract is
used to enhance return, rather than as a hedge, a Portfolio will be directly
exposed to the risks of the contract. Gains or losses from non-hedging positions
may be substantially greater than the cost of the position.
Hedging: Hedging is a strategy in which a Portfolio uses a derivative security
to reduce certain risk characteristics of an underlying security or portfolio of
securities. While hedging strategies can be very useful and inexpensive ways of
reducing risk, they are sometimes ineffective due to unexpected changes in the
market. Hedging also involves the risk that changes in the value of the
derivative will not match those of the instruments being hedged as expected, in
which case any losses on the instruments being hedged may not be reduced.
Examples of hedging strategies are:
- Long Hedge - Strategy in which an investor locks in a future
price on a security/index by buying a futures contract.
- Neutral Hedge - Strategy that is designed to provide the
highest expected return on a portfolio of securities assuming
that the price of a particular investment in the portfolio
remains constant.
- Perfect Hedge - a hedge whose change in value is equal to the
change in value of the underlying security, positive or
negative.
- Short Hedge - Strategy designed to reduce the risk of a
decline in value of a security/index without requiring
ownership of that security.
34
<PAGE> 38
Small market capitalization: Companies with smaller market capitalizations
(particularly under $1 billion) tend to be at early stages of development with
limited product lines, market access for products, financial resources, access
to new capital, or depth in management. It may be difficult to obtain reliable
information and financial data about these companies. Consequently, the
securities of smaller companies may not be as readily marketable and may be
subject to more abrupt or erratic market movements.
Natural resources sector: The value of equity investments related to natural
resources will fluctuate pursuant to market conditions generally, as well as the
market for the particular natural resource in which the issuer is involved, and
are subject to numerous factors including events of nature and international
politics.
MANAGEMENT
Investment Adviser
SunAmerica Asset Management Corp. was organized in 1982 under the laws
of the state of Delaware. SunAmerica selects and manages the investments,
provides various administrative services, and supervises the daily business
affairs of each Portfolio. In addition to managing the Portfolios, SunAmerica
serves as adviser, manager and/or administrator for Anchor Pathway Fund, Anchor
Series Trust, Style Select Series, Seasons Series Trust, SunAmerica Income
Funds, SunAmerica Money Market Funds, Inc., and SunAmerica Series Trust.
SunAmerica managed, advised or administered assets in excess of $15 billion as
of October 31, 1998. For the fiscal year ended December 31, 1998, each Portfolio
paid SunAmerica a fee equal to the following percentage of average daily net
assets:
<TABLE>
<CAPTION>
Trust Fee
<S> <C>
Growth and Income Portfolio
Growth Portfolio
Capital Appreciation Portfolio
Foreign Securities Portfolio
Natural Resources Portfolio
Multi-Asset Portfolio
Strategic Multi-Asset Portfolio
Money Market Portfolio
Government and Quality Bond Portfolio
Fixed Income Portfolio
High Yield Portfolio
</TABLE>
35
<PAGE> 39
SunAmerica is located in The SunAmerica Center, 733 Third Avenue, New
York, New York 10017.
Subadviser
Wellington Management Company, LLP acts as Subadviser to each Portfolio
of the Trust, pursuant to a Subadvisory Agreement with SunAmerica. Wellington
Management is independent of SunAmerica and discharges its responsibilities
subject to the policies of the Trustees and the oversight and supervision of
SunAmerica which pays Wellington Management's fees.
Wellington Management is a Massachusetts limited liability partnership.
The principal business address of Wellington Management is 75 State Street,
Boston, Massachusetts 02109. Wellington Management is a professional investment
counseling firm that provides investment services to investment companies,
employee benefit plans, endowments, foundations, and other institutions and
individuals.
Portfolio Management
The following individuals are primarily responsible for the day-to-day
management of the particular Portfolios as indicated in the following chart:
<TABLE>
<S> <C> <C>
Portfolio Name and Title of
Portfolio Manager Experience
Growth and Income Matthew E. Megargel Mr. Megargel has served as the portfolio
Portfolio Senior Vice President manager for the Portfolio since 1998. He
joined Wellington Management in 1983
as _______.
Growth Portfolio Frank V. Wisneski Wellington Management's Growth
Senior Vice President Investment Team is comprised of
Messrs. Wisneski, Megargel and
Hamington and has been responsible for
managing the Portfolio since 1995.
Capital Appreciation Robert D. Rands Mr. Rands has served as the
Portfolio Senior Vice President portfolio manager for the
Capital Appreciation Portfolio
since its inception in 1987.
He joined Wellington
Management in 1978 as
________.
</TABLE>
36
<PAGE> 40
<TABLE>
<CAPTION>
Portfolio Name and Title of
Portfolio Manager Experience
<S> <C> <C>
Foreign Securities Trond Skramstad Mr. Skramstad has been responsible for
Portfolio Senior Vice President managing the Portfolio since 1994 and is
Chairman of Wellington Management'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.
Prior to joining Wellington Management
in 1993, Mr. Skramstad was an
international equity portfolio manager
and principal at Scudder, Stevens &
Clark since 1990.
Andrew S. Offit Mr. Offit has served as the associate
Vice President portfolio manager of the Portfolio since
1997. Prior to joining Wellington
Management as _______, in 1997, Mr.
Offit was a portfolio manager at
Chestnut Hill Management during 1997,
and at Fidelity Investments as ________,
from 1987 to _____.
Matthew E. Megargel See above.
Senior Vice President
John J. Harrington See above.
Vice President
Natural Resources Ernst H. von Metzsch Mr. von Metzsch has served as the
Portfolio Senior Vice President portfolio manager for the Portfolio
since 1994. He joined Wellington
Management in 1973 as _______.
</TABLE>
37
<PAGE> 41
<TABLE>
<CAPTION>
Portfolio Name and Title of
Portfolio Manager Experience
<S> <C> <C>
James Bevilacqua Mr. Bevilacqua has served as the
Vice President assistant portfolio manager of the
Portfolio since 1998. He joined
Wellington Management in 1994 as
_______. He was previously with
Anderson Consulting and General
Electric as _______ from _____ to
____.
Multi-Asset Portfolio Adam D. Seitchik See above.
Vice President
Matthew E. Megargel Mr. Megargel has served as associate
Senior Vice President portfolio manager since ____. See
above.
John C. Keogh Mr. Keogh has served as associate
Senior Vice President portfolio manager since _________. He
joined Wellington Management in 1983
Strategic Multi-Asset Adam D. Seitchik Mr. Seitchik has served as the strategist
Portfolio Vice President for the Portfolio since 1997. He joined
Wellington Management in 1994 as _______.
He was previously with John Hancock
Investment & Pension Group as _______
from ______ to _______.
Trond Skramstad See above. Mr. Skramstad has served as
Senior Vice President associate portfolio manager since 1998.
</TABLE>
38
<PAGE> 42
<TABLE>
<CAPTION>
Portfolio Name and Title of
Portfolio Manager Experience
<S> <C> <C>
Robert Evans Mr. Evans has served as associate
Vice President portfolio manager since 1998. He joined
Wellington Management in 1995 as _______.
Prior to joining Wellington Management,
Mr. Evans was a Senior Global Fixed
Income Portfolio Manager with Pacific
Investment Management Company from 1991
through 1994. Robert D. Rands See above.
Mr. Rands has served as Senior Vice
President associate portfolio manager
since ____.
Money Market Timothy E. Smith See above.
Portfolio Vice President
Government and John C. Keogh See above.
Quality Bond Senior Vice President
Portfolio
Fixed Income Thomas L. Pappas Mr. Pappas has served as the portfolio
Portfolio Senior Vice President manager for the Portfolio since 1995. He
joined Wellington Management in 1987 as _______.
High Yield Portfolio Catherine A. Smith Ms. Smith has served as the portfolio
Senior Vice President manager for the Portfolio since 1992.
She joined the Wellington Management in
1984 as _______.
</TABLE>
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.
39
<PAGE> 43
(OUTSIDE BACK COVER)
FOR MORE INFORMATION
The following documents contain more information about the Portfolios
and are available free of charge upon request:
Annual/Semi-annual Reports. Contain
financial statements, performance data and
information on portfolio holdings. The
annual report also contains a written
analysis of market conditions and investment
strategies that significantly affected a
Portfolio's performance for the most
recently completed fiscal year.
Statement of Additional Information (SAI).
Contains additional information about the
Portfolios' policies, investment
restrictions and business structure. This
prospectus incorporates the SAI by
reference.
You may obtain copies of these documents or ask questions about the
Portfolios by contacting:
Anchor National Life Insurance Company
Annuity Service Center
P.O. Box 54299
Los Angeles, California 90054-0299
1-800-445-7862
-or-
First Sun America Life Insurance Company
Service Center
P.O. Box 54299
Los Angeles, California 90054-0299
1-800-99-NYSUN (New York Shareholders)
1-800-445-SUN2 (all others)
Information about the Portfolios (including the SAI) can be reviewed and copied
at the Public Reference Room of the Securities and Exchange Commission,
Washington, D.C. Call (800) SEC-0330 for information on the operation of the
Public Reference Room. Information about the Portfolios is also available on the
Securities and Exchange Commission's web-site at http://www.sec.gov and copies
may be obtained upon payment of a duplicating fee by writing the Public
Reference Section of the Securities and Exchange Commission, Washington, D.C.
20549-6009.
You should rely only on the information contained in this prospectus. No one is
authorized to provide you with any different information.
[Logo]
Anchor National Life Insurance Company
1 SunAmerica Center
Los Angeles, California 90067-6022
First Sun America Life Insurance Company
733 Third Avenue
New York, New York 10017
INVESTMENT COMPANY ACT
File No. 811-3836
40
<PAGE> 44
STATEMENT OF ADDITIONAL INFORMATION
ANCHOR SERIES TRUST
This Statement of Additional Information is not a prospectus, but should be read
in conjunction with the current Prospectus of Anchor Series Trust (the "Trust")
dated ______________. This Statement of Additional Information incorporates the
Prospectus by reference. Capitalized terms used herein but not defined have the
meanings assigned to them in the Prospectus. The Prospectus may be obtained
without charge by writing to the Trust at the address below or by
calling .
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: _______, 1999
<PAGE> 45
TABLE OF CONTENTS
(TO BE REVISED)
<TABLE>
<CAPTION>
Page
----
<S> <C>
THE TRUST...................................................................................................... B-5
INVESTMENT OBJECTIVES AND POLICIES...............................................................................B-5
Objectives..............................................................................................B-5
Foreign Money Market Instruments........................................................................B-13
Variable and Floating Rate Instruments..................................................................B-13
Government Obligations..................................................................................B-14
When-Issued Securities..................................................................................B-15
Illiquid Securities.....................................................................................B-17
Foreign Securities......................................................................................B-18
Call and Put Options on Securities......................................................................B-19
Absence of Liquid Secondary Options Market..............................................................B-21
Regulation of Futures Contracts and Options Thereon.....................................................B-22
Futures Contracts on Fixed Income
Securities - Characteristics and Risks.........................................................B-23
Options on Futures Contracts............................................................................B-26
Warrants................................................................................................B-27
Stock Index Futures and Options Thereon.................................................................B-28
Stock Index Futures Characteristics and Risks...........................................................B-28
Options on Stock Index Futures and Risks................................................................B-31
Limitations on Stock Index Futures and Related
Options Transactions...........................................................................B-32
Foreign Currency Exchange Transactions..................................................................B-32
Options on Foreign Currencies ..........................................................................B-35
Futures Contracts on Foreign Securities................................................................ B-36
Additional Risks of Options on Foreign Currencies,
Forward Contracts and Futures Contracts on
Foreign Currencies ........................................................................... B-36
Loans of Portfolio Securities...........................................................................B-37
Interest Rate Swap Transactions ........................................................................B-38
Discount Bonds, Convertible Bonds and Preferred Stocks..................................................B-39
Certain Risk Factors Relating to High-Yield
(High-Risk) Bonds..............................................................................B-40
Investment Vehicles Designed to Track an Index ........................................................ B-41
INVESTMENT RESTRICTIONS..........................................................................................B-41
SUNAMERICA ASSET MANAGEMENT CORP.................................................................................B-43
Personal Securities Trading.............................................................................B-47
WELLINGTON MANAGEMENT COMPANY....................................................................................B-47
OFFICERS AND TRUSTEES OF THE TRUST...............................................................................B-49
CUSTODIAN........................................................................................................B-53
INDEPENDENT ACCOUNTANTS AND LEGAL COUNSEL........................................................................B-53
PORTFOLIO TRANSACTIONS AND BROKERAGE.............................................................................B-53
</TABLE>
B-3
<PAGE> 46
<TABLE>
<CAPTION>
<S> <C>
NET ASSET VALUE..................................................................................................B-57
Foreign Securities Portfolio............................................................................B-57
Money Market Portfolio..................................................................................B-58
DIVIDENDS, DISTRIBUTIONS AND TAXES...............................................................................B-59
GENERAL INFORMATION..............................................................................................B-61
OWNERSHIP OF SHARES..............................................................................................B-61
FINANCIAL STATEMENTS.............................................................................................B-62
</TABLE>
B-4
<PAGE> 47
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
eleven 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 "Account Information" 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, or "goals," of each of the
Portfolios, see "More Information About the Portfolios" in the Prospectus. The
following information is provided for those investors wishing to have more
comprehensive information than that contained in the Prospectus. Unless
otherwise specified, each Portfolio may invest in the following securities. The
stated percentage limitations are applied to an investment at the time of
purchase unless indicated otherwise.
ANCHOR SERIES GROWTH AND INCOME PORTFOLIO
The investment objective of the Growth and Income Portfolio is to
provide high current income and long-term capital appreciation. Under normal
circumstances, the Portfolio seeks to achieve its investment objective by
investing at least 65% of its total assets in securities that provide the
potential for growth and offer income. The Portfolio invests primarily in U.S.
common stocks that pay a dividend. Historically, a significant portion of the
return on common stocks has come from the income paid and the reinvestment of
that income. The dividend a stock pays has also provided some cushion during
periods of stock market volatility. As a result, the Portfolio applies a
conservative, long-term approach to stock selection, combining top-down sector
analysis with bottom-up security selection based on fundamental research.
The Portfolio may 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
B-5
<PAGE> 48
exchange. The Portfolio anticipates that the majority of its foreign investments
will be in Depositary Receipts, such as ADRs.
ANCHOR SERIES GROWTH PORTFOLIO
The investment objective of the Growth Portfolio is to seek capital
appreciation primarily through investments in growth equity securities. Under
normal circumstances, the Portfolio will remain fully invested in equity
securities, with most of its holdings in U.S. common stocks. The Portfolio
invests predominantly in larger companies, but normally will also invest in
smaller companies. The Portfolio will be widely diversified by industry and
company. Equity securities selected for the Portfolio may possess both growth
and value style characteristics. The Portfolio is well diversified and its
investments are more broadly represented within each industry sector than more
concentrated portfolios which may take bigger industry bets. As a result, the
Portfolio should be viewed as a core U.S. equity portfolio. The Portfolio favors
stocks of seasoned companies with proven records and above-average earnings
growth, and stocks of smaller companies with outstanding growth records and
potential.
The Portfolio may also invest up to 25% of its assets in foreign
securities. This includes direct investments through purchases in foreign
markets, as well as indirect investments through purchases of Depositary
Receipts, such as ADRs.
ANCHOR SERIES CAPITAL APPRECIATION PORTFOLIO
The investment objective of the Capital Appreciation Portfolio is to
seek long-term capital appreciation primarily through investments in equity
securities. Under normal circumstances, the Portfolio invests the largest
portion of its assets in the common stocks of U.S. companies and will be highly
diversified by company, industry and market capitalization. The Portfolio may
also be highly diversified by company, industry and market capitalization. The
Portfolio may also invest in cash equivalents and index futures. Up to 25% of
the portfolio's assets may be invested in securities of foreign companies. This
includes direct investments through purchases in foreign markets, as well as
indirect investments through purchases of Depositary Receipts, such as ADRs.
The Portfolio follows as dynamic investment approach. Investments will
be selected from a broad universe of securities on the basis of the
Sub-Adviser's assessment of the potential for capital appreciation. As a result,
investments used in the future may be different from those used today. In
addition, investors should expect the Portfolio's focus on particular companies,
industries, countries, styles and market capitalizations to vary as a result of
new and changing investment opportunities and the Sub-Adviser's stock selection
process. Because large positions may be taken, the risk of the portfolio manager
being wrong is larger than in an index fund or some other more passive
investment.
B-6
<PAGE> 49
The Portfolio favors stocks of smaller companies which may be newer and
less seasoned, stocks of companies in new or changing industries, and stocks
with greater potential for future appreciation in value - including under-valued
or low-priced securities.
ANCHOR SERIES FOREIGN SECURITIES PORTFOLIO
The investment objective of the Foreign Securities Portfolio is
long-term capital appreciation through investment in a diversified portfolio
primarily composed of equity securities issued by non- U.S. companies. The
Portfolio invests in common stocks of a highly diversified group of companies
and industries world-wide. Diversification can be a benefit or a detriment to
Portfolio performance. Generally, diversification helps reduce the volatility or
variability of the Portfolio's returns relative to another portfolio which
invests in fewer stocks or whose investments are focused in fewer countries or
industry sectors.
The Portfolio invests primarily in stock of companies which are
considered large to medium-sized (measured by market capitalization) in the
markets where these investments trade. The Portfolio may also invest in smaller
companies when management views them as attractive alternatives to the stocks of
larger or more established companies. The Portfolio will make direct investments
in foreign equities by purchasing stocks in foreign markets, as well as indirect
investments in foreign equities through purchases of Depositary Receipts, such
as ADRs.
The Portfolio invest primarily in stocks which trade in larger or more
established markets, but may also invest (to a lesser degree) in smaller,
less-developed or emerging markets, where management believes there is
significant opportunity for growth of capital. The definition of "emerging
markets" may change over time as a result of development in national or regional
economies and capital markets. Within emerging market investments, the Portfolio
seeks to participate in the more established markets which management believes
provide sufficient liquidity.
At present, the Portfolio's investment strategy focuses on large
capitalization, high quality companies issued in developed stock markets around
the world. However, the Portfolio follows a dynamic investment approach, and in
the future the Portfolio's investment strategy may change to accommodate future
market conditions. For example, the Portfolio could invest more in less
established companies or markets. In addition, the combination of investments in
a diversified portfolio such as the Portfolio may react to world economic and
political events in unexpected ways. There is no guarantee that the Portfolio
will meet its investment objectives.
ANCHOR SERIES NATURAL RESOURCES PORTFOLIO
B-7
<PAGE> 50
The investment objective of the Natural Resources Portfolio is to
provide total return in excess of the U.S. rate of inflation as represented by
the Consumer Price Index. The Portfolio invests primarily in equity and
equity-related securities of companies world-wide which are expected to benefit
from rising demand for natural resources and natural-resource based products and
services. The Portfolio invests in four principal areas:
- Energy. The energy sector includes companies engaged in
exploration, extraction, servicing, processing, distribution
and transportation of oil, natural gas and other energy
sources.
- Metals and mining. The metals and mining sector includes
companies engaged in exploration, mining, processing,
fabrication, marketing or distribution of precious and
non-precious metals and minerals. The Portfolio will invest at
least 25% of its assets in securities of companies in
gold-related industries.
- Forest products. The forest product sector includes timber,
pulp and paper product companies.
- Other natural resources. Other natural resource-based
companies, including companies engaged in real estate and the
production, processing and distribution of agricultural
products, fertilizer and miscellaneous raw materials.
Under normal circumstances, the Portfolio will invest principally in
equity securities. The Portfolio will invest in domestic securities as well as
foreign securities. The Portfolio will make direct investments in foreign
equities by purchasing stock in foreign markets, as well as indirect investments
in foreign equities through purchases of Depositary Receipts, such as ADRs.
ANCHOR SERIES MULTI-ASSET PORTFOLIO
The investment objective of the Multi-Asset Portfolio is to seek high
long-term total investment return. Total return consists of any income (such as
dividends and interest) plus any capital gains and losses from the Portfolio's
investments. The Portfolio seeks high long-term investment returns through a
combination of income and price appreciation from investments in U.S. common
stocks and fixed income securities. Currently the Portfolio is invested more in
stocks than in fixed income securities. This may change over time in response to
the Sub-Adviser's outlook on the return potential of stocks, bonds and cash. The
Sub-Adviser allocates the assets of the Portfolio among the following
sub-Portfolios:
- Core Equity Sub-Portfolio - The Core Equity Sub-Portfolio
invests primarily in securities that provide the potential for
growth and offer income. The Sub-Portfolio generally invests
in U.S. common stocks that pay a dividend. Historically, a
significant portion of the return on common stocks has come
from the income paid and the reinvestment of that income. The
dividend a stock pays has also provided some cushion during
period of stock market volatility. As a result, the
Sub-Portfolio applies a conservative, long-term
B-8
<PAGE> 51
approach to stock selection, combing top-down sector analysis
with bottom-up security selection based on fundamental
research.
- Core Bond Sub-Portfolio - The Core Bond sub-Portfolio invests
primarily in "investment-grade" bonds and other fixed income
securities. Investment grade securities are those rated at the
time of purchase "Baa" or better by Moody's or "BBB" or better
by S&P or unrated securities that are deemed to be a
comparable quality by the Sub-Adviser. These securities may be
issued in the U.S. or abroad, but generally will be
denominated in U.S. dollars.
ANCHOR SERIES STRATEGIC MULTI-ASSET PORTFOLIO
The investment objective of the Strategic Multi-Asset Portfolio is to
seek high long-term total investment return. Total return consists of any income
(such as dividends and interest) plus any capital gains and losses from the
Portfolio's investments. The Portfolio invests in global common stocks and fixed
income securities. Investments in fixed income securities may include "high
yield/high risk" securities or "junk bonds" issued in the U.S. or abroad.
Investments in common stocks include investments in smaller companies as well as
non-U.S. stocks. The ratio of stocks to bonds is currently weighted more towards
stocks than in the case of the Multi-Asset Portfolio. This may change over time
in response to the Sub-Adviser's outlook on the return potential of stocks,
bonds and cash. The Sub-Adviser's management team meets frequently, and a high
level of integration exists in the decision-making between the managers of the
Sub-Portfolios. Each sub- Portfolio is more highly concentrated than a
stand-alone version would be in recognition of the diversification already
present in the total Portfolio. The Sub-Advisor allocates the assets of the
Portfolio among the following sub-Portfolios:
- Global Core Equity Sub-Portfolio- The Global Core Equity
Sub-Portfolio invests in common stocks of a highly diversified
group of companies and industries world-wide. The
Sub-Portfolio invests primarily in stocks of companies which
are considered large to medium-sized (measured by market
capitalization) in the markets where these investments trade.
The Sub-Portfolio may also invest in smaller companies when
management views them as attractive alternatives to the stocks
of large or more established companies. The Sub-Portfolio will
make direct investments in foreign equities by purchasing
stocks in foreign markets, as well as indirect investments in
foreign equities through purchases of Depositary receipts,
such as ADRS. The Sub-Portfolio invests primarily in stocks
which trade in larger or more established markets, but may
also invest (to a lesser degree) in smaller, less-developed or
emerging markets, where management believes there is
significant opportunity for growth of capital. The definition
of "emerging markets" may change over time as a result of
development in national or regional economies and capital
markets. Within emerging market investments,
B-9
<PAGE> 52
the Sub-Portfolio seeks to participate in the more established
markets which management believes provide sufficient
liquidity.
- Global Core Bond Plus Sub-Portfolio - The Global Core Bond
Plus Sub-Portfolio seeks 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 (including
their agencies and instrumentalities), and supranational
agencies. The Sub-Portfolio may invest in "investment-grade"
bonds and other fixed income securities. Investment grade
securities are those rated at the time of purchase "Baa" or
better by Moody's or "BBB" or better by S&P, or unrated
securities that are deemed to be of comparable quality by the
Sub-Adviser. The Sub-Portfolio may also invest in securities
rated at the time of purchase below "Baa" by Moody's or "BBB"
by S&P, commonly referred to as "junk bonds" or "high
yield/high risk" securities, or in unrated securities that are
of comparable quality as determined by the Sub-Adviser.
- 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 Sub-Portfolio invests in substantially the
same securities as the Capital Appreciation Portfolio.
ANCHOR SERIES MONEY MARKET PORTFOLIO
The investment objective of the Money Market Portfolio is current
income consistent with stability of principal.
The Portfolio will comply with the rules and regulations of the
Securities and Exchange Commission applicable to money market funds. These
regulations impose certain quality, maturity and diversification guidelines on
investments of the Portfolio. As a result, the Portfolio will invest in
instruments maturing in 397 days or less and maintain a dollar-weighted average
portfolio maturity of not more than 90 days.
The Portfolio will be reinvested in obligations denominated in U.S.
dollars which at the time of purchase are "eligible securities" as defined by
the SEC. Under SEC regulations, an eligible security generally is an instrument
that is rated in the highest rating category for short-term debt obligations, or
unrated security which is determined by the Sub-Adviser to be of comparable
quality. Eligible securities may include:
- Commercial paper and other short-term obligations of U.S. and
foreign corporations.
- Certificates of deposit, time deposits, bank notes, bankers'
acceptances and other obligations 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
B-10
<PAGE> 53
parent institution) have total assets of $500 million or more
as shown on their last published financial statements at the
time of investment.
- Obligations issued or guaranteed as to principal and interest
by the U.S. government or its agencies or instrumentalities.
- Short-term obligations issued by state and local governments.
- Obligations of foreign governments, including Canadian and
Provincial Government and Crown Agency Obligations.
- Asset-backed securities and other interests in special purpose
trusts designed to meet the quality and maturity requirements
applicable to eligible securities.
- Repurchase agreements.
ANCHOR SERIES GOVERNMENT AND QUALITY BOND PORTFOLIO
The investment objective of the Government and Quality Bond Portfolio
is relatively high current income, liquidity and security of principal. Under
normal circumstances, the Portfolio will invest in government securities and
high quality corporate bonds of any maturity, including (a) obligations issued,
guaranteed or insured by the U.S. Government, its agencies or instrumentalities
("government securities"); (b) high quality corporate debt securities rated at
the time of purchase at least Aa by Moody's or AA by S&P, or unrated securities
that are deemed to be of comparable quality by the Sub-Adviser ("high quality
corporate bonds"); and (c) U.S. dollar-denominated foreign government and
corporate debt securities of comparable quality.
The Portfolio will invest at least 80% of its total assets in
government securities and high quality corporate bonds. In addition, up to 20%
of the Portfolio may be invested in bonds rated as low as A by Moody's or S&P,
or unrated securities that are deemed to be of comparable quality by the
Sub-Adviser. At present, the Portfolio expects to invest a majority of its
assets in government securities.
The Portfolios will invest a significant portion of its assets in
mortgage-backed securities, including those known as "Ginnie Maes" or GNMA
securities and collateralized mortgage obligations or CMOs, which represent a
participation in the principal and interest payments arising from a pool of
residential mortgages.
ANCHOR SERIES FIXED INCOME PORTFOLIO
The investment objective of the Fixed Income Portfolio is to seek a
high level of current income consistent with preservation of capital. Under
normal circumstances, the Portfolio will invest at least 80% of its total assets
in (a) marketable debt securities of domestic and foreign issuers rated at the
time of purchase at least "Baa" by Moody's or "BBB" by S&P, commonly known as
"investment grade securities," or unrated securities that are deemed to be of
comparable quality by the Sub-Adviser; (b) securities issued or guaranteed by
foreign or U.S. government or their respective agencies or instrumentalities,
including mortgage-backed
B-11
<PAGE> 54
securities: (c) commercial paper rated at the time of purchase Prime-1 by
Moody's or A-1 by S&P; and (d) obligations of banks with total assets in excess
of $1 billion.
The Portfolio may also invest up to 205 of its total assets in
securities rated below "Baa" by Moody's or "BBB" by S&P, commonly referred to as
"junk bonds" or "high yield/high risk" securities, or in unused securities that
are deemed to be of comparable quality by the Sub-Adviser. Presently, the
Sub-Adviser intends to take advantage of the Portfolio's capacity to invest in
high yield/high risk securities.
ANCHOR SERIES HIGH YIELD PORTFOLIO
The primary investment objective of the High Yield Portfolio is to
produce high current income. A secondary investment objective is capital
appreciation. Under normal circumstances, the Portfolio will invest at least 65%
of its total assets in securities rated at the time of purchase below "Baa" by
Moody's or "BBB" by S&P, commonly referred to as "junk bonds" or "high
yield/high risk" securities. The Portfolio will also invest in unrated
securities that are of comparable quality as determined by the Sub-Adviser. The
Portfolio generally invests in: (a) high yield/high risk bonds and other debt
obligations; and (b) convertible securities, such as preferred stocks that may
be converted into common stocks or other equity interests. The Portfolio's
investments may be issued by: U.S. and foreign companies; foreign governments
and their agencies and instrumentalities; and supranational agencies.
To reduce the risk of loss from credit deterioration, the Portfolio
will be broadly diversified by region, industry and issuer. Sector and quality
weightings, as well as individual holdings, will vary and depend upon relative
valuations. The average maturity of the Portfolio will generally range from 7
to12 years. In contrast to investment-grade securities, the prices of high yield
securities are less sensitive to interest rate movements and more sensitive to
the underlying credit quality of the issuer. Consequently, the maturity
structure of the Portfolio will tend to be a by-product of security selection
rather than interest rate anticipation.
The Portfolio may invest without limit in unrated securities, if the
Sub-Adviser believes that such securities offer a relatively high yield without
undue risk.
High yield/high risk securities generally have higher yields than
higher-rated, investment-grade rated securities of the same maturity. However,
if the yield difference between lower-rated and higher-rated securities narrows,
the Portfolio may purchase higher-rated securities. The Portfolio generally will
purchaser higher-rated securities only if the Sub-Adviser believes that yield
will not decrease significantly as a result of such investment. However, the
Portfolio may also need to purchase higher-rated securities to maintain the
liquidity necessary to meet redemption requests from its shareholders.
B-12
<PAGE> 55
A significant portion of the Portfolio's investments are purchased and
sold in large institutional markets. Many of these transactions are exempted
from the registration requirements of the securities laws pursuant to Rule 144A
of the Securities Act. While many of these so-called "Rule 144A securities" are
considered liquid, the liquidity of these investments may be affected by the
actions of a few institutional investors.
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.
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
The Portfolios of the Trust may purchase variable or floating rate
instruments which include a demand feature, such as variable amount master
demand notes. Variable or floating rate instruments bear interest at a rate that
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.
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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 investments for the Money Market Portfolio. The
Subadviser 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 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 Administration, Small Business Administration and the
Tennessee Valley Authority. As noted in the Prospectus, certain 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.
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.
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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.
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 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.
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SHORT-TERM INVESTMENTS
Although the Money Market 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,"
below.) 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 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
Securities Act of 1933, as amended (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 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' Subadviser 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 Subadviser 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).
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Each of the Portfolios may invest in commercial paper issued in
reliance on the so-called private placement exemption from registration 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 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 Multi-Asset, Strategic
Multi-Asset and Money Market 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 Growth and Income, Growth, Capital Appreciation, Foreign
Securities, Natural Resources, Multi-Asset, Strategic Multi-Asset, Government
and Quality Bond and Fixed Income Portfolios may invest in foreign debt and
equity securities. The High Yield Portfolio may invest in foreign debt
securities.
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
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supervision and regulation of securities exchanges, brokers, and listed
companies than in the United States.
CALL AND PUT OPTIONS ON SECURITIES
The Growth and Income, Growth, Capital Appreciation, Natural Resources,
Multi-Asset, Strategic Multi-Asset, Fixed Income and High Yield Portfolios may
purchase call and put options on securities or financial indices to enhance
income or hedge its Portfolio. These options may be on securities, aggregates of
securities, financial indices (i.e., the Standard & Poor's 500 Composite Stock
Price Index (the "S&P 500 Index")) and U.S. government securities and may be
either exchange-traded or over-the-counter ("OTC"). The purpose of these
investments is to gain market exposure with limited loss potential. These
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. 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.
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.
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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 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 "Absence of Liquid Secondary Options Market," below, for reasons
why a liquid secondary options market may not exist.
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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 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.
NATURAL RESOURCES
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 Subadviser 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
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subject to numerous factors including events of nature and international
politics. The Subadviser will seek securities that are attractively priced
relative to the intrinsic value of the relevant natural resource, or that are of
companies positioned to benefit during particular portions of the inflationary
cycle.
It is expected that the market price of securities that are tied into
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.
REGULATION OF FUTURES CONTRACTS AND OPTIONS THEREON
Each Portfolio (other than the Money Market Portfolio) may purchase and
sell financial futures contracts and options thereon that 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 ("CFTC"). 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
that are linked to the London Interbank Offered Rate (LIBOR).
The use of exchange traded futures contracts and options thereon by the
Portfolios is subject to regulation by various governmental bodies, including
the SEC and the 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 SEC regulates the dealer community, and in
general, the banks acting as counterparties are regulated by the Office of the
Comptroller of the Currency.
SPECIAL RISKS OF OPTIONS AND FUTURES
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 Subadviser'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
Subadviser's ability to predict correctly movements in the direction of interest
rates and securities prices;
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(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.
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. (See "Fixed Income Securities" below.) 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 that 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
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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 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 that 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 that 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.
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
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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 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.
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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 that are traded on an exchange
in order to hedge against adverse price movements and may 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 a 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.
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
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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 Wellington Management, 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 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.
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 Subadviser deems it appropriate to do so. A Portfolio may realize short-term
profits or losses upon the sale of forward commitments.
WARRANTS
Each Portfolio (other than the Money Market 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
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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 Subadviser, 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 stock index
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 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 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
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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
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
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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 that will not be
completely offset by movements in the price of the securities that 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 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.
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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 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 that 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 put options 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
that 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 Wellington Management, 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 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 each Portfolio (other than the Money
Market Portfolio) may temporarily be held in bank deposits in foreign currencies
during the completion of investment programs, the value of the assets of a
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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 Subadviser 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
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
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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.
A Portfolio is 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 Subadviser. 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 that 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. All or a portion of the foreign
securities purchased by a Portfolio may be in the form of such Depositary
Receipts and other similar global instruments. 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 foreign banks and trust companies, and evidence ownership of either
foreign or domestic underlying securities.
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OPTIONS ON FOREIGN CURRENCIES
The Growth and Income, Growth, Capital Appreciation, Natural Resources,
Strategic Multi-Asset and High Yield 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 that 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 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 that 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.
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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 a foreign currency futures contract to
achieve the same objectives discussed above with 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
B-36
<PAGE> 79
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.
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
that 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
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
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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 be made only to firms deemed by the Subadviser 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 Foreign Securities Portfolio, Natural Resources Portfolio, Growth
and Income Portfolio, Strategic Multi-Asset Portfolio, Multi-Asset Portfolio,
High Yield Portfolio and Fixed Income 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 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.
FIXED INCOME SECURITIES
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Each Portfolio may invest, subject to the percentage and credit quality
limitations stated herein and in the Prospectus, in fixed income securities,
including corporate debt obligations issued by corporations and governments.
The convertible securities in which the Growth and Income 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 Subadviser. 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 below for a discussion of the risks associated with
lower-rated, high-yield securities.
The High Yield Portfolio will pursue its goal 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." The
Portfolio may invest, without limit, in unrated securities if such securities
offer, in the opinion of the Subadviser, 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 Subadviser 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 Subadviser believes that
the risk of loss of income and principal may be substantially reduced with only
a relatively small reduction in yield.
Consistent with the Fixed Income Portfolio's investment objective, the
Portfolio may have up to 20% of its assets invested in instruments that are not
investment grade, including preferred stocks, when individually attractive
yields offset lower credit quality.
Up to 20% of the Government and Quality Bond 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 Subadviser to be of comparable quality.
See the Appendix for a description of corporate bond and commercial
paper ratings.
DISCOUNT BONDS, CONVERTIBLE BONDS AND PREFERRED STOCKS
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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 that 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
that 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 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 Subadviser 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 "More Information About the Portfolios."
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.
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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 decrease the values and liquidity of high-yield bonds, especially
in a thin market.
INVESTMENT 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 that correspond generally to the performance of a particular benchmark
index, such as the S&P 500 Index or a Morgan Stanley Capital International
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 1940 Act 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 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.
INVESTMENT RESTRICTIONS
The Trust has adopted the following restrictions relating to the
investment of assets of the 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 the approval of a majority of the outstanding
shares of such Portfolio. Except as otherwise indicated, none of the eleven
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
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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 Wellington Management or SunAmerica
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 that are secured by real estate and securities of
companies that invest or deal in real estate.
8. Act as underwriter except to the extent that, in connection
with the disposition of portfolio securities, 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.
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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); (b) repurchase
agreements (subject to the limitation in paragraph 11 above);
and (c) as otherwise permitted by exemptive order of the SEC.
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. (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 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 and Income, Growth,
Capital Appreciation, Natural Resources, Multi-Asset,
Strategic Multi-Asset, Fixed Income and High Yield Portfolios.
SUNAMERICA ASSET MANAGEMENT CORP.
SunAmerica Asset Management Corp. ("SunAmerica"), 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
Portfolios of the Trust.
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SunAmerica is engaged in providing investment advice and management
services to the Trust, other mutual funds, pension funds, and related assets and
programs offered by affiliated companies. SunAmerica also provides investment
advice to individual companies and clients. As of October 31, 1998, SunAmerica
advised and/or administered in excess of $15 billion of assets. SunAmerica
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 SunAmerica. 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 SunAmerica or Wellington Management. SunAmerica is a wholly-owned
subsidiary of SunAmerica, Inc., which is a wholly-owned subsidiary of American
International Group, Inc. ("AIG"), the leading U.S.-based international
insurance organization.
AIG, a Delaware corporation, is a holding company that through its
subsidiaries is primarily engaged in a broad range of insurance and insurance
related activities and financial services in the United States and abroad. AIG,
through its subsidiaries, is also engaged in a range of financial services
activities. AIG's asset management operations are carried out primarily by AIG
Global Investment Group, Inc., a direct wholly owned subsidiary of AIG, and its
affiliates (collectively, "AIG Global"). AIG Global manages the investment
portfolios of various AIG subsidiaries, as well as third party assets, and is
responsible for product design and origination, marketing and distribution of
third party asset management products, including offshore and private investment
funds and direct investment. As of June 30, 1998, AIG Global managed more than
$86 billion of assets, of which approximately $10.8 billion represented assets
of unaffiliated third parties. AIG Capital Management Corp., an indirect
wholly-owned subsidiary of AIG Global Investment Group, Inc., serves as
investment adviser to The AIG Money Market Fund, a separate series of The
Advisors' Inner Circle Fund, a registered investment company. In addition, AIG
Global Investment Corp., an AIG Global group company, serves as the
sub-investment adviser to an unaffiliated registered investment company. AIG
companies do not otherwise provide investment advice to any registered
investment companies.
The Advisory Agreement provides that SunAmerica 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 SunAmerica'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
SunAmerica or Wellington Management), the charges and expenses of independent
accountants, legal counsel, 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
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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 SunAmerica, or
by SunAmerica, 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, SunAmerica 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, SunAmerica 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>
Growth and Income $0-$100 million .700%
>$100 million .650%
>$250 million .600%
>$500 million .575%
Growth $0-$250 million .750%
>$250 million .675%
>$500 million .600%
Capital Appreciation $0-$100 million .750%
</TABLE>
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<PAGE> 88
<TABLE>
<S> <C> <C>
>$100 million .675%
>$250 million .625%
>$500 million .600%
Foreign Securities $0-$100 million .900%
>$100 million .825%
>$250 million .750%
>$500 million .700%
Multi-Asset,
Strategic Multi-Asset
$0-$200 million 1.000%
>$200 million .875%
>$500 million .800%
Money Market $0-$150 million .500%
>$150 million .475%
>$250 million .450%
>$500 million .425%
Government & Quality Bond,
Fixed Income
$0-$200 million .625%
>$200 million .575%
>$500 million .500%
High Yield $0-$250 million .700%
>$250 million .575%
>$500 million .500%
</TABLE>
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, 1998, 1997, and 1996.
ADVISORY FEES
<TABLE>
<CAPTION>
FUND 1998 1997 1996
---- ---- ---- ----
<S> <C> <C> <C>
Growth and Income Portfolio $280,911 $220,009
</TABLE>
B-46
<PAGE> 89
<TABLE>
<S> <C> <C>
Growth Portfolio $3,049,207 $2,393,836
Capital Appreciation Portfolio $4,366,046 $3,030,849
Foreign Securities Portfolio $404,182 $473,257
Natural Resources Portfolio $380,856 $302,086
Multi-Asset Portfolio $1,501,407 $1,569,359
Strategic Multi-Asset Portfolio $563,207 $597,679
Money Market Portfolio $383,800 $432,146
Government and Quality Bond Portfolio $1,364,101 $1,392,653
Fixed Income Portfolio $124,001 $152,430
High Yield Portfolio $286,254 $313,621
</TABLE>
PERSONAL SECURITIES TRADING
The Trust and SunAmerica 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.
Finally, the Subadviser 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
Subadviser 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 Subadviser to all of the
Portfolios of the Trust, pursuant to the Subadvisory Agreement with SunAmerica.
(See "Management" in
B-47
<PAGE> 90
the Prospectus for additional information concerning the Subadviser.) Under
the Subadvisory Agreement, the Subadviser manages the investment and
reinvestment of each of the Portfolios. The Subadviser is independent of
SunAmerica and discharges its responsibilities subject to the policies of the
Trustees and the oversight and supervision of SunAmerica, which pays the
Subadviser's fee. Wellington Management 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 Subadvisory 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 Subadvisory 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 Subadvisory
Agreement may be terminated at any time, without penalty, by the Trustees, by
the holders of a majority of the respective Portfolio's outstanding voting
securities, by SunAmerica or not less than 30 nor more than 60 days written
notice to the Subadviser, or by the Subadviser on 90 days written notice to
SunAmerica and the Trust. Under the terms of the Subadvisory Agreement, the
Subadviser 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 Subadvisory fees received by
Wellington Management, as reported to the Trust by SunAmerica, for each
Portfolio pursuant to the Subadvisory Agreement for the fiscal years ended
December 31, 1998, 1997 and 1996.
SUBADVISORY FEES
<TABLE>
<CAPTION>
FUND 1998 1997 1996
---- ---- ---- ----
<S> <C> <C> <C>
Growth and Income Portfolio $130,423 $102,147
Growth Portfolio $910,003 $766,639
Capital Appreciation Portfolio $1,429,761 $1,057,476
Foreign Securities Portfolio $179,429 $206,599
Natural Resources Portfolio $175,784 $140,974
Multi-Asset Portfolio $299,772 $310,404
Strategic Multi-Asset Portfolio $162,641 $169,536
Money Market Portfolio $57,570 $64,822
Government and Quality Bond Portfolio $294,844 $299,809
</TABLE>
B-48
<PAGE> 91
<TABLE>
<CAPTION>
Fund 1998 1997 1996
---- ---- ---- ----
<S> <C> <C> <C>
Fixed Income Portfolio $44,640 $54,875
High Yield Portfolio $122,680 $134,409
</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 with the Principal Occupations
Name, Age and Address Trust During Past 5 Years
- --------------------- ----------------------- -------------------
<S> <C> <C>
S. James Coppersmith, 65 Trustee (since 1987) Retired; formerly, President and
7 Elmwood Road General Manager, WCVB-TV, a
Marblehead, MA 01945 division of the Hearst Corporation
(1982 to 1994); Director/Trustee
the SunAmerica Mutual Funds,
SunAmerica Equity Funds,
SunAmerica Income Funds and
Style Select Series, Inc. ("Style
Select").
Samuel M. Eisenstat, 58 Trustee and Attorney, solo practitioner; Of
430 East 86 Street Chairman of the Counsel, Kramer, Levin, Naftalis
New York, NY 10028 Board (since 1986) & Frankel; Director of Volt
Information Sciences Funding,
Inc., a subsidiary of Volt
Information Sciences, Inc. since
October 1993; Director/Trustee
and Chairman of the Boards of the
SunAmerica Mutual Funds and
Style Select.
Stephen J. Gutman, 55 Trustee (since 1986) Partner and Managing Member of
515 East 79 Street B.B. Associates LLC (menswear
New York, NY 10021 specialty retailing and other
activities)since June 1988;
Chairman of the Board, Chief
Operating and Executive Officer
of Beau Brummel Casuals
</TABLE>
B-49
<PAGE> 92
<TABLE>
<CAPTION>
POSITION WITH THE PRINCIPAL OCCUPATIONS
NAME, AGE AND ADDRESS TRUST DURING PAST 5 YEARS
- --------------------- ----------------- -------------------
<S> <C> <C>
Limited, Inc., a menswear special
retailer since May 1989; Director/Trustee
of the SunAmerica Mutual Funds and
Style Select.
Peter A. Harbeck*, 44 Trustee and President Director/Trustee of SunAmerica
The SunAmerica Center (since 1994) Mutual Funds and Style Select;
733 Third Avenue Director and President of
New York, NY 10017-3204 SunAmerica; Director of
SunAmerica Capital Services, Inc.
("SACS"), since February 1993;
Director and President of SunAmerica
Fund Services, Inc. ("SAFS"), since
May 1988; President of SunAmerica
Mutual Funds; Executive Vice President
and Chief Operating Officer of SunAmerica,
from May 1988 to August 1995; Executive
Vice President, SACS, from November
1991 to August 1995; and Director,
Resources Trust Company.
Peter C. Sutton, 34 Treasurer (since 1994) Senior Vice President,
The SunAmerica Center SunAmerica, since April 1997;
733 Third Avenue Treasurer, SunAmerica Mutual
New York, NY 10017-3204 Funds since February 1996 and
Style Select since September
1996; Vice President and
Assistant Treasurer of SunAmerica
Series Trust and Anchor Pathway
Fund since October 1994 and
Seasons Series Trust since
April 1997; formerly, Vice
President of SunAmerica (1994-1997);
Controller, SunAmerica Mutual Funds
(March 1993 - February 1996) and
Assistant Controller, SunAmerica
Mutual Funds
</TABLE>
B-50
<PAGE> 93
<TABLE>
<CAPTION>
POSITION WITH THE PRINCIPAL OCCUPATIONS
NAME, AGE AND ADDRESS TRUST DURING PAST 5 YEARS
- --------------------- ----------------- -------------------
<S> <C> <C>
(1990-1993); joined SunAmerica in 1990.
Robert M. Zakem, 41 Secretary and Chief Secretary and Chief Compliance
The SunAmerica Center Compliance Officer Officer of SunAmerica Mutual
733 Third Avenue (since 1993) Funds, since 1993 and Style
New York, NY 10017-3204 Select, since 1996; Senior Vice
President and General Counsel
of SunAmerica, since April 1993;
Executive Vice President, General
Counsel and Director, SACS, since
February 1993; and Vice President,
General Counsel and Assistant
Secretary of SAFS, since January
1994; Vice President and Assistant
Secretary, SunAmerica Series Trust
and Anchor Pathway Fund, since
April 1993; Vice President and
Assistant Secretary of Seasons
Series Trust, since April 1997;
formerly, Vice President and
Associate General Counsel,
SunAmerica, from March 1992
to April 1993; Associate, Piper
& Marbury from 1989 to 1992.
</TABLE>
The Trustees of the Trust are responsible for the overall supervision
of the operation of the Trust and each Portfolio and perform various duties
imposed on trustees of investment companies by the 1940 Act and under the
Trust's Declaration of Trust. 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 SunAmerica 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. The Audit Committee is charged with
recommending to the Full Board the engagement or discharge of the Trust's
independent accountants, directing investigations into matters within the scope
of the independent accountants' duties; reviewing with the
B-51
<PAGE> 94
independent accountants the audit plan and results of the audit; approving
professional services provided by the independent accountants and other
accounting firms prior to the performance of such services; reviewing the
independence of the independent accountants; considering the range of audit and
non-audit fees; and preparing and submitting committee minutes to the Full
Board. 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 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 ______________, the Trustees and officers of the Trust owned in
the aggregate, less than 1% of the total outstanding shares of each Portfolio of
the Trust.]
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, 1998. Neither the Trustees who are interested persons of the
Trust nor any officers of the Trust receive any compensation.
B-52
<PAGE> 95
COMPENSATION TABLE
<TABLE>
<CAPTION>
AGGREGATE PENSION OR ESTIMATED TOTAL
COMPENSATION RETIREMENT ANNUAL COMPENSATION
FROM REGISTRANT BENEFITS BENEFITS UPON FROM REGISTRANT
ACCRUED AS PART RETIREMENT AND FUND
OF FUND COMPLEX PAID TO
TRUSTEE EXPENSES* TRUSTEES*
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
S. James
Coppersmith
- -------------------------------------------------------------------------------------
Samuel M.
Eisenstat
- -------------------------------------------------------------------------------------
Stephen J.
Gutman
- -------------------------------------------------------------------------------------
</TABLE>
* Information is as of December 31, 1998 for the five investment companies in
the complex that 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 and delivers
securities and cash upon proper instructions from the Trust.
INDEPENDENT ACCOUNTANTS AND LEGAL COUNSEL
PricewaterhouseCoopers 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. The firm of Swidler Berlin
Shereff Friedman, LLP, 919 Third Avenue, New York, New York 10022 has been
selected as legal counsel to 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 Subadviser. 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.
B-53
<PAGE> 96
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 Subadviser will consider various relevant factors, including, but not
limited to, the size and type of the transaction; the nature and character of
the markets 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 Wellington Management or SunAmerica
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 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 Wellington
Management and SunAmerica; 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 Wellington Management
or SunAmerica will not necessarily be reduced as a result of the receipt of such
supplemental information. The Subadviser may effect individual securities
transactions at commission rates in excess of the minimum commission rates
available, if Wellington Management 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 Wellington Management'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 Subadviser. There may be occasions
when the Trust and one or more of the other clients advised by Wellington
Management 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
B-54
<PAGE> 97
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 SunAmerica and the Subadvisory
arrangement with Wellington Management 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.
For the fiscal year ended December 31, 1998, the ______ Portfolios
acquired no securities of brokers or dealers that executed its portfolio
transactions during the year, and the ____ Portfolios acquired $_________ from
the following brokers or dealers that executed its portfolio transactions:
The following tables set forth the aggregate brokerage commissions paid by the
Portfolios and the amounts of the brokerage commissions paid to affiliated
broker-dealers for such Portfolios for the fiscal years ended December 31, 1998,
1997, and 1996.
1998 BROKERAGE COMMISSIONS
<TABLE>
<CAPTION>
PERCENTAGE OF
AMOUNT OF
TRANSACTIONS
INVOLVING
PAYMENT OF
COMMISSIONS
PERCENTAGE OF PAID TO
AGGREGATE AMOUNT COMMISSIONS PAID AFFILIATED
BROKERAGE PAID TO AFFILIATED TO AFFILIATED BROKERS-
PORTFOLIO COMMISSIONS BROKER-DEALERS BROKER-DEALERS DEALERS
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Growth and Income
Portfolio
- ----------------------------------------------------------------------------------------------
Growth Portfolio
- ----------------------------------------------------------------------------------------------
Capital Appreciation
Portfolio
- ----------------------------------------------------------------------------------------------
Foreign Securities
Portfolio
- ----------------------------------------------------------------------------------------------
Natural Resources
Portfolio
- ----------------------------------------------------------------------------------------------
Multi-Asset Portfolio
- ----------------------------------------------------------------------------------------------
Strategic Multi-Asset
Portfolio
- ----------------------------------------------------------------------------------------------
Money Market Portfolio
- ----------------------------------------------------------------------------------------------
Government and Quality
Bond Portfolio
- ----------------------------------------------------------------------------------------------
Fixed Income Portfolio
- ----------------------------------------------------------------------------------------------
High Yield Portfolio
- ----------------------------------------------------------------------------------------------
</TABLE>
B-55
<PAGE> 98
1997 BROKERAGE COMMISSIONS
<TABLE>
<CAPTION>
AGGREGATE AMOUNT PERCENTAGE OF
BROKERAGE PAID TO AFFILIATED COMMISSIONS PAID TO
PORTFOLIO COMMISSIONS BROKER-DEALERS AFFILIATED BROKER
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Growth and Income Portfolio $ 34,572 0 0
- -------------------------------------------------------------------------------------------
Growth Portfolio $270,013 $ 250 0.09%
- -------------------------------------------------------------------------------------------
Capital Appreciation Portfolio $948,818 $ 20,400 2.15%
- -------------------------------------------------------------------------------------------
Foreign Securities Portfolio $213,438 0 0
- -------------------------------------------------------------------------------------------
Natural Resources Portfolio $ 82,069 0 0
- -------------------------------------------------------------------------------------------
Multi-Asset Portfolio $113,205 0 0
- -------------------------------------------------------------------------------------------
Strategic Multi-Asset Portfolio $110,345 $ 420 0.38%
- -------------------------------------------------------------------------------------------
Fixed Income Portfolio $ 9 0 0
- -------------------------------------------------------------------------------------------
High Yield Portfolio $ 351 0 0
- -------------------------------------------------------------------------------------------
</TABLE>
1996 BROKERAGE COMMISSIONS
<TABLE>
<CAPTION>
AGGREGATE AMOUNT PERCENTAGE OF
BROKERAGE PAID TO AFFILIATED COMMISSIONS PAID TO
PORTFOLIO COMMISSIONS BROKER/DEALERS AFFILIATED BROKER
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Growth and Income Portfolio $ 39,598 $ 12 0.0%
- -------------------------------------------------------------------------------------------
Growth Portfolio $357,209 $ 6,310 1.8%
- -------------------------------------------------------------------------------------------
Capital Appreciation Portfolio $655,271 $ 25,962 4.0%
- -------------------------------------------------------------------------------------------
Foreign Securities Portfolio $248,098 $ 552 0.2%
- -------------------------------------------------------------------------------------------
Natural Resources Portfolio $ 84,830 $ 1,300 1.5%
- -------------------------------------------------------------------------------------------
Multi-Asset Portfolio $107,911 $ 750 0.7%
- -------------------------------------------------------------------------------------------
Strategic Multi-Asset Portfolio $117,865 $ 3,963 3.4%
- -------------------------------------------------------------------------------------------
</TABLE>
B-56
<PAGE> 99
NET ASSET VALUE
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 that 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 that 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 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.
B-57
<PAGE> 100
A security 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 that 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 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 that might arise from differences
between the two. The Rule requires that the Portfolio limit its investments to
instruments that 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
B-58
<PAGE> 101
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
Internal Revenue Code of 1986, as amended (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) 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.
Each Portfolio will comply with asset diversification regulations
prescribed by the U.S. Treasury Department under the Code. In general, these
regulations effectively provide that, as of the end of each calendar quarter or
within 30 days thereafter, no more than 55% of the total assets of the
Portfolios may be represented by any one investment, no more than 70% by any two
investments, no more than 80% by any three investments, and no more than 90% by
any four investments. For this purpose, all securities of the same issuer are
considered a single investment, but each U.S. agency or instrumentality is
treated as a separate issuer. There are also alternative diversification tests
that may be satisfied by the Portfolios under the regulation. Each Portfolio
intends to comply with the diversification regulations. If a Portfolio fails to
comply with these regulations, the contracts invested in that Portfolio will not
be treated as annuity, endowment or life insurance contracts under the Code.
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.
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SPECIAL CONSIDERATIONS
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."
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<PAGE> 103
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.
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
B-61
<PAGE> 104
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. 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.
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, 1998.
[TO BE FILED BY AMENDMENT]
B-62
<PAGE> 105
APPENDIX
CORPORATE BOND AND COMMERCIAL PAPER RATINGS
DESCRIPTION OF MOODY'S CORPORATE RATINGS
Aaa Bonds rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally
referred to as "gilt edge." Interest payments are protected by
a large or by an exceptionally stable margin and principal is
secure. While the various protective elements are likely to
change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa Bonds rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than
the best bonds because margins of protection may not be as
large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other
elements present that make the long-term risks appear somewhat
larger than in Aaa securities.
A Bonds rated A possess many favorable investment attributes and
are considered as upper medium grade obligations. 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 Bonds rated Baa are considered as medium grade obligations;
i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for
the present but certain protective elements may be lacking or
may be characteristically unreliable over any great length of
time. Such bonds lack outstanding investment characteristics
and in fact have speculative characteristics as well.
Ba Bonds rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the
protection of interest and principal payments may be very
moderate, and therefore not well safeguarded during both good
and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B Bonds rated B generally lack characteristics of desirable
investments. Assurance of interest and principal payments or
of maintenance of other terms of the contract over any long
period of time may be small.
Caa Bonds rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with
respect to principal or interest.
B-63
<PAGE> 106
Ca Bonds rated Ca represent obligations that are speculative in a
high degree. Such issues are often in default or have other
marked shortcomings.
C Bonds rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
Note: Moody's may apply numerical modifiers 1, 2 and 3 in each generic
rating classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of the generic rating
category.
DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS
The term "commercial paper" as used by Moody's means promissory
obligations not having an original maturity in excess of nine months. Moody's
makes no representations as to whether such commercial paper is by any other
definition "commercial paper" or is exempt from registration under the
Securities Act.
Moody's commercial paper ratings are opinions of the ability of issuers
to repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's makes no representation that such obligations are
exempt from registration under the Securities Act, nor does it represent that
any specific note is a valid obligation of a rated issuer or issued in
conformity with any applicable law. Moody's employs the following three
designations, all judged to be investment grade, to indicate the relative
repayment capacity of rated issuers:
Issuers rated PRIME-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations. PRIME-1
repayment capacity will normally be evidenced by the following characteristics:
- Leading market positions in well established industries
- High rates of return on funds employed
- Conservative capitalization structures with moderate reliance on
debt and ample asset protection
- Broad margins in earnings coverage of fixed financial charges and
high internal cash generation
- Well established access to a range of financial markets and assured
sources of alternate liquidity.
Issuers rated PRIME-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, will be more subject
to variation. Capitalization characteristics, while still
B-64
<PAGE> 107
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
Issuers rated PRIME-3 (or related supporting institutions) have an
acceptable capacity for repayment of short-term promissory obligations. The
effect of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
level of debt protection measurements and the requirement for relatively high
financial leverage. Adequate alternate liquidity is maintained.
Issuers rated NOT PRIME do not fall within any of the Prime rating
categories.
If an issuer represents to Moody's that its commercial paper
obligations are supported by the credit of another entity or entities, then the
name or names of such supporting entity or entities are listed within
parentheses beneath the name of the issuer, or there is a footnote referring the
reader to another page for the name or names of the supporting entity or
entities. In assigning ratings to such issuers, Moody's evaluates the financial
strength of the indicated affiliated corporations, commercial banks, insurance
companies, foreign governments or other entities, but only as one factor in the
total rating assessment. Moody's makes no representation and gives no opinion on
the legal validity or enforceability of any support arrangement. You are
cautioned to review with your counsel any questions regarding particular support
arrangements.
Among the factors considered by Moody's in assigning ratings are the
following: (1) evaluation of the management of the issuer; (2) economic
evaluation of the issuer's industry or industries and an appraisal of
speculative type risks that may be inherent in certain areas; (3) evaluation of
the issuer's products in relation to competition and customer acceptance; (4)
liquidity; (5) amount and quality of long-term debt; (6) trend of earnings over
a period of ten years; (7) financial strength of a parent company and the
relationships that exist with the issuer; and (8) recognition by management of
obligations that may be present or may arise as a result of public interest
questions and preparations to meet such obligations.
DESCRIPTION OF STANDARD & POOR'S CORPORATE DEBT RATINGS
A Standard & Poor's corporate or municipal rating is a current
assessment of the creditworthiness of an obligor with respect to a specific
obligation. This assessment may take into consideration obligors such as
guarantors, insurers, or lessees.
The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor.
The ratings are based on current information furnished by the issuer or
obtained by Standard & Poor's from other sources it considers reliable. Standard
& Poor's does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be changed,
suspended or withdrawn as a result of changes in, or unavailability of, such
information, or for other reasons.
B-65
<PAGE> 108
The ratings are based, in varying degrees, on the following
considerations: (1) likelihood of default capacity and willingness of the
obligor as to the timely payment of interest and repayment of principal in
accordance with the terms of the obligation; (2) nature of and provisions of the
obligation; and (3) protection afforded by, and relative position of, the
obligation in the event of bankruptcy, reorganization or other arrangement under
the laws of bankruptcy and other laws affecting creditors' rights.
AAA Debt rated AAA has the highest rating assigned by Standard
& Poor's. Capacity to pay interest and repay principal is
extremely strong.
AA Debt rated AA has a very strong capacity to pay interest
and repay principal and differs from the highest-rated
issues only in small degree.
A Debt rated A has a strong capacity to pay interest and
repay principal although it is somewhat more susceptible to
the adverse effects of changes in circumstances and
economic conditions than debt in higher-rated categories.
BBB Debt rated BBB is regarded as having an adequate capacity
to pay interest and repay principal. Whereas it normally
exhibits adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to
lead to a weakened capacity to pay interest and repay
principal for debt in this category than for debt in
higher-rated categories.
Debt rated BB, B, CCC, CC and C are regarded as having
predominantly speculative characteristics with respect to
capacity to pay interest and repay principal. BB indicates
the least degree of speculation and C the highest degree of
speculation. While such debt will likely have some quality
and protective characteristics, these are outweighed by
large uncertainties or major risk exposure to adverse
conditions.
BB Debt rated BB has less near-term vulnerability to default
than other speculative grade debt. However, it faces major
ongoing uncertainties or exposure to adverse business,
financial or economic conditions that could lead to
inadequate capacity to meet timely interest and principal
payment. The BB rating category is also used for debt
subordinated to senior debt that is assigned an actual or
implied BBB- rating.
B Debt rated B has a greater vulnerability to default but
presently has the capacity to meet interest payments and
principal repayments. Adverse business, financial or
economic conditions would likely impair capacity or
willingness to pay interest and repay principal. The B
rating category is also used for debt subordinated to
senior debt that is assigned an actual or implied BB or BB-
rating.
B-66
<PAGE> 109
CCC Debt rated CCC has a current identifiable vulnerability to
default, and is dependent upon favorable business,
financial and economic conditions to meet timely payments
of interest and repayments of principal. In the event of
adverse business, financial or economic conditions, it is
not likely to have the capacity to pay interest and repay
principal. The CCC rating category is also used for debt
subordinated to senior debt that is assigned an actual or
implied B or B- rating.
CC The rating CC is typically applied to debt subordinated to
senior debt that is assigned an actual or implied CCC
rating.
C The rating C is typically applied to debt subordinated to
senior debt that is assigned an actual or implied CCC- debt
rating. The C rating may be used to cover a situation where
a bankruptcy petition has been filed but debt service
payments are continued.
CI The rating CI is reserved for income bonds on which no
interest is being paid.
D Debt rated D is in default. The D rating is assigned on the
day an interest or principal payment is missed. The D
rating also will be used upon the filing of a bankruptcy
petition if debt service payments are jeopardized.
Plus (+) or minus (-): The ratings of AA to CCC may be modified by
the addition of a plus or minus sign to show relative standing within
these ratings categories.
Provisional ratings: The letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful completion of the
project being financed by the debt being rated and indicates that payment of
debt service requirements is largely or entirely dependent upon the successful
and timely completion of the project. This rating, however, while addressing
credit quality subsequent to completion of the project, makes no comment on the
likelihood or risk of default upon failure of such completion. The investor
should exercise judgment with respect to such likelihood and risk.
L The letter "L" indicates that the rating pertains to the
principal amount of those bonds to the extent that the
underlying deposit collateral is insured by the Federal
Savings & Loan Insurance Corp. or the Federal Deposit
Insurance Corp. and interest is adequately collateralized.
* Continuance of the rating is contingent upon Standard &
Poor's receipt of an executed copy of the escrow agreement
or closing documentation confirming investments and cash
flows.
NR Indicates that no rating has been requested, that there is
insufficient information on which to base a rating or that
Standard & Poor's does not rate a particular type of
obligation as a matter of policy.
B-67
<PAGE> 110
Debt Obligations of Issuers outside the United States and its
territories are rated on the same basis as domestic corporate and municipal
issues. The ratings measure the credit-worthiness of the obligor but do not take
into account currency exchange and related uncertainties.
BOND INVESTMENT QUALITY STANDARDS: Under present commercial bank regulations
issued by the Comptroller of the Currency, bonds rated in the top four
categories ("AAA," "AA," "A," "BBB," commonly known as "investment grade"
ratings) are generally regarded as eligible for bank investment. In addition,
the laws of various states governing legal investments impose certain rating
or other standards for obligations eligible for investment by savings banks,
trust companies, insurance companies and fiduciaries generally.
DESCRIPTION OF STANDARD & POOR'S COMMERCIAL PAPER RATINGS.
A Standard & Poor's commercial paper rating is a current assessment
of the likelihood of timely payment of debt having an original maturity of not
more than 365 days. Ratings are graded into four categories, ranging from "A"
for the highest quality obligations to "D" for the lowest.
A Issues assigned this highest rating are regarded as having
the greatest capacity for timely payment. Issues in this
category are delineated with the numbers 1, 2 and 3 to
indicate the relative degree of safety.
A-1 This designation indicates that the degree of safety
regarding timely payment is either overwhelming or very
strong. Those issues designated "A-1" that are determined
to possess overwhelming safety characteristics are denoted
with a plus (+) sign designation.
A-2 Capacity for timely payment on issues with this designation
is strong. However, the relative degree of safety is not as
high as for issues designated "A-1."
A-3 Issues carrying this designation have a satisfactory
capacity for timely payment. They are, however, somewhat
more vulnerable to the adverse effect of changes in
circumstances than obligations carrying the higher
designations.
B Issues rated "B" are regarded as having only adequate
capacity for timely payment. However, such capacity may be
damaged by changing conditions or short-term adversities.
C This rating is assigned to short-term debt obligations with
a doubtful capacity for payment.
D This rating indicates that the issue is either in default
or is expected to be in default upon maturity.
B-68
<PAGE> 111
The commercial paper rating is not a recommendation to purchase or
sell a security. The ratings are based on current information furnished to
Standard & Poor's by the issuer or obtained from other sources it considers
reliable. The ratings may be changed, suspended, or withdrawn as a result of
changes in or unavailability of such information.
B-69
<PAGE> 112
PART C
OTHER INFORMATION
Item 23. Exhibits.
(a) Declaration of Trust, as amended. Incorporated herein by
reference to Post-Effective Amendment No. 24 to
Registrant's Registration Statement on Form N-1A (File No.
2-86188) filed on December 28, 1995.
(b) By-Laws, as amended. Incorporated herein by reference to
Post-Effective Amendment No. 24 to Registrant's
Registration Statement on Form N-1A (File No. 2-86188)
filed on December 28, 1995.
(c) Inapplicable.
(d) (i) Investment Advisory and Management Agreement.*
(ii) Subadvisory Agreement.*
(e) Inapplicable.
(f) Directors'/Trustees' Retirement Plan.*
(g) Custodian Contract, as amended. Incorporated herein by
reference to Post-Effective Amendment No. 27 to the
Registrant's Registration Statement on Form N-1A (File No.
2-86188) filed on February 28, 1997.
(h) Form of Fund Participation Agreement. Incorporated herein
by reference to Post-Effective Amendment No. 25 to the
Registrant's Registration Statement on Form N-1A (File No.
2-86188) filed on February 29, 1996.
(i) Opinion and Consent of Counsel. Incorporated herein by
reference to Exhibit 10 of Post-Effective Amendment No. 27
to the Registrant's Registration Statement on Form N-1A
(File No. 2-86188) filed on February 28, 1997.
(j) Consent of Accountants.*
(k) Inapplicable.
(l) Inapplicable.
<PAGE> 113
(m) Inapplicable.
(n) Financial Data Schedules.*
(o) (i) Inapplicable.
(ii) Powers of Attorney. Incorporated herein by reference
to Post-Effective Amendment No. 25 to Registrant's
Registration Statement on Form N-1A (File No. 2-86188)
filed on February 29, 1996.
- -------------
* To be filed by amendment.
Item 24. Persons Controlled By or Under Common Control with Registrant.
To be provided by amendment.
Item 25. Indemnification.
The Declaration of Trust (Section 5.3) provides that "[e]ach 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
<PAGE> 114
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, 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 26. Business and Other Connections of the Investment Adviser.
Information concerning the business and other connections of
SunAmerica Asset Management Corp. ("SunAmerica"), the Investment
Adviser, is incorporated herein by reference to SunAmerica's Form ADV
(File No. 801-19813), and information concerning the business and
other connections of Wellington Management Company, LLP
("Wellington"), the Subadviser, 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 27. Principal Underwriters.
There is no principal underwriter for the Registrant.
Item 28. Location and Accounts and Records.
<PAGE> 115
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.
SunAmerica Asset Management Corp. is located at 733 Third Avenue, New
York, NY 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, LLP is located at 75 State Street,
Boston, Massachusetts 02109. It maintains the books and records
required to be maintained pursuant to Section 31(a) of the Investment
Company Act of 1940 and the rules promulgated thereunder.
Item 29. Management Services.
Inapplicable.
Item 30. Undertakings.
Inapplicable.
<PAGE> 116
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, (the "1933 Act") and the Investment Company Act of 1940, as amended,
the Registrant has duly caused this Post-Effective Amendment No. 29 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 29th day
of January, 1999.
ANCHOR SERIES TRUST
By: /s/ Peter A. Harbeck
---------------------
Peter A. Harbeck
President and Trustee
Pursuant to the requirements of the 1933 Act, this Post-Effective
Amendment No. 29 to the Registrant's Registration Statement on Form N-1A has
been signed below by the following persons in the capacities and on the date
indicated:
/s/ Peter A. Harbeck President and Trustee January 29, 1999
- ---------------------- (Principal Executive Officer)
Peter A. Harbeck
* Treasurer January 29, 1999
- ---------------------- (Principal Financial and
Peter C. Sutton Accounting Officer)
* Trustee January 29, 1999
- ----------------------
S. James Coppersmith
* Trustee January 29, 1999
- ----------------------
Samuel M. Eisenstat
* Trustee January 29, 1999
- ----------------------
Stephen J. Gutman
*By:/s/ Robert M Zakem January 29, 1999
------------------
Attorney-in-Fact
Robert M. Zakem
