<PAGE> 1
As filed with the Securities and Exchange Commission on April 14, 2000
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. 31 /X/
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 / /
AMENDMENT NO. 31 /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
/X/ on April 20, 2000 pursuant to paragraph (b) of Rule 485
/ / 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
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PROSPECTUS
APRIL 20, 2000
----------------------------------------------
ANCHOR SERIES TRUST
-- Growth and Income Portfolio
-- Growth Portfolio
-- Capital Appreciation Portfolio
-- Natural Resources Portfolio
-- Multi-Asset Portfolio
-- Strategic Multi-Asset Portfolio
-- Money Market Portfolio
-- Government and Quality
Bond 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.
<PAGE> 3
2
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TABLE OF CONTENTS
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<TABLE>
<S> <C>
TRUST HIGHLIGHTS............................................ 3
Q&A....................................................... 3
ACCOUNT INFORMATION......................................... 17
Transaction Policies...................................... 17
Dividend Policies and Taxes............................... 18
MORE INFORMATION ABOUT THE PORTFOLIOS....................... 18
Investment Selection...................................... 18
Investment Strategies..................................... 18
GLOSSARY.................................................... 22
Investment Terminology.................................... 22
Risk Terminology.......................................... 24
MANAGEMENT.................................................. 26
Investment Adviser........................................ 26
Subadviser................................................ 26
Portfolio Management...................................... 27
Custodian, Transfer and Dividend-Paying Agent............. 29
FINANCIAL HIGHLIGHTS........................................ 29
FOR MORE INFORMATION........................................ 32
</TABLE>
<PAGE> 4
Q&A
"CORE EQUITY SECURITIES" are stocks, primarily of well established
companies, diversified by industry and company type that are selected
based on their predictable or anticipated earnings growth and best
relative value.
A "GROWTH" PHILOSOPHY -- that of investing in securities believed to
offer the potential for capital appreciation -- focuses on securities of
companies that are considered to have a historical record of
above-average growth rate, significant growth potential, above-average
earnings growth or value, the ability to sustain earnings growth, or
that offer proven or unusual products or services, or operate in
industries experiencing increasing demand.
A "VALUE" PHILOSOPHY -- that of investing in securities that are
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 selection criteria is usually calculated to identify
stocks of companies with solid financial strength and generous dividend
yields that have low price-earnings ratios and have generally been
overlooked by the market; or companies undervalued within an industry or
market capitalization category.
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TRUST HIGHLIGHTS
- --------------------------------------------------------------------------------
The following questions and answers are designed to give you an overview of
Anchor Series Trust (the "Trust") and to provide you with information about the
Trust's nine separate investment series (Portfolios) and their investment goals
and principal strategies. More complete investment information is provided in
the chart, under "More Information About the Portfolios," which is on page 19,
and the glossary that follows on page 22.
Q: WHAT ARE THE PORTFOLIOS' INVESTMENT GOALS AND PRINCIPAL INVESTMENT
STRATEGIES?
A: Each Portfolio operates as a separate mutual fund and has its own investment
goal and a principal investment 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>
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EQUITY PORTFOLIOS
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PORTFOLIO INVESTMENT GOAL PRINCIPAL INVESTMENT STRATEGY
-----------------------------------------------------------------------------------------
<S> <C> <C>
GROWTH AND INCOME high current income and invests primarily (at least
PORTFOLIO long-term capital 65%) in core equity securities
appreciation that provide the potential for
growth and offer income, such
as dividend-paying stocks
-----------------------------------------------------------------------------------------
GROWTH PORTFOLIO capital appreciation invests primarily in core
equity securities that are
widely diversified by industry
and company
-----------------------------------------------------------------------------------------
CAPITAL APPRECIATION long-term capital invests primarily in growth
PORTFOLIO appreciation equity securities across a
wide range of industries and
companies, using a
wide-ranging and flexible
stock picking approach; may be
concentrated and will
generally have less
investments in large company
securities than the Growth
Portfolio
-----------------------------------------------------------------------------------------
NATURAL RESOURCES total return in excess using a value approach,
PORTFOLIO of the U.S. rate of invests primarily in equity
inflation as represented securities of U.S. or foreign
by the Consumer Price companies that are expected to
Index provide favorable returns in
periods of rising inflation;
at least 65% related to
natural resources, such as
energy, metals, mining and
forest products
-----------------------------------------------------------------------------------------
</TABLE>
3
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4
CAPITAL APPRECIATION/GROWTH is an increase in the market value of
securities held.
ASSET ALLOCATION is a varying combination, depending on market
conditions and risk level, of stocks, bonds, money market instruments
and other assets.
TOTAL RETURN is a measure of performance which combines all elements of
return including income and capital appreciation; it represents the
change in value of an investment over a given period expressed as a
percentage of the initial investment.
FIXED INCOME PORTFOLIOS typically seek to provide high current income
consistent with the preservation of capital by investing in fixed income
securities.
INCOME is interest payments from bonds or dividends from stocks.
YIELD is the annual dollar income received on an investment expressed as
a percentage of the current or average price.
MARKET CAPITALIZATION represents the total market value of the
outstanding securities of a corporation.
"HIGH-QUALITY" INSTRUMENTS have a very strong capacity to pay interest
and repay principal; they reflect the issuers' high creditworthiness and
low risk of default.
<TABLE>
<CAPTION>
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ALLOCATION PORTFOLIOS
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PORTFOLIO INVESTMENT GOAL PRINCIPAL INVESTMENT STRATEGY
-----------------------------------------------------------------------------------------
<S> <C> <C> <C>
MULTI-ASSET PORTFOLIO long-term total actively allocates the
investment return Portfolio's assets among
consistent with moderate equity securities, investment
investment risk grade fixed income securities
and cash with less risk than
the Strategic Multi-Asset
Portfolio
-----------------------------------------------------------------------------------------
STRATEGIC MULTI-ASSET high long-term total actively allocates the
PORTFOLIO investment return Portfolio's assets among
equity securities of U.S. and
foreign companies, medium and
small company equity
securities, global fixed
income securities (including
high-yield, high-risk bonds)
and cash with more risk than
the Multi-Asset Portfolio
-----------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
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FIXED INCOME PORTFOLIOS
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PORTFOLIO INVESTMENT GOAL PRINCIPAL INVESTMENT STRATEGY
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<S> <C> <C> <C>
MONEY MARKET PORTFOLIO current income invests in a diversified
consistent with portfolio of money market
stability of principal instruments maturing in 397
days or less and maintains a
dollar-weighted average
portfolio maturity of not more
than 90 days
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GOVERNMENT AND QUALITY relatively high current invests in obligations issued,
BOND PORTFOLIO income, liquidity and guaranteed or insured by the
security of principal U.S. government, its agencies
or instrumentalities and in
high quality corporate fixed
income securities
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HIGH YIELD PORTFOLIO high current income and, invests primarily (at least
secondarily, capital 65%) in high-yielding,
appreciation high-risk, income producing
bonds ("junk bonds") and other
fixed income securities
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</TABLE>
<PAGE> 6
Q: WHAT ARE THE PRINCIPAL RISKS OF INVESTING IN THE PORTFOLIOS?
A: The following section describes the principal risks of each Portfolio, while
the charts beginning on page 19 describe various additional risks.
Risks of Investing in Equity Securities
The GROWTH AND INCOME, GROWTH, CAPITAL APPRECIATION AND NATURAL RESOURCES
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. You should be aware that the performance of different types of
equity stocks may perform well under varying market conditions -- for
example "value" stocks may perform well under circumstances in which
"growth" stocks in general have fallen, or vice versa.
Risks of Investing in Bonds
The GOVERNMENT AND QUALITY BOND AND HIGH YIELD PORTFOLIOS 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, movements in the bond market or defaults (or even
the potential for future default) by bond issuers. To the extent a Portfolio
is invested in the bond market, movements in the bond market may affect its
performance. In addition, individual bonds selected for any of these
Portfolios may underperform the market generally.
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 AND STRATEGIC MULTI-ASSET 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 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 (also known as "money market securities"), you
should be aware that an investment in the MONEY MARKET PORTFOLIO is subject
to the risk that the value of its investments may be subject to changes in
interest rates, changes in the rating of any money market security and in
the ability of an issuer to make payments of interest and principal. 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 Portfolio.
Risks of Investing in Foreign Securities
All of the Portfolios except the MONEY MARKET PORTFOLIO may, and the
STRATEGIC MULTI-ASSET AND NATURAL RESOURCES PORTFOLIOS will, invest to
varying degrees in foreign securities. These securities may be denominated
in currencies other than U.S. dollars. Foreign investing presents special
risks,
5
<PAGE> 7
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, CAPITAL
APPRECIATION, STRATEGIC MULTI-ASSET AND NATURAL RESOURCES PORTFOLIOS.
Risks of Investing in Natural Resources
The NATURAL RESOURCES PORTFOLIO will be subject to certain risks specific to
investing in the natural resources industry. Investments in securities
related to precious metals and minerals are considered speculative. Prices
of 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.
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. The Portfolio's
investments in natural resources securities exposes it to greater risk than
a portfolio less concentrated in a group of related industries.
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 calendar year to calendar year and comparing the
Portfolios' average annual returns to those of an appropriate market index.
Fee and expenses incurred at the contract level are not reflected in the bar
charts or tables. If these amounts were reflected, returns would be less
than those shown. Of course, past performance is not necessarily an
indication of how a Portfolio will perform in the future.
6
<PAGE> 8
- --------------------------------------------------------------------------------
GROWTH AND INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GROWTH AND INCOME PORTFOLIO
---------------------------
<S> <C>
1990 -3.84
1991 26.8
1992 20.1
1993 22.02
1994 -9.67
1995 16.59
1996 20.15
1997 28.76
1998 30.16
1999 15.88
</TABLE>
During the 10-year period shown in the bar chart, the highest return for a
quarter was 20.28% (quarter ended 12/31/98) and the lowest return for a quarter
was -9.77% (quarter ended 9/30/90).
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS (AS OF THE PAST ONE PAST FIVE PAST TEN RETURN SINCE
CALENDAR YEAR ENDED DECEMBER 31, 1999) YEAR YEARS YEARS INCEPTION(1)
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------
Growth and Income Portfolio 15.88% 22.16% 15.95% 13.02%
- -----------------------------------------------------------------------------------------------------
S&P 500(R)(2) 21.01% 11.40% 18.21% 17.00%
- -----------------------------------------------------------------------------------------------------
Lipper VA-UF Growth & Income Category(3) 14.64% 10.27% 15.11% 14.20%
- -----------------------------------------------------------------------------------------------------
</TABLE>
(1)Inception date for the Portfolio is March 23, 1987. The since inception
returns for the comparative indices are as of the inception date month end.
(2)The S&P 500(R) Composite Stock Price Index (S&P 500(R)) is an unmanaged,
weighted index of 500 large company stocks that is widely recognized as
representative of the performance of the U.S. stock market.
(3)The Lipper Variable Annuity-Underlying Fund (VA-UF) Growth and Income
Category includes funds that combine a growth of earnings orientation and an
income requirement for level and/or rising dividends.
7
<PAGE> 9
- --------------------------------------------------------------------------------
GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GROWTH PORTFOLIO
----------------
<S> <C>
1990 -1.57
1991 40.82
1992 5.43
1993 7.75
1994 -4.72
1995 26.32
1996 25.05
1997 30.41
1998 28.96
1999 26.94
</TABLE>
During the 10-year period shown in the bar chart, the highest return for a
quarter was 23.93% (quarter ended 12/31/98) and the lowest return for a quarter
was -17.17% (quarter ended 9/30/90).
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS (AS OF THE PAST ONE PAST FIVE PAST TEN RETURN SINCE
CALENDAR YEAR ENDED DECEMBER 31, 1999) YEAR YEARS YEARS INCEPTION(1)
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------
Growth Portfolio 26.94% 27.52% 17.60% 16.80%
- --------------------------------------------------------------------------------------------------------
S&P 500(R)(2) 21.01% 11.40% 18.21% 18.70%
- --------------------------------------------------------------------------------------------------------
Lipper VA-UF Growth Category(3) 31.47% 11.18% 17.90% 18.20%
- --------------------------------------------------------------------------------------------------------
Custom Index(4) 23.16% 14.87% N/A N/A
- --------------------------------------------------------------------------------------------------------
</TABLE>
(1) Inception date for the Portfolio is September 5, 1984. Except for the
Custom Index, the since inception returns for the comparative indices are
as of the inception date month end.
(2) The S&P 500(R) Composite Stock Price Index (S&P 500(R)) is an unmanaged,
weighted index of 500 large company stocks that is widely recognized as
representative of the performance of the U.S. stock market.
(3) The Lipper Variable Annuity-Underlying Fund (VA-UF) Growth Category
includes funds that normally invest in companies whose long term earnings
are expected to grow significantly faster than the earnings of the stocks
represented in the major unmanaged stock indices.
(4) Custom Index consists of 50% Russell 3000 Index and 50% of an index
compiled with the 50 largest Morningstar Growth Mutual Funds. The Russell
3000 Index represents the top 3,000 stocks traded on the New York Stock
Exchange, American Stock Exchange and National Association of Securities
Dealers Automated Quotations, by market capitalizations.
8
<PAGE> 10
- --------------------------------------------------------------------------------
CAPITAL APPRECIATION PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CAPITAL APPRECIATION PORTFOLIO
------------------------------
<S> <C>
1990 -16.18
1991 56.14
1992 25.94
1993 21.07
1994 -3.8
1995 34.57
1996 25.14
1997 25.43
1998 22.2
1999 67.58
</TABLE>
During the 10-year period shown in the bar chart, the highest return for a
quarter was 39.01% (quarter ended 12/31/99) and the lowest return for a quarter
was -26.82% (quarter ended 9/30/90).
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS (AS OF THE PAST ONE PAST FIVE PAST TEN RETURN SINCE
CALENDAR YEAR ENDED DECEMBER 31, 1999) YEAR YEARS YEARS INCEPTION(1)
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------
Capital Appreciation Portfolio 67.58% 34.03% 23.57% 20.08%
- ------------------------------------------------------------------------------------------------------------
Russell 2000 Index(2) 21.26% 8.99% 13.40% 10.90%
- ------------------------------------------------------------------------------------------------------------
Lipper VA-UF Capital Appreciation Category(3) 40.06% 11.03% 18.45% 15.10%
- ------------------------------------------------------------------------------------------------------------
Custom Index(4) 22.37% 10.20% 15.16% N/A
- ------------------------------------------------------------------------------------------------------------
</TABLE>
(1)Inception date for the Portfolio is March 23, 1987. Except for the Custom
Index, the since inception returns for the comparative indices are as of the
inception date month end.
(2)Russell 2000 Index represents the top 2,000 stocks traded on the New York
Stock Exchange, American Stock Exchange and National Association of
Securities Dealers Automated Quotations, by market capitalizations.
(3)The Lipper Variable Annuity-Underlying Fund (VA-UF) Capital Appreciation
Category includes funds that aim at maximum capital appreciation.
(4)Custom Index consists of 45% S&P 500(R), 45% Russell 2000 Index (as described
above in footnote 2) and 10% Morgan Stanley Capital International (MSCI) All
Country (AC) World Free (ex-U.S.) Index. The MSCI AC World Free (Ex-U.S.)
Index includes performance of 2,124 securities listed in 45 countries, which
includes the countries contained in the MSCI EAFE Index, as well as North
American countries (excluding the U.S.) and other emerging markets worldwide.
The index covers approximately the top 60% of market capitalization for each
of the countries included within the index. The MSCI EAFE Index consists of
foreign companies located in developed markets of 21 different countries in
Europe, Australia, Asia and the Far East.
9
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- --------------------------------------------------------------------------------
NATURAL RESOURCES PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NATURAL RESOURCES PORTFOLIO
---------------------------
<S> <C>
1990 -15.02
1991 4.87
1992 2.52
1993 36.15
1994 1.01
1995 17.46
1996 14.11
1997 -8.59
1998 -17.33
1999 41.51
</TABLE>
During the 10-year period shown in the bar chart, the highest return for a
quarter was 21.23% (quarter ended 6/30/99) and the lowest return for a quarter
was -17.46% (quarter ended 12/31/97).
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS (AS OF THE PAST ONE PAST FIVE PAST TEN RETURN SINCE
CALENDAR YEAR ENDED DECEMBER 31, 1999) YEAR YEARS YEARS INCEPTION(1)
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------
Natural Resources Portfolio 41.51% 7.46% 6.06% 7.50%
- ---------------------------------------------------------------------------------------------------
S&P 500(R)(2) 21.01% 11.40% 18.21% 18.90%
- ---------------------------------------------------------------------------------------------------
Lipper VA-UF Natural Resources Category(3) 24.66% 3.37% 3.63% 3.00%
- ---------------------------------------------------------------------------------------------------
MSCI Energy Sources Index(4) 23.05% 9.56% N/A N/A
- ---------------------------------------------------------------------------------------------------
MSCI Gold Mines Index(4) 1.26% -20.29% N/A N/A
- ---------------------------------------------------------------------------------------------------
MSCI Non-Ferrous Metals Index(4) 80.86% 5.25% N/A N/A
- ---------------------------------------------------------------------------------------------------
</TABLE>
(1) Inception date for the Portfolio is January 4, 1988. Except for the MSCI
indices, the since inception returns for the comparative indices are as of
the inception date month end.
(2) The S&P 500(R) Composite Stock Price Index (S&P 500(R)) is an unmanaged,
weighted index of 500 large company stocks that is widely recognized as
representative of the performance of the U.S. stock market.
(3) The Lipper Variable Annuity-Underlying Fund (VA-UF) Natural Resources
Category includes funds that invest more than 65% of its equity commitment
in natural resource stocks.
(4) The Morgan Stanley Capital International (MSCI) Energy Sources, Gold Mines
and Non-Ferrous Metals Indices represent specific commodities underlying
the Natural Resources Portfolio.
10
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- --------------------------------------------------------------------------------
MULTI-ASSET PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MULTI-ASSET PORTFOLIO
---------------------
<S> <C>
1990 1.62
1991 27.28
1992 8.22
1993 7.31
1994 -1.68
1995 24.94
1996 13.87
1997 21.12
1998 24.47
1999 12.45
</TABLE>
During the 10-year period shown in the bar chart, the highest return for a
quarter was 12.98% (quarter ended 12/31/98) and the lowest return for a quarter
was -8.61% (quarter ended 9/30/90).
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS (AS OF THE PAST ONE PAST FIVE PAST TEN RETURN SINCE
CALENDAR YEAR ENDED DECEMBER 31, 1999) YEAR YEARS YEARS INCEPTION(1)
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------
Multi-Asset Portfolio 12.45% 19.25% 13.54% 11.32%
- --------------------------------------------------------------------------------------------------------
S&P 500(R)(2) 21.01% 11.40% 18.21% 16.60%
- --------------------------------------------------------------------------------------------------------
Lehman Brothers Aggregate Index(3) -0.82% 5.56% 7.70% 7.90%
- --------------------------------------------------------------------------------------------------------
Lipper VA-UF Flexible Category(4) 12.13% 8.94% 12.42% 11.60%
- --------------------------------------------------------------------------------------------------------
Custom Index(5) 12.31% 9.82% 13.97% N/A
- --------------------------------------------------------------------------------------------------------
</TABLE>
(1) Inception date for the Portfolio is March 23, 1987. Except for the Custom
Index, the since inception returns for the comparative indices are as of
the inception date month end.
(2) The S&P 500(R) Composite Stock Price Index (S&P 500(R)) is an unmanaged,
weighted index of 500 large company stocks that is widely recognized as
representative of the performance of the U.S. stock market.
(3) The Lehman Brothers Aggregate Index combines several Lehman Brothers
indexes which include the government and corporate markets, agency mortgage
pass-through securities, and asset-backed securities.
(4) The Lipper Variable Annuity-Underlying Fund (VA-UF) Flexible Category
includes funds which allocate their investments across various asset
classes, including domestic common stocks, bonds, and money market
instruments, with a focus on total return.
(5) Custom Index consists of 60% S&P 500(R), 35% Lehman Brothers Aggregate
Index (as described above in footnotes 2 and 3, respectively) and 5%
3-month T-bill.
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- --------------------------------------------------------------------------------
STRATEGIC MULTI-ASSET PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
STRATEGIC MULTI-ASSET PORTFOLIO
-------------------------------
<S> <C>
1990 -7.57
1991 24.19
1992 3.94
1993 15.31
1994 -2.58
1995 22.77
1996 14.81
1997 14.32
1998 15.21
1999 28.15
</TABLE>
During the 10-year period shown in the bar chart, the highest return for a
quarter was 16.65% (quarter ended 12/31/99) and the lowest return for a quarter
was -15.78% (quarter ended 9/30/90).
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS (AS OF THE PAST ONE PAST FIVE PAST TEN RETURN SINCE
CALENDAR YEAR ENDED DECEMBER 31, 1999) YEAR YEARS YEARS INCEPTION(1)
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------
Strategic Multi-Asset Portfolio 28.15% 18.93% 12.29% 11.32%
- --------------------------------------------------------------------------------------------------------
Lipper VA-UF Global Flexible Average(3) 13.57% 8.39% 11.29% N/A
- --------------------------------------------------------------------------------------------------------
MSCI AC World Free USD Index(4) 26.81% 9.64% 11.71% N/A
- --------------------------------------------------------------------------------------------------------
Salomon Brothers World Gov't Bond-U.S.$
Hedge Index(5) 1.33% 6.56% 8.37% 8.10%
- --------------------------------------------------------------------------------------------------------
Custom Index(6) 17.77% 8.92% 11.53% N/A
- --------------------------------------------------------------------------------------------------------
</TABLE>
(1)Inception date for the Portfolio is March 23, 1987. Except for the MSCI and
Custom Indices, the since inception returns for the comparative indices are
as of the inception date month end.
(2)The S&P 500(R) Composite Stock Price Index (S&P 500(R)) is an unmanaged,
weighted index of 500 large company stocks that is widely recognized as
representative of the performance of the U.S. stock market.
(3)The Lipper Variable Annuity-Underlying Fund (VA-UF) Global Flexible Average
includes funds that allocate their investments across various asset classes,
including both domestic and foreign stocks, bonds and money market
instruments, with a focus on total return. At least 25% of its portfolio is
invested in securities traded outside of the U.S., including shares of gold
mines, gold-oriented mining finance houses, gold coins, or bullion.
(4)The Morgan Stanley Capital International (MSCI) All Country (AC) World Free
USD Index is a market capitalization weighted benchmark of the listed
securities of Argentina, Australia, Austria, Belgium, Brazil, Canada, Chile,
China, Colombia, Czech Republic, Denmark, Finland, France, Germany,
12
<PAGE> 14
Greece, Hong Kong, Hungary, India, Indonesia, Ireland, Israel, Italy,
Japan, Jordan, Korea, Malaysia, Mexico, Netherlands, New Zealand, Norway,
Pakistan, Peru, Philippines, Poland, Portugal, Russia, Singapore, South
Africa, Spain, Sri Lanka, Sweden, Switzerland, Taiwan, Thailand, Turkey,
United Kingdom, United States, and Venezuela, that uses an arbitrary
sampling of stocks and aims to capture 60% of the total market
capitalization at both the country and industry levels.
(5) The Salomon Smith Barney World Government Bond -- U.S.$ Hedge Index is a
market capitalization weighted, total return benchmark designed to cover
the government bond markets of Australia, Austria, Belgium, Canada,
Denmark, Finland, France, Germany, Ireland, Italy, Japan, Netherlands,
Spain, Sweden, Switzerland, United Kingdom, the United States and Portugal.
For a country to be added to the Index, its eligible issues must total at
least US$20 billion, DM30 billion, and Y2.5 trillion for three consecutive
months.
(6) Custom Index consists of 65% MSCI AC World Free USD Index, 20% Salomon
Smith Barney World Gov't Bond -- (U.S. $ Hedge) Index (as described above
in footnotes 4 and 5, respectively), 10% Lehman Brothers High Yield Index,
and 5% 3-month T-bill. Custom Index prior to 2/28/98 consisted of 30% MSCI
AC World Free ex-U.S. Index, 20% Lehman Brothers Aggregate Index, 30% S&P
500 Index (as described above in footnote 2) and 10% Russell 2000 Index,
and 10% 3-month T-bill. The Lehman Brothers High Yield Index covers the
universe of fixed rate, publicly issued, non-investment grade debt
registered with the SEC. All bonds included in the index must be U.S.
dollar-denominated and non-convertible. The Morgan Stanley Capital
International (MSCI) All Country (AC) World Free (Ex-U.S.) Index is
described in footnote 5 on page 9. The Lehman Brothers Aggregate Index
combines several Lehman Brothers indices which include the government and
corporate markets, agency mortgage pass-through securities, and
asset-backed securities. The Russell 2000 Index represents the top 2,000
stocks traded on the New York Stock Exchange, American Stock Exchange and
National Association of Securities Dealers Automated Quotations, by market
capitalizations.
13
<PAGE> 15
- --------------------------------------------------------------------------------
MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MONEY MARKET PORTFOLIO
----------------------
<S> <C>
1990 7.4
1991 5.6
1992 3.4
1993 2
1994 3.8
1995 5.6
1996 5
1997 5.1
1998 5.1
1999 4.69
</TABLE>
During the 10-year period shown in the bar chart, the highest return for a
quarter was 2.35% (quarter ended 6/30/89) and the lowest return for a quarter
was 0.64% (quarter ended 6/30/93).
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS (AS OF THE PAST ONE PAST FIVE PAST TEN RETURN SINCE
CALENDAR YEAR ENDED DECEMBER 31, 1999) YEAR YEARS YEARS INCEPTION*
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------
Money Market Portfolio 4.69% 4.89% 5.30% 5.75%
- --------------------------------------------------------------------------------------------------
</TABLE>
* Inception date for the Portfolio is 12/31/84.
14
<PAGE> 16
- --------------------------------------------------------------------------------
GOVERNMENT AND QUALITY BOND PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GOVERNMENT AND QUALITY BOND PORTFOLIO
-------------------------------------
<S> <C>
1990 7.79
1991 17.29
1992 6.9
1993 8.27
1994 -3.07
1995 19.42
1996 2.89
1997 9.53
1998 9.18
1999 -1.65
</TABLE>
During the 10-year period shown in the bar chart, the highest return for a
quarter was 9.76% (quarter ended 6/30/98) and the lowest return for a quarter
was -3.09% (quarter ended 3/31/94).
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS (AS OF THE PAST ONE PAST FIVE PAST TEN RETURN SINCE
CALENDAR YEAR ENDED DECEMBER 31, 1999) YEAR YEARS YEARS INCEPTION(1)
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------
Government and Quality Bond Portfolio -1.65% 7.64% 7.44% 9.04%
- ----------------------------------------------------------------------------------------------------
Lehman Brothers Aggregate Index(2) -0.82% 5.56% 7.70% 9.60%
- ----------------------------------------------------------------------------------------------------
Lipper VA-UF General U.S. Government
Category(3) -2.13% 5.03% 6.90% 8.50%
- ----------------------------------------------------------------------------------------------------
</TABLE>
(1) Inception date for the Portfolio is September 5, 1984. The since inception
returns for the comparative indices are as of the inception date month end.
(2) The Lehman Brothers Aggregate Index combines several Lehman Brothers
indices which include the government and corporate markets, agency mortgage
pass-through securities, and asset-backed securities.
(3) The Lipper Variable Annuity-Underlying Fund (VA-UF) General U.S. Government
Category includes funds which invest at least 65% of assets in U.S.
government and agency issues.
15
<PAGE> 17
- --------------------------------------------------------------------------------
HIGH YIELD PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
HIGH YIELD PORTFOLIO
--------------------
<S> <C>
1990 -10.75
1991 33.06
1992 13.91
1993 19.08
1994 -4.48
1995 18.78
1996 11.70
1997 11.38
1998 -4.48
1999 5.72
</TABLE>
During the 10-year period shown in the bar chart, the highest return for a
quarter was 12.92% (quarter ended 3/31/91) and the lowest return for a quarter
was -11.45% (quarter ended 9/30/98).
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS (AS OF THE PAST ONE PAST FIVE PAST TEN RETURN SINCE
CALENDAR YEAR ENDED DECEMBER 31, 1999) YEAR YEARS YEARS INCEPTION(1)
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------
High Yield Portfolio 5.72% 8.33% 8.67% 8.23%
- ----------------------------------------------------------------------------------------------------
Lehman Brothers High Yield Index(2) 2.39% 6.33% 10.72% 10.20%
- ----------------------------------------------------------------------------------------------------
Lipper VA-UF High Current Yield
Category(3) 3.81% 6.50% 10.34% 9.70%
- ----------------------------------------------------------------------------------------------------
</TABLE>
(1)Inception date for the Portfolio is January 2, 1986. The since inception
returns for the comparative indices are as of December 31, 1985.
(2)The Lehman Brothers High Yield Index covers the universe of fixed rate,
publicly issued, non-investment grade debt registered with the Securities and
Exchange Commission. All bonds included in the index must be U.S.
dollar-denominated and non-convertible.
(3)The Lipper Variable Annuity-Underlying Fund (VA-UF) High Current Yield
Category includes funds which aim at high (relative) current yield from fixed
income securities. There are no quality or maturity restrictions, though
these funds tend to invest in lower grade debt issues.
16
<PAGE> 18
- --------------------------------------------------------------------------------
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
of Anchor National Life Insurance Company, First SunAmerica Life Insurance
Company, AIG Life Insurance Company and American International Life Assurance
Company of New York; and variable annuity contracts issued by Phoenix Home Life
Mutual Insurance Company and Presidential Life Insurance Company (variable
annuity contracts and variable life insurance policies are hereinafter
collectively referred to as "Variable Contracts"). All shares of the Trust are
owned by "Separate Accounts" of the aforementioned life insurance companies. So
if you would like to invest in a Portfolio, you must purchase a Variable
Contract from one of the life insurance companies. 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. You will find information about purchasing a Variable Contract and the
Portfolios available to you in the prospectus that offers the contracts, which
accompanies this Prospectus.
Anchor National Life Insurance Company, First SunAmerica Life Insurance Company,
AIG Life Insurance Company and American International Life Assurance Company of
New York are under common control with, and therefore are affiliated with the
Trust's investment advisor and manager, SunAmerica Asset Management Corp.
(SAAMCo). Phoenix Home Life Mutual Insurance Company and Presidential Life
Insurance Company are not affiliated with SAAMCo. 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 SAAMCo. 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.
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.
Each Portfolio may invest to an 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 sell 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.
17
<PAGE> 19
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
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 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 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. A bottom-up investment approach searches for
outstanding performance of individual stocks before considering the impact of
economic or industry trends. Each Portfolio is managed using a 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.
INVESTMENT STRATEGIES
Each Portfolio has its own investment goal and principal strategy for pursuing
it as described in the charts beginning on page 3. The charts provided below
summarize information about each Portfolio's investments. We have included a
glossary to define the investment and risk terminology used in the charts and
throughout this Prospectus. Unless otherwise indicated, investment restrictions,
including percentage limitations, apply at the time of purchase. You should
consider your ability to assume the risks involved before investing in a
Portfolio through one of the variable contracts.
18
<PAGE> 20
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
EQUITY PORTFOLIOS
- -------------------------------------------------------------------------------------------------------------------
GROWTH AND INCOME GROWTH CAPITAL APPRECIATION NATURAL RESOURCES
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
What are the - Equity securities: - Equity securities: - Equity securities: - Equity securities:
Portfolio's - large-cap stocks - large-cap stocks - large-cap stocks - large-cap stocks
principal - mid-cap stocks - mid-cap stocks - mid-cap stocks - mid-cap stocks
investments? - small-cap stocks - small-cap stocks - foreign equity
securities
including ADRs,
EDRs, or GDRs
- -------------------------------------------------------------------------------------------------------------------
In what other types - Equity securities: - Equity securities: - Equity securities: - Equity securities:
of investments may - foreign equity - foreign equity - foreign equity - small-cap stocks
the Portfolio securities securities securities - rights
significantly including ADRs, including ADRs, including ADRs, - warrants
invest? EDRs or GDRs (up EDRs or GDRs (up EDRs or GDRs (up - Fixed income
to 20%) to 25%) to 25%) securities:
- convertible - preferred stocks
securities (up to
20% in below
investment grade
convertible
securities)
- small-cap stocks
- Fixed-income
securities:
- U.S. government
securities
- asset backed and
mortgage backed
securities
- high quality foreign
government bonds
- investment grade
corporate bonds (up
to 35% of total
assets)
- Short-term
investments
- -------------------------------------------------------------------------------------------------------------------
What other types of - Currency - Currency - Currency - Borrowing for
investments may the transactions transactions transactions temporary or
Portfolio use as - Borrowing for - Borrowing for - Borrowing for emergency purposes
part of efficient temporary or temporary or temporary or (up to 10%)
portfolio emergency purposes emergency purposes emergency purposes - Currency
management or to (up to 10%) (up to 10%) (up to 10%) transactions
enhance return? - Illiquid securities - Illiquid securities - Illiquid securities - Options and futures
(up to 10%) (up to 10%) (up to 10%) - Forward commitments
- Forward commitments - Forward commitments - Forward commitments - Defensive
- When-issued/delayed - When-issued/delayed - When-issued/delayed investments
delivery delivery delivery - Illiquid securities
transactions transactions transactions (up to 10%)
- Securities lending - Defensive - Defensive - When issued/delayed
(up to 33 1/3%) investments investments delivery transactions
- Defensive - Special situations - Special situations - Special situations
investments - Options and futures - Options and futures - REITs
- Special situations - Rights and warrants - Rights and warrants
- Options and futures - Convertible - Convertible
- Rights and warrants securities (up to 20%) securities
- -------------------------------------------------------------------------------------------------------------------
What risks normally - Market volatility - Market volatility - Market volatility - Foreign exposure
affect the - Securities selection - Securities selection - Security selection - Emerging markets
Portfolio? - Active trading - Active trading - Growth stocks - Market volatility
- Hedging - Hedging - Small companies - Small companies
- Growth stocks - Active trading - Natural resources
- Hedging sector
- Security selection
- Hedging
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
19
<PAGE> 21
<TABLE>
<CAPTION>
<S> <C> <C>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
ASSET ALLOCATION PORTFOLIOS
- ----------------------------------------------------------------------------------------------------------------
STRATEGIC
MULTI-ASSET MULTI-ASSET
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
What are the Portfolio's principal - Equity securities: - Equity securities:
investments? - large cap stocks - large-cap stocks
- mid-cap stocks - mid-cap stocks
- convertible securities - small-cap stocks
- Fixed-income securities: - foreign equity securities
- U.S. government securities including ADRs, EDRs or GDRs
- asset backed and mortgage backed - Fixed-income securities:
securities - U.S. government securities
- investment grade corporate bonds - foreign fixed income securities
- non-convertible preferred stocks - asset backed and mortgage backed
- Short-term investments securities
- corporate bonds
- junk bonds
- Short-term investments
- ----------------------------------------------------------------------------------------------------------------
In what other types of investments - Equity securities: - Equity securities:
may the Portfolio significantly - foreign equity securities - rights
invest? including ADRs, EDRs, or GDRs - warrants
- rights
- warrants
- small-cap stocks
- Fixed-income securities:
- zero coupon bonds
- ----------------------------------------------------------------------------------------------------------------
What other types of investments may - Borrowing for temporary or - Borrowing for temporary or
the Portfolio use as part of emergency purposes (up to 10%) emergency purposes (up to 10%)
efficient portfolio management or to - Currency transactions - Currency transactions
enhance return? - Options and futures - Options and futures
- Forward commitments - Forward commitments
- Defensive investments - Defensive investments
- Special situations - Special situations
- Illiquid securities (up to 10%) - Illiquid securities (up to 10%)
- When issued/delayed delivery - When issued/delayed delivery
transactions transactions
- ----------------------------------------------------------------------------------------------------------------
What risks normally affect the - Market volatility - Market volatility
Portfolio? - Security selection - Security selection
- Interest rate fluctuations - Growth stocks
- Small and medium sized companies - Small and medium sized companies
- Hedging - Interest rate fluctuations
- Active trading - Hedging
- Active trading
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE> 22
<TABLE>
<CAPTION>
<S> <C> <C> <C>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
FIXED INCOME PORTFOLIOS
- -------------------------------------------------------------------------------------------------------------------
GOVERNMENT AND
MONEY MARKET QUALITY BOND HIGH YIELD
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
What are the - Short-term investments - Fixed-income securities: - Fixed-income securities:
Portfolio's - U.S. and foreign - U.S. government securities - junk bonds
principal - high quality corporate bonds - foreign bonds
investments? - mortgage backed and asset
backed securities
- -------------------------------------------------------------------------------------------------------------------
In what other types N/A - Fixed-income securities: - Equity securities:
of investments may - corporate bonds rated as - convertible securities
the Portfolio low as "A" (up to 20%) - Fixed-income securities:
significantly - foreign fixed income - zero coupon bonds
invest? securities - discount bonds
- -------------------------------------------------------------------------------------------------------------------
What other types of - Borrowing for temporary or - Borrowing for temporary or - Borrowing for temporary or
investments may the emergency purposes emergency purposes emergency purposes
Portfolio use as (up to 10%) (up to 10%) (up to 10%)
part of efficient - Illiquid securities (up to - Illiquid securities (up to - Illiquid securities (up to
portfolio 10%) 10%) 10%)
management or to - Forward commitments - Forward commitments - Forward commitments
enhance return? - When-issued/delayed delivery - When-issued/delayed delivery - When-issued/delayed delivery
transactions transactions transactions
- Defensive investments - Defensive investments
- Zero coupon bonds - Non-convertible preferred
- Currency transactions stocks
- Options and futures - Currency transactions
- Special situations - Options and futures
- Special situations
- Warrants
- Common stocks
- Investment grade
fixed-income securities
- -------------------------------------------------------------------------------------------------------------------
What risks normally - Securities selection - Market volatility - Interest rate fluctuations
affect the - Interest rate fluctuations - Securities selection - Active trading
Portfolio? - Foreign exposure - Interest rate fluctuations - Hedging
- Active trading - Foreign exposure - Market volatility
- Active trading - Securities selection
- Hedging - Credit quality
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
21
<PAGE> 23
- --------------------------------------------------------------------------------
GLOSSARY
- --------------------------------------------------------------------------------
INVESTMENT TERMINOLOGY
BORROWING FOR TEMPORARY OR EMERGENCY PURPOSES involves the borrowing of cash or
securities by a Portfolio in limited circumstances, including to meet
redemptions. Borrowing will cost a Portfolio interest expense and other fees.
Borrowing may exaggerate changes in a Portfolio's net asset value and the cost
may reduce a Portfolio's return.
CURRENCY TRANSACTIONS include the purchase and sale of currencies to facilitate
the settlement of securities transactions and forward currency contracts, which
are used to hedge against changes in currency exchange rates.
DEFENSIVE INVESTMENTS include high quality fixed income securities, repurchase
agreements and other 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.
EQUITY SECURITIES, such as COMMON STOCKS, represent shares of equity ownership
in a corporation. Common stocks may or may not receive dividend payments.
Certain securities have common stock characteristics, including certain
convertible securities such as CONVERTIBLE PREFERRED STOCK, CONVERTIBLE BONDS,
WARRANTS and RIGHTS, and may be classified as equity securities. Investments in
equity securities and securities with equity characteristics include:
- LARGE-CAP STOCKS are common stocks of large companies that generally have
market capitalizations of over $9.5 billion, although there may be some
overlap among capitalization categories. Market capitalization categories
may change based on market conditions or changes in market capitalization
classifications as defined by agencies such as Standard & Poor's (S&P),
the Frank Russell Company (Russell), Morningstar, Inc. (Morningstar) or
Lipper, Inc. (Lipper).
- MID-CAP STOCKS are common stocks of medium sized companies that generally
have market capitalizations ranging from $1.5 billion to $9.5 billion,
although there may be some overlap among capitalization categories.
Market capitalization categories may change based on market conditions or
changes in market capitalization classifications as defined by agencies
such as S&P, Russell, Morningstar or Lipper. With respect to the MFS
MID-CAP GROWTH PORTFOLIO, the Subadviser will consider companies with
market capitalizations equaling or exceeding $250 million but not
exceeding the top range of the Russell MidCap(TM) Growth Index to be
medium sized companies.
- SMALL-CAP STOCKS are common stocks of small companies that generally have
market capitalizations of $1.5 billion or less, although there may be
some overlap among capitalization categories. Market capitalization
categories may change based on market conditions or changes in market
capitalization classifications as defined by agencies such as S&P,
Russell, Morningstar, or Lipper.
- CONVERTIBLE SECURITIES are securities (such as bonds or preferred stocks)
that may be converted into common stock of the same or a different
company.
- WARRANTS are rights to buy common stock of a company at a specified price
during the life of the warrant.
- RIGHTS represent a preemptive right of stockholders to purchase
additional shares of a stock at the time of a new issuance before the
stock is offered to the general public.
FIRM COMMITMENT AGREEMENTS and 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.
22
<PAGE> 24
FIXED INCOME SECURITIES are broadly classified as securities that provide for
periodic payment, typically interest or dividend payments, to the holder of the
security at a stated rate. Most fixed income securities, such as bonds,
represent indebtedness of the issuer and provide for repayment of principal at a
stated time in the future. Others do not provide for repayment of a principal
amount. The issuer of a SENIOR FIXED INCOME SECURITY is obligated to make
payments on this security ahead of other payments to security holders.
Investments in fixed income securities include:
- 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.
- CORPORATE DEBT INSTRUMENTS (BONDS, NOTES AND DEBENTURES) are securities
representing a debt of a corporation. The issuer is obligated to repay a
principal amount of indebtedness at a stated time in the future and in
most cases to make periodic payments of interest at a stated rate.
- An INVESTMENT GRADE FIXED INCOME SECURITY is rated in one of the top four
rating categories by a debt rating agency (or is considered of comparable
quality by the Adviser or Subadviser). The two best-known debt rating
agencies are S&P and Moody's Investors Service, Inc.( Moody's).
INVESTMENT GRADE refers to any security rated "BBB" or above by S&P or
"Baa" or above by Moody's.
- A JUNK BOND is a high yield, high risk bond that does not meet the credit
quality standards of an investment grade security.
- 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
securities, collateralized mortgage obligations, commercial
mortgage-backed securities, and asset-backed securities.
- PREFERRED STOCKS receive dividends at a specified rate and have
preference over common stock in the payment of dividends and the
liquidation of assets.
- ZERO-COUPON BONDS AND DEFERRED INTEREST BONDS. Zero coupon and deferred
interest bonds are debt obligations issued or purchased at a significant
discount from face value.
FOREIGN SECURITIES are issued by companies located outside of the United States,
including emerging markets. Foreign securities may include foreign corporate and
government bonds, foreign equity securities, foreign investment companies,
passive foreign investment companies (PFICs), American Depositary Receipts
(ADRs) or other similar securities that represent interests in foreign equity
securities, such as European Depositary Receipts (EDRs) and Global Depositary
Receipts (GDRs). An EMERGING MARKET country is generally one with a low or
middle income or economy or that is in the early stages of its industrialization
cycle. For fixed income investments, an emerging market includes those where the
sovereign credit rating is below investment grade. Emerging market countries may
change over time depending on market and economic conditions and the list of
emerging market countries may vary by Adviser or Subadviser.
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
23
<PAGE> 25
the date of the agreement. Similarly, a Portfolio selling such securities does
not participate in further gains or losses on the date of the agreement.
ILLIQUID/RESTRICTED 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 the
obligation to deliver assets or money depending on the performance of one or
more underlying assets or a market or economic index. An option gives its owner
the right, but not the obligation, to buy ("call") or sell ("put") a specified
amount of a security at a specified price within in a specified time period. A
futures contract is an exchange-traded legal contract to buy or sell a standard
quantity and quality of a commodity, financial instrument, index, etc. at a
specified future date and price.
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.
SECURITIES LENDING involves a loan of securities by a Portfolio in exchange for
cash or collateral. A Portfolio earns interest on the loan while retaining
ownership of the security.
SHORT-TERM INVESTMENTS 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.
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.
RISK TERMINOLOGY
ACTIVE TRADING: A strategy used whereby the Portfolio may engage in frequent
trading of portfolio securities to achieve its investment goal. 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. 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. During periods of increased market volatility, active trading
may be more pronounced. In the "Financial Highlights" section we provide each
Portfolio's portfolio turnover rate for each of the last five fiscal years.
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
24
<PAGE> 26
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 an issuer is in an EMERGING MARKET. Historically, the markets of
EMERGING MARKET countries have been more volatile than more developed markets;
however, such markets can provide higher rates of return to investors.
GROWTH STOCKS: Growth stocks can be volatile for several reasons. Since the
issuers usually reinvest a high portion of earnings in their own business,
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.
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.
INTEREST RATE FLUCTUATIONS: The volatility of fixed income securities is due
principally to changes in interest rates. The market value of bonds and other
fixed income securities usually tends to vary inversely with the level of
interest rates. As interest rates rise the value of such securities typically
falls, and as interest rates fall, the value of such securities typically rise.
Longer-term and lower coupon bonds tend to be more sensitive to changes in
interest rates.
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.
NATURAL RESOURCES SECTOR: The value of equity investments in the natural
resources sector will fluctuate based on a number of factors, including: market
conditions generally; the market for the particular natural resource in which
the issuer is involved; events of nature; and international politics.
PREPAYMENT: Prepayment risk is the possibility that the principal of the loans
underlying mortgage-backed or other pass-through 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 decline, with
the effect that the securities subject to prepayment risk held by a Portfolio
may exhibit price characteristics of longer-term debt securities.
SECURITIES SELECTION: A strategy used by a Portfolio, or securities selected by
its portfolio manager, may fail to produce the intended return.
SMALL AND MEDIUM SIZED COMPANIES: Companies with smaller market capitalizations
(particularly under $1.5 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. Consequently, the securities of smaller
companies may not be as readily marketable and may be subject to more abrupt or
erratic market movements. Securities of medium sized companies are also usually
more volatile and entail greater risks than securities of large companies.
25
<PAGE> 27
- --------------------------------------------------------------------------------
MANAGEMENT
- --------------------------------------------------------------------------------
INVESTMENT ADVISER
SunAmerica Asset Management Corp. SAAMCo serves as investment adviser and
manager for all the Portfolios of the Trust. SAAMCo oversees the Subadviser,
provides various administrative services and supervises the daily business
affairs of each Portfolio. SAAMCo, located at The SunAmerica Center, 733 Third
Avenue, New York, New York 10017, is a corporation organized in 1982 under the
laws of the state of Delaware. In addition to serving as investment adviser and
manager to the Trust, SAAMCo serves as adviser, manager and/or administrator for
Anchor Pathway Fund, Brazos Mutual Funds, Seasons Series Trust, SunAmerica Style
Select Series, Inc., SunAmerica Equity Funds, SunAmerica Income Funds,
SunAmerica Money Market Funds, Inc., SunAmerica Series Trust and SunAmerica
Strategic Investment Series, Inc. For the fiscal year ended December 31, 1999,
each Portfolio paid SAAMCo a fee equal to the following percentage of average
daily net assets:
<TABLE>
<CAPTION>
PORTFOLIO FEE
--------- ----
<S> <C>
Growth and Income Portfolio................................. 0.70%
Growth Portfolio............................................ 0.68%
Capital Appreciation Portfolio.............................. 0.62%
Natural Resources Portfolio................................. 0.75%
Multi-Asset Portfolio....................................... 1.00%
Strategic Multi-Asset Portfolio............................. 1.00%
Money Market Portfolio...................................... 0.50%
Government and Quality Bond Portfolio....................... 0.60%
High Yield Portfolio........................................ 0.70%
</TABLE>
SUBADVISER
Wellington Management Company, LLP (Wellington Management) acts as Subadviser to
each Portfolio of the Trust, pursuant to a Subadvisory Agreement with SAAMCo.
Wellington Management is independent of SAAMCo and discharges its
responsibilities subject to the policies of the Trustees and the oversight and
supervision of SAAMCo which pays Wellington Management's fees.
Wellington Management is a Massachusetts limited liability partnership. The
principal business address of Wellington 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.
26
<PAGE> 28
PORTFOLIO MANAGEMENT
The following individuals or management team is primarily responsible for the
day-to-day management of the Portfolios as indicated in the following chart:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
PORTFOLIO NAME AND TITLE OF EXPERIENCE
PORTFOLIO MANAGER
-------------------------------------------------------------------------------------------------------
<S> <C> <C>
GROWTH AND INCOME PORTFOLIO - Matthew E. Megargel Mr. Megargel has served as the portfolio
Senior Vice President manager for the Portfolio since 1998. He
joined Wellington Management in 1983 as a
global industry analyst. He also manages
the Multi-Asset Portfolio (see below).
-------------------------------------------------------------------------------------------------------
GROWTH PORTFOLIO - Wellington Management's Wellington Management's Growth Investment
Growth Investment Team Team has been responsible for managing the
Portfolio since 1995.
-------------------------------------------------------------------------------------------------------
CAPITAL APPRECIATION - Robert D. Rands Mr. Rands has served as the portfolio
PORTFOLIO Senior Vice President manager for the Portfolio since its
inception in 1987. He joined Wellington
Management in 1978 as a special situations
analyst and became a portfolio manager in
1983. Mr. Rands also manages the Strategic
Multi-Asset Portfolio (see below).
-------------------------------------------------------------------------
- Steven C. Angeli Mr. Angeli has served as the assistant
Vice President portfolio manager for the Portfolio since
1998. He joined Wellington Management as
research analyst in 1994, after receiving
his MBA from Darden Graduate School of
Business Administration at the University
of Virginia. Prior to joining Wellington
Management.
-------------------------------------------------------------------------------------------------------
NATURAL RESOURCES PORTFOLIO - Ernst H. von Metzsch Mr. von Metzsch has served as the
Senior Vice President portfolio manager for the Portfolio since
1994. He joined Wellington Management in
1973 as an analyst. He became a portfolio
manager in 1984.
-------------------------------------------------------------------------
- James Bevilacqua Mr. Bevilacqua has served as the assistant
Vice President portfolio manager of the Portfolio since
1998. He joined Wellington Management as
an analyst in the global industry research
group in 1994, after receiving his MBA
from Stanford Graduate School of Business.
-------------------------------------------------------------------------------------------------------
MULTI-ASSET PORTFOLIO - John C. Keogh Mr. Keogh has served as portfolio manager
Senior Vice President for the Portfolio since 1994. Mr. Keogh
also serves as portfolio manager for the
Government and Quality Board Portfolio
(see below).
-------------------------------------------------------------------------
- Matthew E. Megargel Mr. Megargel has served as portfolio
Senior Vice President manager for the Portfolio since 1998. Mr.
Megargel also serves as portfolio manager
for the Growth and Income Portfolio (see
above).
-------------------------------------------------------------------------------------------------------
</TABLE>
27
<PAGE> 29
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
PORTFOLIO NAME AND TITLE OF EXPERIENCE
PORTFOLIO MANAGER
-------------------------------------------------------------------------------------------------------
<S> <C> <C>
STRATEGIC MULTI-ASSET - 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. He joined
Wellington Management in 1993 as a
Director of International Equities.
-------------------------------------------------------------------------
- Andrew S. Offit Mr. Offit has served as the associate
Vice President portfolio manager of the Portfolio since
1997. Mr. Offit joined Wellington
Management as an international portfolio
manager in 1997. Mr. Offit was previously
a portfolio manager at Chestnut Hill
Management during 1997, and analyst and
portfolio manager at Fidelity Management
and Research Company from 1987 to 1997.
-------------------------------------------------------------------------
- Robert L. Evans Mr. Evans has served as portfolio manager
Senior Vice President for the Portfolio since 1998. He joined
Wellington Management in 1995 as a
portfolio manager. Prior to joining
Wellington Management, Mr. Evans was an
international fixed income portfolio
manager with Pacific Investment Company
from 1991 to 1995.
-------------------------------------------------------------------------
- Robert D. Rands Mr. Rands has served as portfolio manager
Senior Vice President for the Portfolio since 1994. Mr. Rands
also manages the Capital Appreciation
Portfolio (see above).
-------------------------------------------------------------------------------------------------------
MONEY MARKET PORTFOLIO - Timothy E. Smith Mr. Smith has served as the portfolio
Vice President manager for the Portfolio since 1997. He
joined Wellington Management in 1992 as an
investment professional.
-------------------------------------------------------------------------------------------------------
GOVERNMENT AND QUALITY BOND - John C. Keogh Mr. Keogh has served as the portfolio
PORTFOLIO Senior Vice President manager for the Portfolio since 1994. He
joined Wellington Management as a
portfolio manager in 1983. Mr. Keogh also
manages the Multi-Asset Portfolio (see
above).
-------------------------------------------------------------------------------------------------------
HIGH YIELD PORTFOLIO - Catherine A. Smith Ms. Smith has served as the portfolio
Senior Vice President manager for the Portfolio since 1992. She
joined Wellington Management in 1985 as a
high yield analyst and began managing
fixed income portfolios in 1988.
-------------------------------------------------------------------------------------------------------
</TABLE>
28
<PAGE> 30
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.
- --------------------------------------------------------------------------------
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, is included in
the Trust's Annual Report to shareholders, which is available upon request.
<TABLE>
<CAPTION>
NET DIVIDENDS DIVIDENDS
REALIZED TOTAL DECLARED FROM NET NET
NET ASSET NET & UNREALIZED FROM FROM NET REALIZED NET ASSET ASSETS RATIO OF
VALUE INVEST- GAIN (LOSS) INVEST- INVEST- GAIN ON VALUE END OF EXPENSES
PERIOD BEGINNING MENT ON MENT MENT INVEST- END OF TOTAL PERIOD TO AVERAGE
ENDED OF PERIOD INCOME* INVESTMENTS OPERATIONS INCOME MENTS PERIOD RETURN** (000'S) NET ASSETS
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
Money Market Portfolio
12/31/95 $ 1.00 $0.05 $ -- $ 0.05 $(0.05) $ -- $ 1.00 5.6% $ 93,692 0.6%
12/31/96 1.00 0.05 -- 0.05 (0.05) -- 1.00 5.0 74,001 0.6
12/31/97 1.00 0.05 -- 0.05 (0.05) -- 1.00 5.1 69,804 0.6
12/31/98 1.00 0.05 -- 0.05 (0.05) -- 1.00 5.1 65,553 0.6
12/31/99 1.00 0.05 -- 0.05 (0.05) -- 1.00 4.7 63,222 0.7
Government & Quality Bond Portfolio
12/31/95 12.86 0.90 1.55 2.45 (1.08) -- 14.23 19.4 225,579 0.7
12/31/96 14.23 0.87 (0.50) 0.37 (0.90) (0.03) 13.67 2.9 221,603 0.7
12/31/97 13.67 0.84 0.42 1.26 (0.92) (0.05) 13.96 9.5 234,623 0.7
12/31/98 13.96 0.79 0.48 1.27 (0.57) (0.02) 14.64 9.2 375,667 0.7
12/31/99 14.64 0.78 (1.02) (0.25) (0.51) (0.21) 13.68 (1.7) 480,572 0.7
High Yield Portfolio
12/31/95 7.87 0.77 0.67 1.44 (0.98) -- 8.33 18.8 46,817 0.9
12/31/96 8.33 0.74 0.19 0.93 (0.88) -- 8.38 11.7 45,687 0.9
12/31/97 8.38 0.75 0.18 0.93 (0.93) -- 8.38 11.4 40,193 0.9
12/31/98 8.38 0.71 (1.13) (0.42) (1.16) -- 6.80 (4.5) 26,099 0.9
12/31/99 6.80 0.62 (0.25) 0.37 (1.05) -- 6.12 5.7 20,077 1.2
Growth and Income Portfolio
12/31/95 11.56 0.61 1.29 1.90 (0.83) (0.62) 12.01 16.6 32,008 0.9
12/31/96++ 12.01 0.33 2.02 2.35 (0.77) -- 13.59 20.2 33,465 0.9
12/31/97 13.59 0.15 3.74 3.89 (0.34) -- 17.14 28.8 44,417 0.8
12/31/98 17.14 0.14 4.80 4.94 (0.17) (0.80) 21.11 30.2 52,190 0.8
12/31/99 21.11 0.10 3.06 3.16 (0.15) (3.12) 21.00 15.9 49,710 0.9
<CAPTION>
RATIO OF NET
INVESTMENT
INCOME PORTFOLIO
PERIOD TO AVERAGE TURNOVER
ENDED NET ASSETS RATE
<S> <C> <C>
Money Market Portfolio
12/31/95 5.5% --%
12/31/96 4.9 --
12/31/97 5.0 --
12/31/98 5.0 --
12/31/99 4.6 --
Government & Quality
Bond Portfolio
12/31/95 6.5 135.2
12/31/96 6.3 106.7
12/31/97 6.1 75.7
12/31/98 5.5 150.2
12/31/99 5.5 31.1
High Yield Portfolio
12/31/95 9.2 68.1
12/31/96 8.8 58.0
12/31/97 8.8 101.4
12/31/98 9.0 109.6
12/31/99 9.2 55.0
Growth and Income
Portfolio
12/31/95 5.2 88.8
12/31/96++ 2.5 108.5
12/31/97 1.0 49.4
12/31/98 0.7 41.0
12/31/99 0.5 20.4
</TABLE>
- ---------------
* Selected data for a share of beneficial interest outstanding throughout each
period (calculated based upon average shares outstanding)
** Does not reflect expenses that apply to the separate accounts of the
insurance companies. If such expenses had been included, total return would
have been lower for each period presented.
++ Prior to March 1, 1996, the portfolio was invested primarily in convertible
debt securities. After that date, the portfolio primarily invests in common
stock.
29
<PAGE> 31
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NET DIVIDENDS DIVIDENDS
REALIZED TOTAL DECLARED FROM NET NET
NET ASSET NET & UNREALIZED FROM FROM NET REALIZED NET ASSET ASSETS
VALUE INVESTMENT GAIN (LOSS) INVEST- INVEST- GAIN ON VALUE END OF
PERIOD BEGINNING INCOME ON MENT MENT INVEST- END OF TOTAL PERIOD
ENDED OF PERIOD (LOSS)* INVESTMENTS OPERATIONS INCOME MENTS PERIOD RETURN** (000'S)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
Growth Portfolio
12/31/95 $18.18 $0.11 $ 4.62 $ 4.73 $(0.05) $(3.38) $19.48 26.3% $ 307,857
12/31/96 19.48 0.20 4.57 4.77 (0.11) (0.95) 23.19 25.0 366,602
12/31/97 23.19 0.16 6.76 6.92 (0.20) (2.87) 27.04 30.4 485,528
12/31/98 27.04 0.11 7.19 7.30 (0.14) (1.68) 32.52 29.0 669,330
12/31/99 32.52 0.08 8.31 8.39 (0.10) (2.29) 38.52 26.9 868,765
Capital Appreciation Portfolio
12/31/95 17.51 0.06 6.00 6.06 (0.15) (0.20) 23.22 34.6 356,218
12/31/96 23.22 0.06 5.73 5.79 (0.06) (0.95) 28.00 25.1 567,672
12/31/97 28.00 0.02 7.05 7.07 (0.05) (2.81) 32.21 25.4 814,311
12/31/98 32.21 0.04 6.24 6.28 (0.02) (2.88) 35.59 22.2 1,100,646
12/31/99 35.59 0.08 23.40 23.48 (0.03) (2.02) 57.02 67.6 1,986,888
Natural Resources Portfolio
12/31/95 13.29 0.18 2.15 2.33 (0.21) (0.29) 15.12 17.5 28,941
12/31/96 15.12 0.22 1.89 2.11 (0.13) (0.23) 16.87 14.1 45,329
12/31/97 16.87 0.20 (1.49) (1.29) (0.17) (0.99) 14.42 (8.6) 50,054
12/31/98 14.42 0.21 (2.72) (2.51) (0.19) (0.13) 11.59 (17.3) 39,299
12/31/99 11.59 0.14 4.67 4.81 (0.18) -- 16.22 41.5 54,391
Multi-Asset Portfolio
12/31/95 11.71 0.40 2.47 2.87 (0.49) (1.05) 13.04 24.9 168,243
12/31/96 13.04 0.35 1.36 1.71 (0.49) (0.91) 13.35 13.9 150,619
12/31/97 13.35 0.34 2.36 2.70 (0.43) (2.10) 13.52 21.1 145,685
12/31/98 13.52 0.30 2.56 2.86 (0.40) (2.49) 13.49 24.5 146,712
12/31/99 13.49 0.26 1.28 1.54 (0.34) (2.11) 12.58 12.5 129,442
Strategic Multi-Asset Portfolio
12/31/95 11.29 0.32 2.18 2.50 (0.23) (1.78) 11.78 22.8 64,026
12/31/96 11.78 0.25 1.41 1.66 (0.40) (0.84) 12.20 14.8 57,744
12/31/97 12.20 0.23 1.48 1.71 (0.31) (2.32) 11.28 14.3 53,289
12/31/98 11.28 0.23 1.13 1.36 (0.26) (1.92) 10.46 15.2 49,254
12/31/99 10.46 0.24 2.50 2.74 (0.17) (1.26) 11.77 28.2 79,273
<CAPTION>
RATIO OF NET
RATIO OF INVESTMENT
EXPENSES INCOME (LOSS) PORTFOLIO
PERIOD TO AVERAGE TO AVERAGE TURNOVER
ENDED NET ASSETS NET ASSETS RATE
<S> <C> <C> <C>
- --------------------------------------------------
Growth Portfolio
12/31/95 0.9% 0.6% 92.1%
12/31/96 0.8 0.9 51.7
12/31/97 0.8 0.6 32.2
12/31/98 0.8 0.4 27.1
12/31/99 0.7 0.2 39.9
Capital Appreciation Portfolio
12/31/95 0.8 0.3 60.1
12/31/96 0.8 0.2 69.2
12/31/97 0.7 0.1 60.1
12/31/98 0.7 0.1 59.6
12/31/99 0.7 0.2 63.7
Natural Resources Portfolio
12/31/95 1.0 1.3 32.0
12/31/96 0.9 1.3 52.5
12/31/97 0.9 1.2 27.9
12/31/98 0.9 1.6 51.2
12/31/99 1.0 1.0 86.7
Multi-Asset Portfolio
12/31/95 1.1 3.2 85.9
12/31/96 1.1 2.6 64.1
12/31/97 1.1 2.4 56.5
12/31/98 1.1 2.2 51.1
12/31/99 1.1 2.0 40.9
Strategic Multi-Asset Portfolio
12/31/95 1.3 2.7 36.9
12/31/96 1.4 2.0 51.3
12/31/97 1.4 1.8 59.7
12/31/98 1.5 2.0 157.1
12/31/99 1.5 2.4 158.9
</TABLE>
- ---------------
* Selected data for a share of beneficial interest outstanding throughout each
period (calculated based upon average shares outstanding)
** Does not reflect expenses that apply to the separate accounts of the
insurance companies. If such expenses had been included, total return would
have been lower for each period presented.
30
<PAGE> 32
- --------------------------------------------------------------------------------
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
at no charge by calling (800) 445-7862 or by writing the Trust at P.O. Box 54299
Los Angeles, California 90054-0299.
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 electronic request at the
following e-mail address: [email protected], or 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.
INVESTMENT COMPANY ACT
- - File No. 811-3836
31
<PAGE> 33
Please forward a copy (without charge) of the Statement of Additional
Information concerning Anchor Series Trust to:
(Please print or type and fill in all information)
----------------------------------------------------
Name
----------------------------------------------------
Address
----------------------------------------------------
City/State/Zip
----------------------------------------------------
Date:________________ Signed:_______________________
Return to: Anchor National Life Insurance Company, Annuity Service Center, P.O.
Box 54299,
Los Angeles, California 90054-0299.
32
<PAGE> 34
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 April 20, 2000. 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 Trust's audited financial
statements are incorporated into this Statement of Additional Information by
reference to its 1999 annual report to shareholders. You may request a copy of
the annual report and/or Prospectus at no charge by calling (800) 445-7862 or
writing the Trust at the address below.
----------
P.O. BOX 54299
LOS ANGELES, CALIFORNIA 90054-0299
(800) 445-SUN2.
----------
DATED: APRIL 20, 2000
<PAGE> 35
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
THE TRUST....................................................................B-3
INVESTMENT OBJECTIVES AND POLICIES...........................................B-3
Growth and Income Portfolio.........................................B-3
Growth Portfolio....................................................B-4
Capital Appreciation Portfolio......................................B-4
Natural Resources Portfolio.........................................B-4
Multi-Asset Portfolio...............................................B-5
Strategic Multi-Asset Portfolio.....................................B-6
Money Market Portfolio..............................................B-7
Government and Quality Bond Portfolio...............................B-7
High Yield Portfolio................................................B-8
Supplemental Investment/Risk Charts.................................B-8
Supplemental Glossary..............................................B-10
Supplemental Information About Derivatives and Their Use...........B-35
Supplemental Information Concerning High-Yield, High-Risk Bonds
and Securities Ratings.............................................B-37
INVESTMENT RESTRICTIONS.....................................................B-39
SUNAMERICA ASSET MANAGEMENT CORP............................................B-40
Advisory Fees......................................................B-43
Personal Securities Trading........................................B-43
WELLINGTON MANAGEMENT COMPANY...............................................B-44
Subadvisory Fees...................................................B-45
OFFICERS AND TRUSTEES OF THE TRUST..........................................B-46
COMPENSATION TABLE..........................................................B-49
CUSTODIAN...................................................................B-49
INDEPENDENT ACCOUNTANTS AND LEGAL COUNSEL...................................B-49
</TABLE>
B-2
<PAGE> 36
<TABLE>
<S> <C>
PORTFOLIO TRANSACTIONS AND BROKERAGE........................................B-50
1999 Brokerage Commissions.........................................B-51
1998 Brokerage Commissions........................................B-52
1997 Brokerage Commissions.........................................B-53
NET ASSET VALUE.............................................................B-53
Money Market Portfolio.............................................B-54
DIVIDENDS, DISTRIBUTIONS AND TAXES..........................................B-55
SPECIAL CONSIDERATIONS......................................................B-55
GENERAL INFORMATION.........................................................B-56
OWNERSHIP OF SHARES.........................................................B-57
FINANCIAL STATEMENTS........................................................B-57
APPENDIX ...................................................................B-58
</TABLE>
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
nine 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, AIG Life Insurance Company and American
International Life Assurance Company of New York; and variable annuity contracts
issued by Phoenix Home Life Mutual 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. The Target '98 Portfolio ceased
operations on December 11, 1998. On August 6, 1999, the shares of the Fixed
Income Portfolio and Foreign Securities Portfolio were substituted with shares
of the Government and Quality Bond Portfolio and Strategic Multi-Asset
Portfolio, respectively.
B-3
<PAGE> 37
INVESTMENT OBJECTIVES AND POLICIES
The investment goal and principal investment strategy for each of the
Portfolios, along with certain types of investments the Portfolios make under
normal market conditions and for efficient portfolio management, are described
under "More Information About the Portfolios - Investment Strategies" in the
Prospectus. The following information is provided for those investors wishing to
have more comprehensive information than that contained in the Prospectus.
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 primarily in core equity securities that provide the potential for
growth and offer income, such as dividend-paying stocks. 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.
GROWTH PORTFOLIO
The investment objective of the Growth Portfolio is capital
appreciation. Under normal circumstances, the Portfolio will invest primarily in
core equity securities that are widely diversified by industry and company. 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.
CAPITAL APPRECIATION PORTFOLIO
The investment objective of the Capital Appreciation Portfolio is
long-term capital appreciation. Under normal circumstances, the Portfolio
invests primarily in growth equity securities across a wide range of industries
and companies, using a wide-ranging and flexible stock picking approach and may
be concentrated and will generally have less investments in large company
securities than the Growth Portfolio. The Portfolio may also invest in cash
equivalents and index futures. Subject to the limitations listed in the
prospectus and herein, the Portfolio may invest in securities of foreign
companies. This includes direct
B-4
<PAGE> 38
investments through purchases in foreign markets, as well as indirect
investments through purchases of Depositary Receipts, such as ADRs.
The Portfolio follows a dynamic investment approach. Investments will
be selected from a broad universe of securities on the basis of the Subadviser'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 Subadviser'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.
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.
NATURAL RESOURCES PORTFOLIO
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 using a value approach primarily
in equity securities of U.S. or foreign companies that are expected to provide
favorable returns in periods of rising inflation, at least 65% related to
natural resources, such as energy, metals, mining and forest products. 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.
- 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.
MULTI-ASSET PORTFOLIO
B-5
<PAGE> 39
The investment objective of the Multi-Asset Portfolio is to seek
long-term total investment return consistent with moderate investment risk.
Total return consists of any income (such as dividends and interest) plus any
capital gains and losses from the Portfolio's investments. The Portfolio
actively allocates the Portfolio's assets among equity securities, investment
grade fixed income securities and cash with less risk than the Strategic
Multi-Asset Portfolio. Currently the Portfolio is invested more in stocks than
in fixed income securities. This may change over time in response to the
Subadviser's outlook on the return potential of stocks, bonds and cash. The
Subadviser 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 approach to
stock selection, combining 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 of
comparable quality by the Subadviser. These securities may be
issued in the U.S. or abroad, but generally will be
denominated in U.S. dollars.
STRATEGIC MULTI-ASSET PORTFOLIO
The investment objective of the Strategic Multi-Asset Portfolio is 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 actively allocates the Portfolio's assets among
equity securities of U.S. and foreign companies, medium and small company equity
securities, global fixed income securities (including high-yield, high-risk
bonds) and cash with more risk than the Multi-Asset Portfolio. 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 Subadviser's
outlook on the return potential of stocks, bonds and cash. The Subadviser'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:
B-6
<PAGE> 40
- 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, 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 (such as the World Bank, European Investment Bank and
European Bank for Reconstruction and Development). 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 Subadviser. 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 Subadviser.
- 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.
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 ("SEC")
applicable to money market funds. These regulations impose certain quality,
maturity and diversification guidelines on investments of the Portfolio. As a
result, the Portfolio invests in a
B-7
<PAGE> 41
diversified portfolio of money market instruments maturing in 397 days or less
and maintains 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 Subadviser 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 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.
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 obligations issued,
guaranteed or insured by the U.S. government, its agencies or instrumentalities
and in high quality corporate fixed income securities.
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
Subadviser. At present, the Portfolio expects to invest a majority of its assets
in government securities.
B-8
<PAGE> 42
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.
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 in
high-yielding, high-risk, income producing bonds, also known as "junk bonds,"
and other fixed income securities. The Portfolio will also invest in unrated
securities that are of comparable quality as determined by the Subadviser. 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 to
12 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
Subadviser 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 Subadviser 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.
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 of 1933, as amended (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.
SUPPLEMENTAL INVESTMENT/RISK CHARTS
B-9
<PAGE> 43
The following charts and information supplements the information contained in
the prospectus and also provides information concerning investments the
Portfolios make on an periodic basis which includes infrequent investments or
investments in which the Portfolios reserve the right to invest. We have also
included a supplemental glossary to define investment and risk terminology used
in the charts below that does not otherwise appear in the Prospectus under the
section entitled "Glossary." In addition, the supplemental glossary also
provides additional and/or more detailed information about certain investment
and risk terminology that appears in the Prospectus under the section entitled
"Glossary." Unless otherwise indicated, investment restrictions, including
percentage limitations, apply at the time of purchase.
<TABLE>
<CAPTION>
EQUITY PORTFOLIOS
GROWTH AND INCOME GROWTH CAPITAL APPRECIATION NATURAL RESOURCES
------------------- ---------------------- ---------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C>
In what other - REITs - Fixed income - Fixed income - Fixed income
types of securities securities securities:
investments may - short-term - short-term - U.S.
the Portfolio investments investments government
periodically - REITs - REITs securities
invest? - foreign fixed
income
securities
- asset and
mortgage
backed securities
- investment
grade
corporate bonds
- short-term
investments
------------------- ---------------------- ---------------------- ---------------------- ----------------------
What other types - Foreign exposure - Foreign exposure - Foreign exposure - Credit quality
of risk may - Credit quality - Credit quality - Credit quality - Illiquidity
potentially or - Illiquidity - Illiquidity - Illiquidity - Prepayment
periodically - Prepayment - Prepayment - Prepayment - Derivatives
affect the - Derivatives - Derivatives - Derivatives - Interest rate
Portfolio? - Interest rate - Interest rate fluctuations
fluctuations fluctuations
------------------- ---------------------- ---------------------- ---------------------- ----------------------
</TABLE>
<TABLE>
<CAPTION>
ASSET ALLOCATION PORTFOLIOS
MULTI-ASSET STRATEGIC MULTI-ASSET
------------------- --------------------------------------------- ---------------------------------------------
<S> <C> <C>
In what other - REITs - Fixed-income securities:
types of - zero coupon bonds
investments may - REITs
the Portfolio
periodically
invest?
------------------- --------------------------------------------- ---------------------------------------------
What other types - Foreign exposure - Illiquidity
of risk may - Illiquidity - Prepayment
potentially or - Prepayment - Derivatives
periodically - Derivatives
affect the
Portfolio?
------------------- --------------------------------------------- ---------------------------------------------
</TABLE>
B-10
<PAGE> 44
<TABLE>
<CAPTION>
FIXED INCOME PORTFOLIOS
MONEY MARKET GOVERNMENT AND QUALITY HIGH YIELD
BOND
------------------- ---------------------------- --------------------------- ----------------------------------
<S> <C> <C> <C>
In what other N/A N/A N/A
types of
investments may
the Portfolio
periodically
invest?
------------------- ---------------------------- --------------------------- ----------------------------------
What other types - Illiquidity - Foreign exposure - Foreign exposure
of risk may - Prepayment - Illiquidity - Illiquidity
potentially or - Prepayment - Prepayment
periodically - Derivatives - Derivatives
affect the - Small and medium sized
portfolio? companies
------------------- ---------------------------- --------------------------- ----------------------------------
</TABLE>
SUPPLEMENTAL GLOSSARY
SHORT-TERM INVESTMENTS, including both U.S. and non-U.S. dollar denominated
money market instruments, are invested in for reasons that may include (a) for
liquidity purposes (to meet redemptions and expenses); (b) to generate a return
on idle cash held by a Portfolio during periods when an Adviser/Subadviser is
unable to locate favorable investment opportunities; or (c) for temporary
defensive purposes. The MONEY MARKET SECURITIES PORTFOLIO invests principally in
short-term investments. Common short-term investments include:
Money Market Securities - Money Market securities may include
securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities, repurchase agreements, commercial paper, bankers'
acceptances, time deposits and certificates of deposit.
Commercial Bank Obligations - Certificates of deposit
(interest-bearing time deposits), bankers' acceptances (time drafts drawn
on a commercial bank where the bank accepts an irrevocable obligation to
pay at maturity) and documented discount notes (corporate promissory
discount notes accompanied by a commercial bank guarantee to pay at
maturity) representing direct or contingent obligations of commercial
banks. The MONEY MARKET SECURITIES PORTFOLIO may also invest in obligations
issued by commercial banks with total assets of less than $1 billion if the
principal amount of these obligations owned by the MONEY MARKET SECURITIES
PORTFOLIO is fully insured by the Federal Deposit Insurance Corporation
("FDIC").
Savings Association Obligations - Certificates of deposit
(interest-bearing time deposits) issued by mutual savings banks or savings
and loan associations with assets in excess of $1 billion and whose
deposits are insured by the FDIC. The MONEY MARKET SECURITIES PORTFOLIO may
also invest in obligations issued by mutual savings banks or savings and
loan associations with total assets of less than $1 billion if the
principal amount of these obligations owned by the MONEY MARKET SECURITIES
PORTFOLIO is fully insured by the FDIC.
Commercial Paper - Short-term notes (up to 12 months) issued
by corporations or governmental bodies, including variable amount master
demand notes. The MONEY MARKET
B-11
<PAGE> 45
SECURITIES PORTFOLIO may purchase commercial paper only if judged by the
Adviser to be of suitable investment quality. This includes commercial
paper that is (a) rated in the two highest categories by Standard & Poor's
and by Moody's, or (b) other commercial paper deemed on the basis of the
issuer's creditworthiness to be of a quality appropriate for the MONEY
MARKET SECURITIES PORTFOLIO. (No more than 5% of the MONEY MARKET
SECURITIES PORTFOLIO'S assets may be invested in commercial paper in the
second highest rating category; no more than the greater of 1% of the MONEY
MARKET SECURITIES PORTFOLIO'S assets or $1 million may be invested in such
securities of any one issuer.) See "Description of Commercial Paper and
Bond Ratings" for a description of the ratings. The MONEY MARKET SECURITIES
PORTFOLIO will not purchase commercial paper described in (b) above if such
paper would in the aggregate exceed 15% of its total assets after such
purchase.
Variable Amount Master Demand Notes permit a Portfolio to
invest varying amounts at fluctuating rates of interest pursuant to the
agreement in the master note. These are direct lending obligations between
the lender and borrower, they are generally not traded, and there is no
secondary market. Such instruments are payable with accrued interest in
whole or in part on demand. The amounts of the instruments are subject to
daily fluctuations as the participants increase or decrease the extent of
their participation. The MONEY MARKET SECURITIES PORTFOLIO'S investments in
these instruments are limited to those that have a demand feature enabling
the MONEY MARKET SECURITIES PORTFOLIO unconditionally to receive the amount
invested from the issuer upon seven or fewer days' notice. Generally, THE
MONEY MARKET SECURITIES PORTFOLIO attempts to invest in instruments having
a one-day notice provision. In connection with master demand note
arrangements, the Adviser/Subadviser, subject to the direction of the
Trustees, monitors on an ongoing basis, the earning power, cash flow and
other liquidity ratios of the borrower, and its ability to pay principal
and interest on demand. The Adviser/Subadviser also considers the extent to
which the variable amount master demand notes are backed by bank letters of
credit. These notes generally are not rated by Moody's or Standard & Poor's
and a Portfolio may invest in them only if it is determined that at the
time of investment the notes are of comparable quality to the other
commercial paper in which a Portfolio may invest. Master demand notes are
considered to have a maturity equal to the repayment notice period unless
the Adviser/Subadviser has reason to believe that the borrower could not
make timely repayment upon demand.
Corporate Bonds and Notes - A Portfolio may purchase corporate
obligations that mature or that may be redeemed in 397 days or less. These
obligations originally may have been issued with maturities in excess of
such period. The MONEY MARKET SECURITIES PORTFOLIO may invest only in
corporate bonds or notes of issuers having outstanding short-term
securities rated in the top two rating categories by Standard & Poor's and
Moody's. See "Description of Commercial Paper and Bond Ratings" for
description of investment-grade ratings by Standard & Poor's and Moody's.
Government Securities - Debt securities maturing within one
year of the date of purchase include adjustable-rate mortgage securities
backed by GNMA, FNMA, FHLMC and other non-agency issuers. Although certain
floating or variable rate obligations (securities whose coupon rate changes
at least annually and generally more frequently) have maturities in excess
of one year, they are also considered short-term debt securities. See "U.S.
Government Securities," above.
B-12
<PAGE> 46
Repurchase Agreements. A Portfolio will enter into repurchase
agreements involving only securities in which it could otherwise invest and
with selected banks and securities dealers whose financial condition is
monitored by the Adviser/Subadviser, subject to the guidance of the Board
of Trustees. In such agreements, the seller agrees to repurchase the
security at a mutually agreed-upon time and price. The period of maturity
is usually quite short, either overnight or a few days, although it may
extend over a number of months. The repurchase price is in excess of the
purchase price by an amount that reflects an agreed-upon rate of return
effective for the period of time a Portfolio's money is invested in the
security. Whenever a Portfolio enters into a repurchase agreement, it
obtains appropriate collateral. The instruments held as collateral are
valued daily and if the value of the instruments declines, the Portfolio
will require additional collateral. If the seller under the repurchase
agreement defaults, the Portfolio may incur a loss if the value of the
collateral securing the repurchase agreement has declined, and may incur
disposition costs in connection with liquidating the collateral. In
addition, if bankruptcy proceedings are commenced with respect to the
seller of the security, realization of the collateral by the Portfolio may
be delayed or limited. The Trustees have established guidelines to be used
by the Adviser/Subadviser in connection with transactions in repurchase
agreements and will regularly monitor each Portfolio's use of repurchase
agreements. A Portfolio will not invest in repurchase agreements maturing
in more than seven days if the aggregate of such investments along with
other illiquid securities exceeds 15% (10% with respect to the MONEY MARKET
SECURITIES PORTFOLIO) of the value of its net assets. However, there is no
limit on the amount of a Portfolio's net assets that may be subject to
repurchase agreements having a maturity of seven days or less for temporary
defensive purposes.
MORTGAGE-BACKED SECURITIES include investments in mortgage-related
securities, including certain U.S. government securities such as GNMA, FNMA or
FHLMC certificates (as defined below), and private mortgage-related securities,
which represent an undivided ownership interest in a pool of mortgages. The
mortgages backing these securities include conventional thirty-year fixed-rate
mortgages, fifteen-year fixed-rate mortgages, graduated payment mortgages and
adjustable rate mortgages. The U.S. government or the issuing agency guarantees
the payment of interest and principal of these securities. However, the
guarantees do not extend to the securities' yield or value, which are likely to
vary inversely with fluctuations in interest rates. These certificates are in
most cases pass-through instruments, through which the holder receives a share
of all interest and principal payments, including prepayments, on the mortgages
underlying the certificate, net of certain fees.
The yield on mortgage-backed securities is based on the average expected
life of the underlying pool of mortgage loans. Because the prepayment
characteristics of the underlying mortgages vary, it is not possible to predict
accurately the average life of a particular issue of pass-through certificates.
Mortgage-backed securities are often subject to more rapid repayment than their
stated maturity date would indicate as a result of the pass-through of
prepayments of principal on the underlying mortgage obligations. Thus, the
actual life of any particular pool will be shortened by any unscheduled or early
payments of principal and interest. Principal prepayments generally result from
the sale of the underlying property or the refinancing or foreclosure of
underlying mortgages. The occurrence of prepayments is affected by a wide range
of
B-13
<PAGE> 47
economic, demographic and social factors and, accordingly, it is not possible
to predict accurately the average life of a particular pool. Yield on such pools
is usually computed by using the historical record of prepayments for that pool,
or, in the case of newly-issued mortgages, the prepayment history of similar
pools. The actual prepayment experience of a pool of mortgage loans may cause
the yield realized by the Portfolio to differ from the yield calculated on the
basis of the expected average life of the pool.
Prepayments tend to increase during periods of falling interest rates,
while during periods of rising interest rates prepayments will most likely
decline. When prevailing interest rates rise, the value of a pass-through
security may decrease as does the value of other debt securities, but, when
prevailing interest rates decline, the value of a pass-through security is not
likely to rise on a comparable basis with other debt securities because of the
prepayment feature of pass-through securities. The reinvestment of scheduled
principal payments and unscheduled prepayments that the Portfolio receives may
occur at higher or lower rates than the original investment, thus affecting the
yield of the Portfolio. Monthly interest payments received by the Portfolio have
a compounding effect, which may increase the yield to shareholders more than
debt obligations that pay interest semi-annually. Because of those factors,
mortgage-backed securities may be less effective than U.S. Treasury bonds of
similar maturity at maintaining yields during periods of declining interest
rates. Accelerated prepayments adversely affect yields for pass-through
securities purchased at a premium (i.e., at a price in excess of principal
amount) and may involve additional risk of loss of principal because the premium
may not have been fully amortized at the time the obligation is repaid. The
opposite is true for pass-through securities purchased at a discount. A
Portfolio may purchase mortgage-backed securities at a premium or at a discount.
The following is a description of GNMA, FNMA and FHLMC certificates, the
most widely available mortgage-backed securities:
GNMA Certificates. GNMA Certificates are mortgage-backed
securities that evidence an undivided interest in a pool or pools of
mortgages. GNMA Certificates that a Portfolio may purchase are the modified
pass-through type, which entitle the holder to receive timely payment of
all interest and principal payments due on the mortgage pool, net of fees
paid to the issuer and GNMA, regardless of whether or not the mortgagor
actually makes the payment.
GNMA guarantees the timely payment of principal and interest
on securities backed by a pool of mortgages insured by the Federal Housing
Administration ("FHA") or the FMHA, or guaranteed by the Veterans
Administration. The GNMA guarantee is authorized by the National Housing
Act and is backed by the full faith and credit of the United States. The
GNMA is also empowered to borrow without limitation from the U.S. Treasury
if necessary to make any payments required under its guarantee.
The average life of a GNMA Certificate is likely to be
substantially shorter than the original maturity of the mortgages
underlying the securities. Prepayments of principal by
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mortgagors and mortgage foreclosure will usually result in the return of
the greater part of principal investment long before the maturity of the
mortgages in the pool. Foreclosures impose no risk to principal investment
because of the GNMA guarantee, except to the extent that a Portfolio has
purchased the certificates at a premium in the secondary market.
FHLMC Certificates. The FHLMC issues two types of mortgage
pass-through securities: mortgage participation certificates ("PCs") and
guaranteed mortgage certificates ("GMCs") (collectively, "FHLMC
Certificates"). PCs resemble GNMA Certificates in that each PC represents a
pro rata share of all interest and principal payments made and owed on the
underlying pool. The FHLMC guarantees timely monthly payment of interest
(and, under certain circumstances, principal) of PCs and the ultimate
payment of principal.
GMCs also represent a pro rata interest in a pool of
mortgages. However, these instruments pay interest semi-annually and return
principal once a year in guaranteed minimum payments. The expected average
life of these securities is approximately ten years. The FHLMC guarantee is
not backed by the full faith and credit of the U.S. Government.
FNMA Certificates. The FNMA issues guaranteed mortgage
pass-through certificates ("FNMA Certificates"). FNMA Certificates
represent a pro rata share of all interest and principal payments made and
owed on the underlying pool. FNMA guarantees timely payment of interest and
principal on FNMA Certificates. The FNMA guarantee is not backed by the
full faith and credit of the U.S. Government.
Other types of pass through mortgage-backed securities include:
Conventional Mortgage Pass-Through Securities represent
participation interests in pools of mortgage loans that are issued by
trusts formed by originators of the institutional investors in mortgage
loans (or represent custodial arrangements administered by such
institutions). These originators and institutions include commercial banks,
savings and loans associations, credit unions, savings banks, insurance
companies, investment banks or special purpose subsidiaries of the
foregoing. For federal income tax purposes, such trusts are generally
treated as grantor trusts or REMICs and, in either case, are generally not
subject to any significant amount of federal income tax at the entity
level.
The mortgage pools underlying Conventional Mortgage
Pass-Throughs consist of conventional mortgage loans evidenced by
promissory notes secured by first mortgages or first deeds of trust or
other similar security instruments creating a first lien on residential or
mixed residential and commercial properties. Conventional Mortgage
Pass-Throughs (whether fixed or adjustable rate) provide for monthly
payments that are a "pass-through" of the monthly interest and principal
payments (including any prepayments) made by the individual borrowers on
the pooled mortgage loans, net of any fees or other amount paid to any
guarantor, administrator and/or servicer of the underlying mortgage loans.
A trust fund with respect to which a REMIC election has been made may
include regular interests in other REMICs, which in turn will ultimately
evidence interests in mortgage loans.
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Conventional mortgage pools generally offer a higher rate of
interest than government and government-related pools because of the
absence of any direct or indirect government or agency payment guarantees.
However, timely payment of interest and principal of mortgage loans in
these pools may be supported by various forms of insurance or guarantees,
including individual loans, title, pool and hazard insurance and letters of
credit. The insurance and guarantees may be issued by private insurers and
mortgage poolers. Although the market for such securities is becoming
increasingly liquid, mortgage-related securities issued by private
organizations may not be readily marketable.
Collateralized Mortgage Obligations ("CMOs") are fully
collateralized bonds that are the general obligations of the issuer thereof
(e.g., the U.S. government, a U.S. government instrumentality, or a private
issuer). Such bonds generally are secured by an assignment to a trustee
(under the indenture pursuant to which the bonds are issued) of collateral
consisting of a pool of mortgages. Payments with respect to the underlying
mortgages generally are made to the trustee under the indenture. Payments
of principal and interest on the underlying mortgages are not passed
through to the holders of the CMOs as such (i.e., the character of payments
of principal and interest is not passed through, and therefore payments to
holders of CMOs attributable to interest paid and principal repaid on the
underlying mortgages do not necessarily constitute income and return of
capital, respectively, to such holders), but such payments are dedicated to
payment of interest on and repayment of principal of the CMOs.
Principal and interest on the underlying mortgage assets may
be allocated among the several classes of CMOs in various ways. In certain
structures (known as "sequential pay" CMOs), payments of principal,
including any principal prepayments, on the mortgage assets generally are
applied to the classes of CMOs in the order of their respective final
distribution dates. Thus, no payment of principal will be made on any class
of sequential pay CMOs until all other classes having an earlier final
distribution date have been paid in full.
Additional structures of CMOs include, among others, "parallel
pay" CMOs. Parallel pay CMOs are those that are structured to apply
principal payments and prepayments of the mortgage assets to two or more
classes concurrently on a proportionate or disproportionate basis. These
simultaneous payments are taken into account in calculating the final
distribution date of each class.
A wide variety of CMOs may be issued in the parallel pay or
sequential pay structures. These securities include accrual certificates
(also known as "Z-Bonds"), which accrue interest at a specified rate only
until all other certificates having an earlier final distribution date have
been retired and are converted thereafter to an interest-paying security,
and planned amortization class ("PAC") certificates, which are parallel pay
CMOs which generally require that specified amounts of principal be applied
on each payment date to one or more classes of CMOs (the "PAC
Certificates"), even though all other principal payments and prepayments of
the mortgage assets are then required to be applied to one or more other
classes of the certificates. The scheduled principal payments for the PAC
Certificates generally have the highest priority on each payment date after
interest due has been paid to all classes entitled to receive interest
currently. Shortfalls, if any, are
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<PAGE> 50
added to the amount payable on the next payment date. The PAC Certificate
payment schedule is taken into account in calculating the final
distribution date of each class of PAC. In order to create PAC tranches,
one or more tranches generally must be created to absorb most of the
volatility in the underlying mortgage assets. These tranches tend to have
market prices and yields that are much more volatile than the PAC classes.
Stripped Mortgage-Backed Securities ("SMBS") are often
structured with two classes that receive different proportions of the
interest and principal distributions on a pool of mortgage assets. SMBS
have greater market volatility than other types of U.S. government
securities in which a Portfolio invests. A common type of SMBS has one
class receiving some of the interest and all or most of the principal (the
"principal only" class) from the mortgage pool, while the other class will
receive all or most of the interest (the "interest only" class). The yield
to maturity on an interest only class is extremely sensitive not only to
changes in prevailing interest rates, but also to the rate of principal
payments, including principal prepayments, on the underlying pool of
mortgage assets, and a rapid rate of principal payment may have a material
adverse effect on a Portfolio's yield. While interest-only and
principal-only securities are generally regarded as being illiquid, such
securities may be deemed to be liquid if they can be disposed of promptly
in the ordinary course of business at a value reasonably close to that used
in the calculation of a Portfolio's net asset value per share. Only
government interest-only and principal-only securities backed by fixed-rate
mortgages and determined to be liquid under guidelines and standards
established by the Trustees may be considered liquid securities not subject
to a Portfolio's limitation on investments in illiquid securities.
ASSET-BACKED SECURITIES, issued by trusts and special purpose corporations,
are backed by a pool of assets, such as credit card and automobile loan
receivables, representing the obligations of a number of different parties.
Asset-backed securities present certain risks. For instance, in the case of
credit card receivables, these securities may not have the benefit of any
security interest in the related collateral. Credit card receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts owed on the credit cards, thereby reducing the
balance due. Most issuers of automobile receivables permit the servicer to
retain possession of the underlying obligations. If the servicer were to sell
these obligations to another party, there is a risk that the purchaser would
acquire an interest superior to that of the holders of the related automobile
receivables. In addition, because of the large number of vehicles involved in a
typical issuance and technical requirements under state laws, the trustee for
the holders of the automobile receivables may not have a proper security
interest in all of the obligations backing such receivables. Therefore, there is
the possibility that recoveries on repossessed collateral may not, in some
cases, be available to support payments on these securities.
Asset-backed securities are often backed by a pool of assets representing
the obligations of a number of different parties. To lessen the effect of
failures by obligors to make payments on underlying assets, the securities may
contain elements of credit support that fall into two categories: (i) liquidity
protection and (ii) protection against losses resulting from ultimate default by
an obligor on the underlying assets. Liquidity protection refers to the
provision of advances, generally by the entity administering the pool of assets,
to ensure that the receipt of payments on the underlying pool occurs in a timely
fashion. Protection against
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losses resulting from ultimate default ensures payment through insurance
policies or letters of credit obtained by the issuer or sponsor from third
parties. A Portfolio will not pay any additional or separate fees for credit
support. The degree of credit support provided for each issue is generally based
on historical information respecting the level of credit risk associated with
the underlying assets. Delinquency or loss in excess of that anticipated or
failure of the credit support could adversely affect the return on an investment
in such a security.
U.S. TREASURY INFLATION PROTECTION SECURITIES are issued by the United
States Department of Treasury ("Treasury") with a nominal return linked to the
inflation rate in prices. The index used to measure inflation is the
non-seasonally adjusted U.S. City Average All Items Consumer Price Index for All
Urban Consumers ("CPI-U"). The value of the principal is adjusted for inflation,
and pays interest every six months. The interest payment is equal to a fixed
percentage of the inflation-adjusted value of the principal. The final payment
of principal of the security will not be less than the original par amount of
the security at issuance. The principal of the inflation-protection security is
indexed to the non-seasonally adjusted CPI-U. To calculate the
inflation-adjusted principal value for a particular valuation date, the value of
the principal at issuance is multiplied by the index ratio applicable to that
valuation date. The index ratio for any date is the ratio of the reference CPI
applicable to such date to the reference CPI applicable to the original issue
date. Semiannual coupon interest is determined by multiplying the
inflation-adjusted principal amount by one-half of the stated rate of interest
on each interest payment date. Inflation-adjusted principal or the original par
amount, whichever is larger, is paid on the maturity date as specified in the
applicable offering announcement. If at maturity the inflation-adjusted
principal is less than the original principal value of the security, an
additional amount is paid at maturity so that the additional amount plus the
inflation-adjusted principal equals the original principal amount. Some
inflation-protection securities may be stripped into principal and interest
components. In the case of a stripped security, the holder of the stripped
principal component would receive this additional amount. The final interest
payment, however, will be based on the final inflation-adjusted principal value,
not the original par amount.
The reference CPI for the first day of any calendar month is the CPI-U for
the third preceding calendar month. (For example, the reference CPI for December
1 is the CPI-U reported for September of the same year, which is released in
October.) The reference CPI for any other day of the month is calculated by a
linear interpolation between the reference CPI applicable to the first day of
the month and the reference CPI applicable to the first day of the following
month. Any revisions the Bureau of Labor Statistics (or successor agency) makes
to any CPI-U number that has been previously released will not be used in
calculations of the value of outstanding inflation-protection securities. In the
case that the CPI-U for a particular month is not reported by the last day of
the following month, the Treasury will announce an index number based on the
last year-over-year CPI-U inflation rate available. Any calculations of the
Treasury's payment obligations on the inflation-protection security that need
that month's CPI-U number will be based on the index number that the Treasury
has announced. If the CPI-U is rebased to a different year, the Treasury will
continue to use the CPI-U series based on the base reference period in effect
when the security was first issued as long as that series continues to be
published. If the CPI-U is discontinued during the period the
inflation-protection security is outstanding, the Treasury will, in consultation
with the Bureau of Labor Statistics (or successor agency), determine an
appropriate substitute index and methodology for linking the discontinued series
with the new price index series. Determinations of the Secretary of the Treasury
in this regard are final.
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Inflation-protection securities will be held and transferred in either of
two book-entry systems: the commercial book-entry system (TRADES) and TREASURY
DIRECT. The securities will be maintained and transferred at their original par
amount, i.e., not at their inflation-adjusted value. STRIPS components will be
maintained and transferred in TRADES at their value based on the original par
amount of the fully constituted security.
LOAN PARTICIPATIONS AND ASSIGNMENTS include investments in fixed and
floating rate loans ("Loans") arranged through private negotiations between an
issuer of sovereign or corporate debt obligations and one or more financial
institutions ("Lenders"). Investments in Loans are expected in most instances to
be in the form of participations in Loans ("Participations") and assignments of
all or a portion of Loans ("Assignments") from third parties. In the case of
Participations, the Portfolio will have the right to receive payments of
principal, interest and any fees to which it is entitled only from the Lender
selling the Participation and only upon receipt by the Lender of the payments
from the borrower. In the event of the insolvency of the Lender selling a
Participation, the Portfolio may be treated as a general creditor of the Lender
and may not benefit from any set-off between the Lender and the borrower. The
Portfolio will acquire Participations only if the Lender interpositioned between
the Portfolio and the borrower is determined by the Adviser/Subadviser to be
creditworthy. When the Portfolio purchases Assignments from Lenders it will
acquire direct rights against the borrower on the Loan. Because Assignments are
arranged through private negotiations between potential assignees and potential
assignors, however, the rights and obligations acquired by the Portfolio as the
purchaser of an Assignment may differ from, and be more limited than, those held
by the assigning Lender. Because there is no liquid market for such securities,
the Portfolio anticipates that such securities could be sold only to a limited
number of institutional investors. The lack of a liquid secondary market may
have an adverse impact on the value of such securities and the Portfolio's
ability to dispose of particular Assignments or Participations when necessary to
meet the Portfolio's liquidity needs or in response to a specific economic event
such as a deterioration in the creditworthiness of the borrower. The lack of a
liquid secondary market for Assignments and Participations also may make it more
difficult for the Portfolio to assign a value to these securities for purposes
of valuing the Portfolio and calculating its net asset value.
SHORT SALES are effected by selling a security that a Portfolio does not
own. A short sale is "against the box" to the extent that a Portfolio
contemporaneously owns, or has the right to obtain without payment, securities
identical to those sold short. A short sale against the box of an "appreciated
financial position" (e.g., appreciated stock) generally is treated as a sale by
the Portfolio for federal income tax purposes. A Portfolio generally will
recognize any gain (but not loss) for federal income tax purposes at the time
that it makes a short sale against the box. A Portfolio may not enter into a
short sale against the box, if, as a result, more than 25% of its total assets
would be subject to such short sales. When a Portfolio makes a short sale, the
proceeds it receives from the sale will be held on behalf of a broker until the
Portfolio replaces the borrowed securities. To deliver the securities to the
buyer, a Portfolio will need to arrange through a broker to borrow the
securities and, in so doing, a Portfolio will become obligated to replace the
securities borrowed at their market price at the time of replacement, whatever
that price may be. A Portfolio may have to pay a premium to borrow the
securities and must pay any dividends or interest payable on the securities
until they are replaced. A Portfolio's obligation to replace the securities
borrowed in connection with a short sale will be secured by collateral in the
form of cash or liquid securities held in a segregated account in the name of
the broker. In addition, such Portfolio will place in a segregated account an
amount of cash or liquid
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securities equal to the difference, if any, between (1) the market value of the
securities sold at the time they were sold short and (2) any cash or liquid
securities deposited as collateral with the broker in connection with the short
sale (not including the proceeds of the short sale). In the event that the value
of the collateral deposited with the broker, plus the value of the assets in the
segregated account should fall below the value of the securities sold short,
additional amounts to cover the difference will be placed in the segregated
accounts. Short sales by the Portfolio involve certain risks and special
considerations. Possible losses from short sales differ from losses that could
be incurred from a purchase of a security, because losses from short sales may
be unlimited, whereas losses from purchases can equal only the total amount
invested.
INVERSE FLOATERS are leveraged inverse floating rate debt instruments. The
interest rate on an inverse floater resets in the opposite direction from the
market rate of interest to which the inverse floater is indexed. An inverse
floater may be considered to be leveraged to the extent that its interest rate
varies by a magnitude that exceeds the magnitude of the change in the index rate
of interest. The higher degree of leverage inherent in inverse floaters is
associated with greater volatility in their market values. Accordingly, the
duration of an inverse floater may exceed its stated final maturity. Certain
inverse floaters may be deemed to be illiquid securities for purposes of a
Portfolio's 15% limitation on investments in such securities.
ILLIQUID SECURITIES. Each of the Portfolios may invest no more than 15%
(10% in the case of the MONEY MARKET SECURITIES PORTFOLIO) of its net assets,
determined as of the date of purchase, in illiquid securities including
repurchase agreements that 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 "Securities Act"), securities that 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 that have not been registered
under the Securities Act are referred to as private placements or restricted
securities and are purchased directly from the issuer or in the secondary
market. 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 (except in the
case of "Rule 144A securities," as described below).
In recent years, a large institutional market has developed for certain
securities that are not registered under the Securities Act, including
repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be readily
resold or on an issuer's ability to honor a demand for repayment. The fact that
there are contractual or legal restrictions on resale to the general public or
to certain institutions may not be indicative of the liquidity of such
investments.
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Restricted securities eligible for resale pursuant to Rule 144A under the
Securities Act for which there is a readily available market will not be deemed
to be illiquid. The Adviser or Subadviser, as the case may be, 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 Adviser, or
Subadviser, as the case may be, 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).
Commercial paper issues in which a Portfolio may invest include securities
issue by major corporations without registration under the Securities Act in
reliance on the exemption from such registration afforded by Section 3(a)(3)
thereof, and commercial paper issued in reliance on the so-called private
placement exemption from registration afforded by Section 4(2) of the Securities
Act ("Section 4(2) paper"). Section 4(2) paper is restricted as to disposition
under the federal securities laws in that any resale must similarly be made in
an exempt transaction. Section 4(2) paper is normally resold to other
institutional investors through or with the assistance of investment dealers who
make a market in Section 4(2) paper, thus providing liquidity. Section 4(2)
paper that is issued by a company that files reports under the Securities
Exchange Act of 1934 is generally eligible to be sold in reliance on the safe
harbor of Rule 144A described above. The MONEY MARKET SECURITIES PORTFOLIO'S 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 Portfolio's 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.
CURRENCY VOLATILITY. The value of a Portfolio's foreign investments may
fluctuate due to changes in currency rates. A decline in the value of foreign
currencies relative to the U.S. dollar generally can be expected to depress the
value of the Portfolio's non-U.S. dollar denominated 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, the
Portfolio will be exposed to the risks associated with hedging as described in
this glossary. 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.
ILLIQUIDITY. There may not be a market for certain securities making it
difficult or impossible to sell at the time and the price that the seller would
like.
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REITS pool investors' funds for investment primarily in income producing
real estate or real estate related loans or interests. A REIT is not taxed on
income distributed to shareholders if it complies with various requirements
relating to its organization, ownership, assets and income and with the
requirement that it distribute to its shareholders at least 95% of its taxable
income (other than net capital gains) for each taxable year. REITs can generally
be classified as Equity REITs, Mortgage REITs and Hybrid REITs. Equity REITs
invest the majority of their assets directly in real property and derive their
income primarily from rents. Equity REITs can also realize capital gains by
selling property that has appreciated in value. Mortgage REITs invest the
majority of their assets in real estate mortgages and derive their income
primarily from interest payments. Hybrid REITs combine the characteristics of
both Equity REITs and Mortgage REITs. Equity REITs may be affected by changes in
the value of the underlying property owned by the trusts, while Mortgage REITs
may be affected by the quality of credit extended. Equity and Mortgage REITs are
dependent upon management skill, may not be diversified and are subject to
project financing risks. Such trusts are also subject to heavy cash flow
dependency, defaults by borrowers, self-liquidation and the possibility of
failing to qualify for tax-free pass-through of income under the Internal
Revenue Code of 1986, as amended (the "Code") and to maintain exemption from
registration under the 1940 Act. Changes in interest rates may also affect the
value of the debt securities in the Portfolio's portfolio. By investing in REITs
indirectly through the Portfolio, a shareholder will bear not only his
proportionate share of the expense of the Portfolio, but also, indirectly,
similar expenses of the REITs, including compensation of management.
FLOATING RATE OBLIGATIONS. These securities have a coupon rate that changes
at least annually and generally more frequently. The coupon rate is set in
relation to money market rates. The obligations, issued primarily by banks,
other corporations, governments and semi-governmental bodies, may have a
maturity in excess of one year. In some cases, the coupon rate may vary with
changes in the yield on Treasury bills or notes or with changes in LIBOR (London
Interbank Offering Rate). The Adviser considers floating rate obligations to be
liquid investments because a number of U.S. and foreign securities dealers make
active markets in these securities.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES. When-issued or
delayed-delivery transactions call for the purchase or sale of securities at an
agreed-upon price on a specified future date. Although a Portfolio will enter
into such transactions for the purpose of acquiring securities for its portfolio
or for delivery pursuant to options contracts it has entered into, the Portfolio
may dispose of a commitment prior to settlement. When such transactions are
negotiated, the price (which is generally expressed in yield terms) is fixed at
the time the commitment is made, but delivery and payment for the securities
take place at a later date. During the period between commitment by a Portfolio
and settlement (generally within two months but not to exceed 120 days), no
payment is made for the securities purchased by the purchaser, and no interest
accrues to the purchaser from the transaction. Such securities are subject to
market fluctuation, and the value at delivery may be less than the purchase
price. A Portfolio will maintain a segregated account with its custodian,
consisting of cash or liquid securities at least equal to the value of purchase
commitments until payment is made. A Portfolio will likewise segregate liquid
assets in respect of securities sold on a delayed delivery basis.
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A Portfolio will engage in when-issued transactions in order to secure what
is considered to be an advantageous price and yield at the time of entering into
the obligation. When a Portfolio engages in when-issued or delayed delivery
transactions, it relies on the buyer or seller, as the case may be, to
consummate the transaction. Failure to do so may result in a Portfolio losing
the opportunity to obtain a price and yield considered to be advantageous. If a
Portfolio chooses to (i) dispose of the right to acquire a when-issued security
prior to its acquisition or (ii) dispose of its right to deliver or receive
against a firm commitment, it may incur a gain or loss. (At the time a Portfolio
makes a commitment to purchase or sell a security on a when-issued or firm
commitment basis, it records the transaction and reflects the value of the
security purchased, or if a sale, the proceeds to be received in determining its
net asset value.)
To the extent a Portfolio engages in when-issued and delayed delivery
transactions, it will do so for the purpose of acquiring or selling securities
consistent with its investment objectives and policies and not for the purposes
of investment leverage. A Portfolio enters into such transactions only with the
intention of actually receiving or delivering the securities, although (as noted
above) when-issued securities and firm commitments may be sold prior to the
settlement date. In addition, changes in interest rates in a direction other
than that expected by the Adviser/Subadviser before settlement of a purchase
will affect the value of such securities and may cause a loss to a Portfolio.
When-issued transactions and firm commitments may be used to offset
anticipated changes in interest rates and prices. For instance, in periods of
rising interest rates and falling prices, a Portfolio might sell securities in
its portfolio on a forward commitment basis to attempt to limit its exposure to
anticipated falling prices. In periods of falling interest rates and rising
prices, a Portfolio might sell portfolio securities and purchase the same or
similar securities on a when-issued or forward commitment basis, thereby
obtaining the benefit of currently higher cash yields. An example of a
when-issued or delayed delivery security is a "to be announced" or "TBA"
mortgage-backed security. A TBA mortgage-backed security transaction arises when
a mortgage-backed security is purchased or sold with the specific pools to be
announced on a future settlement date, with no definitive maturity date. The
actual principal amount and maturity date will be determined upon settlement
date.
HYBRID INSTRUMENTS, including indexed or structured securities, combine the
elements of futures contracts or options with those of debt, preferred equity or
a depository instrument. Generally, a Hybrid Instrument will be a debt security,
preferred stock, depository share, trust certificate, certificate of deposit or
other evidence of indebtedness on which a portion of or all interest payments,
and/or the principal or stated amount payable at maturity, redemption or
retirement, is determined by reference to prices, changes in prices, or
differences between prices, of securities, currencies, intangibles, goods,
articles or commodities (collectively "Underlying Assets") or by another
objective index, economic factor or other measure, such as interest rates,
currency exchange rates, commodity indices, and securities indices (collectively
"Benchmarks"). Thus, Hybrid Instruments may take a variety of forms, including,
but not limited to, debt instruments with interest or principal payments or
redemption terms determined by reference to the value of a currency or commodity
or securities index at a future point in time, preferred stock with dividend
rates determined by reference to the value of a currency, or convertible
securities with the conversion terms related to a particular commodity.
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Hybrid Instruments can be an efficient means of creating exposure to a
particular market, or segment of a market, with the objective of enhancing total
return. For example, a Portfolio may wish to take advantage of expected declines
in interest rates in several European countries, but avoid the transactions
costs associated with buying and currency-hedging the foreign bond positions.
One solution would be to purchase a U.S. dollar-denominated Hybrid Instrument
whose redemption price is linked to the average three year interest rate in a
designated group of countries. The redemption price formula would provide for
payoffs of greater than par if the average interest rate was lower than a
specified level, and payoffs of less than par if rates were above the specified
level. Furthermore, the Portfolio could limit the downside risk of the security
by establishing a minimum redemption price so that the principal paid at
maturity could not be below a predetermined minimum level if interest rates were
to rise significantly. The purpose of this arrangement, known as a structured
security with an embedded put option, would be to give the Portfolio the desired
European bond exposure while avoiding currency risk, limiting downside market
risk, and lowering transactions costs. Of course, there is no guarantee that the
strategy will be successful and the Portfolio could lose money if, for example,
interest rates do not move as anticipated or credit problems develop with the
issuer of the Hybrid.
The risks of investing in Hybrid Instruments reflect a combination of the
risks of investing in securities, options, futures and currencies. Thus, an
investment in a Hybrid Instrument may entail significant risks that are not
associated with a similar investment in a traditional debt instrument that has a
fixed principal amount, is denominated in U.S. dollars or bears interest either
at a fixed rate or a floating rate determined by reference to a common,
nationally published Benchmark. The risks of a particular Hybrid Instrument
will, of course, depend upon the terms of the instrument, but may include,
without limitation, the possibility of significant changes in the Benchmarks or
the prices of Underlying Assets to which the instrument is linked. Such risks
generally depend upon factors unrelated to the operations or credit quality of
the issuer of the Hybrid Instrument, which may not be readily foreseen by the
purchaser, such as economic and political events, the supply and demand for the
Underlying Assets and interest rate movements. In recent years, various
Benchmarks and prices for Underlying Assets have been highly volatile, and such
volatility may be expected in the future. Reference is also made to the
discussion of futures, options, and forward contracts herein for a discussion of
the risks associated with such investments.
Hybrid Instruments are potentially more volatile and carry greater market
risks than traditional debt instruments. Depending on the structure of the
particular Hybrid Instrument, changes in a Benchmark may be magnified by the
terms of the Hybrid Instrument and have an even more dramatic and substantial
effect upon the value of the Hybrid Instrument. Also, the prices of the Hybrid
Instrument and the Benchmark or Underlying Asset may not move in the same
direction or at the same time.
Hybrid Instruments may bear interest or pay preferred dividends at below
market (or even relatively nominal) rates. Alternatively, Hybrid Instruments may
bear interest at above market rates but bear an increased risk of principal loss
(or gain). The latter scenario may result if "leverage" is used to structure the
Hybrid Instrument. Leverage risk occurs when the Hybrid Instrument is structured
so that a given change in a Benchmark or Underlying Asset is multiplied to
produce a greater value change in the Hybrid Instrument, thereby magnifying the
risk of loss as well as the potential for gain.
Hybrid Instruments may also carry liquidity risk since the instruments are
often "customized" to meet the portfolio needs of a particular investor, and
therefore, the number of investors that are willing and able
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to buy such instruments in the secondary market may be smaller than that for
more traditional debt securities. Under certain conditions, the redemption (or
sale) value of such an investment could be zero. In addition, because the
purchase and sale of Hybrid Instruments could take place in an over-the-counter
market without the guarantee of a central clearing organization or in a
transaction between the Portfolio and the issuer of the Hybrid Instrument, the
creditworthiness of the counterparty or issuer of the Hybrid Instrument would be
an additional risk factor the Portfolio would have to consider and monitor.
Hybrid Instruments also may not be subject to regulation of the CFTC, which
generally regulates the trading of commodity futures by U.S. persons, the
Securities and Exchange Commission (the "SEC"), which regulates the offer and
sale of securities by and to U.S. persons, or any other governmental regulatory
authority.
The various risks discussed above, particularly the market risk of such
instruments, may in turn cause significant fluctuations in the net asset value
of the Portfolio. Accordingly, a Portfolio that so invests will limit its
investments in Hybrid Instruments to 10% of its total assets.
Hybrid Instruments include:
Structured investments which are organized and operated solely for the
purpose of restructuring the investment characteristics of sovereign debt
obligations. This type of restructuring involves the deposit with or
purchase by an entity, such as a corporation or trust, of specified
instruments (such as commercial bank loans) and the issuance by that entity
of one or more classes of securities ("Structured Securities") backed by,
or representing interests in, the underlying instruments. The cash flow on
the underlying instruments may be apportioned among the newly issued
Structured Securities to create securities with different investment
characteristics, such as varying maturities, payment priorities and
interest rate provisions, and the extent of the payments made with respect
to Structured Securities is dependent on the extent of the cash flow on the
underlying instruments. Because Structured Securities of the type typically
involve no credit enhancement, their credit risk generally will be
equivalent to that of the underlying instruments. Investments in Structured
Securities are generally of a class of Structured Securities that is either
subordinated or unsubordinated to the right of payment of another class.
Subordinated Structured Securities typically have higher yields and present
greater risks than unsubordinated Structured Securities. Structured
Securities are typically sold in private placement transactions, and there
currently is no active trading market for Structured Securities.
Investments in government and government-related and restructured debt
instruments are subject to special risks, including the inability or
unwillingness to repay principal and interest, requests to reschedule or
restructure outstanding debt and requests to extend additional loan
amounts.
WEBs. World Equity Benchmark Shares ("WEBS") are shares of an investment
company that invests substantially all of its assets in securities included
in the MSCI indices for specified countries. The market prices of WEBS are
expected to fluctuate in accordance with both changes in the net asset
values of their underlying indices and supply and demand of WEBS on the
American Stock Exchange. In the event substantial market or other
disruptions affecting WEBS should occur in the future, the liquidity and
value of Portfolio's shares could also be substantially and adversely
affected, and the Fund's ability to provide investment results
approximating the performance of securities in the EAFE Index could be
impaired.
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SPDRs. Standard & Poor's Depositary Receipts ("SPDRs") are American Stock
Exchange-traded securities that represent ownership in the SPDR Trust, a
trust established to accumulate and hold a portfolio of common stocks
intended to track the price performance and dividend yield of the S&P 500.
SPDRs may be used for several reasons, including but not limited to
facilitating the handling of cash flows or trading, or reducing transaction
costs. The use of SPDRs would introduce additional risk, as the price
movement of the instrument does not perfectly correlate with the price
action of the underlying index.
INTEREST-RATE SWAPS, MORTGAGE SWAPS, CAPS, FLOORS AND COLLARS. Entering
into interest-rate swaps or mortgage swaps or purchasing interest-rate caps,
floors or collars is often done to protect against interest rate fluctuations
and hedge against fluctuations in the fixed income market. A Portfolio will
generally enter into these hedging transactions primarily to preserve a return
or spread on a particular investment or portion of the portfolio and to protect
against any increase in the price of securities the Portfolio anticipates
purchasing at a later date. Interest-rate swaps involve the exchange by the
Portfolio with another party of their respective commitments to pay or receive
interest, e.g., an exchange of floating-rate payments for fixed-rate payments.
Since interest-rate swaps are individually negotiated, the Portfolios expect to
achieve an acceptable degree of correlation between their respective portfolio
investments and their interest-rate positions. Portfolios will enter into
interest-rate swaps only on a net basis, which means that the two payment
streams are netted out, with the Portfolios receiving or paying, as the case may
be, only the net amount of the two payments. Interest-rate swaps do not involve
the delivery of securities, other underlying assets or principal. Accordingly,
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. If the other party to an interest-rate swap defaults, the Portfolio's risk
of loss consists of the net amount of interest payments that the Portfolio is
contractually entitled to receive, if any. The use of interest-rate swaps is a
highly specialized activity which involves investment techniques and risks
different from those associated with ordinary portfolio securities transactions.
Mortgage swaps are similar to interest-rate swaps in that they represent
commitments to pay and receive interest. The notional principal amount, upon
which the value of the interest payments is based, is tied to a reference pool
or pools of mortgages.
The purchase of an interest-rate cap entitles the purchaser, to the extent
that a specified index exceeds a predetermined interest rate, to receive
payments of interest on a notional principal amount from the party selling such
interest-rate cap. The purchase of an interest-rate floor entitles the
purchaser, to the extent that a specified index falls below a predetermined
interest rate, to receive payments of interest on a notional principal amount
from the party selling such interest rate floor. An interest-rate collar is the
combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates.
Portfolios will not enter into any mortgage swap, interest-rate swap, cap
or floor transaction unless the unsecured commercial paper, senior debt, or the
claims paying ability of the other party thereto is rated either AA or A-1 or
better by Standard & Poor's or Aa or P-1 or better by Moody's, or is determined
to be of equivalent quality by the applicable Subadviser.
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EQUITY SWAPS are typically entered into for the purpose of investing in a
market without owning or taking physical custody of securities in circumstances
in which direct investment is restricted for legal reasons or is otherwise
impracticable. The counterparty to an equity swap contract will typically be a
bank, investment banking firm or broker/dealer. The counterparty will generally
agree to pay the Portfolio the amount, if any, by which the notional amount of
the equity swap contract would have increased in value had it been invested in
the particular stocks, plus the dividends that would have been received on those
stocks. The Portfolio will agree to pay to the counterparty a floating rate of
interest on the notional amount of the equity swap contract plus the amount, if
any, by which that notional amount would have decreased in value had it been
invested in such stocks. Therefore, the return to the Portfolio on any equity
swap contract should be the gain or loss on the notional amount plus dividends
on the stocks less the interest paid by the Portfolio on the notional amount.
A Portfolio will enter into equity swaps only on a net basis, which means
that the two payment streams are netted out, with the Portfolio receiving or
paying, as the case may be, only the net amount of the two payments. Payments
may be made at the conclusion of an equity swap contract or periodically during
its term. Equity swaps do not involve the delivery of securities or other
underlying assets. Accordingly, the risk of loss with respect to equity swaps is
limited to the net amount of payments that a Portfolio is contractually
obligated to make. If the other party to an equity swap defaults, the
Portfolio's risk of loss consists of the net amount of payment that the
Portfolio is contractually entitled to receive, if any. The net amount of the
excess, if any, of the Portfolio's obligations over its entitlements with
respect to each equity swap will be accrued on a daily basis and an amount of
cash or liquid assets, having an aggregate net asset value at least equal to
such accrued excess will be maintained in a segregated account by the
Portfolio's custodian. Inasmuch as these transactions are entered into for
hedging purposes or are offset by segregated cash or liquid assets, as permitted
by applicable law, the Portfolio believes that transactions do not constitute
senior securities under the Act and, accordingly, will not treat them as being
subject to the Portfolio's borrowing restrictions.
SECURITIES LENDING. Consistent with applicable regulatory requirements,
each Portfolio except the MONEY MARKET SECURITIES 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. In
lending its portfolio securities, a Portfolio receives income while retaining
the securities' potential for capital appreciation. The advantage of such loans
is that a 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 high-quality short-term debt securities, including
repurchase agreements. A loan may be terminated by the borrower on one business
day's notice or by a 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 Adviser/Subadviser to be creditworthy. On termination of the
loan, the borrower is required to return the securities to a Portfolio; and any
gain or loss in the market price of the loaned security during the loan would
inure to the Portfolio. Each such Portfolio will pay reasonable finders',
administrative
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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 accompany loaned securities pass to the
borrower, each such 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 that are the subject of the loan.
BORROWING. All of the Portfolios (except the MONEY MARKET SECURITIES
PORTFOLIO) are authorized to borrow money to the extent permitted by applicable
law. The 1940 Act permits each Portfolio to borrow up to 33 _% of its total
assets from banks for temporary or emergency purposes. In seeking to enhance
performance, a Portfolio may borrow for investment purposes and may pledge
assets to secure such borrowings. The MONEY MARKET SECURITIES PORTFOLIO may not
borrow money except for temporary emergency purposes, and then in an amount not
in excess of 5% of the value of the Portfolio's total assets. In the event that
asset coverage for a Portfolio's borrowings falls below 300%, the Portfolio will
reduce within three days the amount of its borrowings in order to provide for
300% asset coverage.
To the extent a Portfolio borrows for investment purposes, borrowing
creates leverage which is a speculative characteristic. Although a Portfolio is
authorized to borrow, it will do so only when the Adviser/Subadviser believes
that borrowing will benefit the Portfolio after taking into account
considerations such as the costs of borrowing and the likely investment returns
on securities purchased with borrowed monies. Borrowing by a Portfolio will
create the opportunity for increased net income but, at the same time, will
involve special risk considerations. Leveraging results from borrowing and will
magnify declines as well as increases in a Portfolio's net asset value per share
and net yield. The Portfolios expect that all of their borrowing will be made on
a secured basis. The Portfolios will maintain a segregated account of cash or
other liquid assets securing the borrowing for the benefit of the lenders. If
assets used to secure a borrowing decrease in value, a Portfolio may be required
to pledge additional collateral to the lender in the form of cash or securities
to avoid liquidation of those assets.
REVERSE REPURCHASE AGREEMENTS. Reverse repurchase agreements may be entered
into with brokers, dealers, domestic and foreign banks or other financial
institutions that have been determined by the Adviser/Subadviser to be
creditworthy. In a reverse repurchase agreement, the Portfolio sells a security
and agrees to repurchase it at a mutually agreed upon date and price, reflecting
the interest rate effective for the term of the agreement. It may also be viewed
as the borrowing of money by the Portfolio. The Portfolio's investment of the
proceeds of a reverse repurchase agreement is the speculative factor known as
leverage. A Portfolio will enter into a reverse repurchase agreement only if the
interest income from investment of the proceeds is expected to be greater than
the interest expense of the transaction and the proceeds are invested for a
period no longer than the term of the agreement. The Portfolio will maintain
with the Custodian a separate account with a segregated portfolio of cash or
liquid securities in an amount at least equal to its purchase obligations under
these agreements (including accrued interest). In the event that the buyer of
securities under a reverse repurchase agreement files for bankruptcy or becomes
insolvent, the buyer or its trustee or receiver may receive an extension of time
to determine whether to enforce the Portfolio's repurchase obligation, and the
Portfolio's use of proceeds of the agreement may effectively be
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restricted pending such decision. Reverse repurchase agreements are considered
to be borrowings and are subject to the percentage limitations on borrowings.
See "Investment Restrictions."
ROLL TRANSACTIONS involve the sale of mortgage or other asset-backed
securities ("roll securities") with the commitment to purchase substantially
similar (same type, coupon and maturity) securities on a specified future date.
During the roll period, the Portfolio foregoes principal and interest paid on
the Roll Securities. The Portfolio is compensated by the difference between the
current sales price and the lower forward price for the future purchase (often
referred to as the "drop") as well as by the interest earned on the cash
proceeds of the initial sale. The Portfolio also could be compensated through
the receipt of fee income equivalent to a lower forward price. A "covered roll"
is a specific type of dollar roll for which there is an offsetting cash position
or a cash equivalent security position that matures on or before the forward
settlement date of the dollar roll transaction. A Portfolio will enter only into
covered rolls. Because "roll" transactions involve both the sale and purchase of
a security, they may cause the reported portfolio turnover rate to be higher
than that reflecting typical portfolio management activities.
Roll transactions involve certain risks, including the following: if the
broker-dealer to whom the Portfolio sells the security becomes insolvent, the
Portfolio's right to purchase or repurchase the security subject to the dollar
roll may be restricted and the instrument that the Portfolio is required to
repurchase may be worth less than an instrument that the Portfolio originally
held. Successful use of roll transactions will depend upon the
Adviser/Subadviser's ability to predict correctly interest rates and in the case
of mortgage dollar rolls, mortgage prepayments. For these reasons, there is no
assurance that dollar rolls can be successfully employed.
STANDBY COMMITMENTS. Standby commitments are put options that entitle
holders to same day settlement at an exercise price equal to the amortized cost
of the underlying security plus accrued interest, if any, at the time of
exercise. A Portfolio may acquire standby commitments to enhance the liquidity
of portfolio securities, but only when the issuers of the commitments present
minimal risk of default. Ordinarily, the Portfolio may not transfer a standby
commitment to a third party, although it could sell the underlying municipal
security to a third party at any time. A Portfolio may purchase standby
commitments separate from or in conjunction with the purchase of securities
subject to such commitments. In the latter case, the Portfolio would pay a
higher price for the securities acquired, thus reducing their yield to maturity.
Standby commitments will not affect the dollar-weighted average maturity of the
Portfolio, or the valuation of the securities underlying the commitments.
Issuers or financial intermediaries may obtain letters of credit or other
guarantees to support their ability to buy securities on demand. The
Adviser/Subadviser may rely upon its evaluation of a bank's credit in
determining whether to support an instrument supported by a letter of credit.
Standby commitments are subject to certain risks, including the ability of
issuers of standby commitments to pay for securities at the time the commitments
are exercised; the fact that standby commitments are not marketable by the
Portfolios; and the possibility that the maturities of the underlying securities
may be different from those of the commitments.
WARRANTS give the holder of the warrant a right to purchase a given number
of shares of a particular issue at a specified price until expiration. Such
investments can generally provide a greater potential for profit or loss than
investments of equivalent amounts in the underlying common stock. The prices of
warrants do not necessarily move with the prices of the underlying securities.
If the holder does not sell the
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warrant, it risks the loss of its entire investment if the market price of the
underlying stock does not, before the expiration date, exceed the exercise price
of the warrant plus the cost thereof. Investment in warrants is a speculative
activity. Warrants pay no dividends and confer no rights (other than the right
to purchase the underlying stock) with respect to the assets of the issuer.
Although the Portfolios may not invest directly in warrants, such Portfolios may
invest in securities that are acquired as part of a unit consisting of a
combination of fixed income and equity securities or securities to which
warrants are attached.
ADRS, GDRS, AND EDRS. Foreign securities include, among other things,
American Depositary Receipts ("ADRs") and other Depositary Receipts, including
Global Depositary Receipts ("GDRs"), European Depositary Receipts ("EDRs") and
others (which, together with ADRs, GDRs and EDRs, are hereinafter collectively
referred to as "Depositary Receipts"), to the extent that such Depositary
Receipts become available. ADRs are securities, typically issued by a U.S.
financial institution (a "depositary"), that evidence ownership interests in a
security or a pool of securities issued by a foreign issuer (the "underlying
issuer") and deposited with the depositary. ADRs include American Depositary
Shares and New York Shares and may be "sponsored" or "unsponsored." Sponsored
ADRs are established jointly by a depositary and the underlying issuer, whereas
unsponsored ADRs may be established by a depositary without participation by the
underlying issuer. GDRs, EDRs and other types of Depositary Receipts are
typically issued by foreign depositaries, although they may also be issued by
U.S. depositaries, and evidence ownership interests in a security or pool of
securities issued by either a foreign or a U.S. corporation. Holders of
unsponsored Depositary Receipts generally bear all the costs associated with
establishing the unsponsored Depositary Receipt. The depositary of unsponsored
Depositary Receipts is under no obligation to distribute shareholder
communications received from the underlying issuer or to pass through to the
holders of the unsponsored Depositary Receipt voting rights with respect to the
deposited securities or pool of securities. Depositary Receipts are not
necessarily denominated in the same currency as the underlying securities to
which they may be connected. Generally, Depositary Receipts in registered form
are designed for use in the U.S. securities market and Depositary Receipts in
bearer form are designed for use in securities markets outside the United
States. A Portfolio may invest in sponsored and unsponsored Depositary Receipts.
For purposes of a Portfolio's investment policies, the Portfolio's investments
in Depositary Receipts will be deemed to be investments in the underlying
securities.
OPTIONS AND FUTURES are contracts involving the right to receive or the
obligation to deliver assets or money depending on the performance of one or
more underlying assets or a market or economic index. An option gives its owner
the right, but not the obligation, to buy ("call") or sell ("put") a specified
amount of a security at a specified price within in a specified time period. A
futures contract is an exchange-traded legal contract to buy or sell a standard
quantity and quality of a commodity, financial instrument, index, etc. at a
specified future date and price. Options and Futures (defined below) are
generally used for either hedging or income enhancement purposes.
Options can either purchased or written (i.e., sold). A call option written
by a Portfolio obligates a Portfolio to sell specified securities to the holder
of the option at a specified price if the option is exercised at any time before
the expiration date. After any such sales up to 25% of a Portfolio's total
assets may be subject to calls. All call options written by a Portfolio must be
"covered," which means that a Portfolio will own the securities subject to the
option as long as the option is outstanding. The purpose of writing covered call
options is to realize greater income than would be realized on portfolio
securities transactions alone.
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However, in writing covered call options for additional income, a Portfolio may
forego the opportunity to profit from an increase in the market price of the
underlying security.
A put option written by a Portfolio obligates a Portfolio to purchase
specified securities from the option holder at a specified price if the option
is exercised at any time before the expiration date. All put options written by
a Portfolio must be "covered," which means that the Portfolio will deposit cash,
U.S. government securities or other high-grade debt securities (i.e., securities
rated in one of the top three categories by Moody's or Standard & Poor's, or, if
unrated, deemed by the Adviser or Subadviser to be of comparable credit quality)
with a value at least equal to the exercise price of the put option in a
segregated account. The purpose of writing such options is to generate
additional income for a Portfolio. However, in return for the option premium, a
Portfolio accepts the risk that it may be required to purchase the underlying
securities at a price in excess of the securities' market value at the time of
purchase.
The following is a more detailed information concerning options, futures
and options on futures:
Options on Securities. When a Portfolio writes (i.e., sells) a
call option ("call") on a security it receives a premium and agrees to sell
the underlying security to a purchaser of a corresponding call on the same
security during the call period (usually not more than 9 months) at a fixed
price (which may differ from the market price of the underlying security),
regardless of market price changes during the call period. A Portfolio has
retained the risk of loss should the price of the underlying security
decline during the call period, which may be offset to some extent by the
premium.
To terminate its obligation on a call it has written, a
Portfolio may purchase a corresponding call in a "closing purchase
transaction." A profit or loss will be realized, depending upon whether the
net of the amount of the option transaction costs and the premium received
on the call written was more or less than the price of the call
subsequently purchased. A profit may also be realized if the call expires
unexercised, because a Portfolio retains the underlying security and the
premium received. If a Portfolio could not effect a closing purchase
transaction due to lack of a market, it would hold the callable securities
until the call expired or was exercised.
When a Portfolio purchases a call (other than in a closing
purchase transaction), it pays a premium and has the right to buy the
underlying investment from a seller of a corresponding call on the same
investment during the call period at a fixed exercise price. A Portfolio
benefits only if the call is sold at a profit or if, during the call
period, the market price of the underlying investment is above the sum of
the call price plus the transaction costs and the premium paid and the call
is exercised. If the call is not exercised or sold (whether or not at a
profit), it will become worthless at its expiration date and a Portfolio
will lose its premium payment and the right to purchase the underlying
investment.
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A put option on securities gives the purchaser the right to
sell, and the writer the obligation to buy, the underlying investment at
the exercise price during the option period. Writing a put covered by
segregated liquid assets equal to the exercise price of the put has the
same economic effect to a Portfolio as writing a covered call. The premium
a Portfolio receives from writing a put option represents a profit as long
as the price of the underlying investment remains above the exercise price.
However, a Portfolio has also assumed the obligation during the option
period to buy the underlying investment from the buyer of the put at the
exercise price, even though the value of the investment may fall below the
exercise price. If the put expires unexercised, a Portfolio (as the writer
of the put) realizes a gain in the amount of the premium. If the put is
exercised, a Portfolio must fulfill its obligation to purchase the
underlying investment at the exercise price, which will usually exceed the
market value of the investment at that time. In that case, a Portfolio may
incur a loss, equal to the sum of the sale price of the underlying
investment and the premium received minus the sum of the exercise price and
any transaction costs incurred.
A Portfolio may effect a closing purchase transaction to
realize a profit on an outstanding put option it has written or to prevent
an underlying security from being put. Furthermore, effecting such a
closing purchase transaction will permit a Portfolio to write another put
option to the extent that the exercise price thereof is secured by the
deposited assets, or to utilize the proceeds from the sale of such assets
for other investments by the Portfolio. A Portfolio will realize a profit
or loss from a closing purchase transaction if the cost of the transaction
is less or more than the premium received from writing the option.
When a Portfolio purchases a put, it pays a premium and has
the right to sell the underlying investment to a seller of a corresponding
put on the same investment during the put period at a fixed exercise price.
Buying a put on an investment a Portfolio owns enables the Portfolio to
protect itself during the put period against a decline in the value of the
underlying investment below the exercise price by selling such underlying
investment at the exercise price to a seller of a corresponding put. If the
market price of the underlying investment is equal to or above the exercise
price and as a result the put is not exercised or resold, the put will
become worthless at its expiration date, and the Portfolio will lose its
premium payment and the right to sell the underlying investment pursuant to
the put. The put may, however, be sold prior to expiration (whether or not
at a profit).
Buying a put on an investment a Portfolio does not own permits
the Portfolio either to resell the put or buy the underlying investment and
sell it at the exercise price. The resale price of the put will vary
inversely with the price of the underlying investment. If the market price
of the underlying investment is above the exercise price and as a result
the put is not exercised, the put will become worthless on its expiration
date. In the event of a decline in the stock market, a Portfolio could
exercise or sell the put at a profit to attempt to offset some or all of
its loss on its portfolio securities.
When writing put options on securities, to secure its
obligation to pay for the underlying security, a Portfolio will deposit in
escrow liquid assets with a value equal to or greater than the exercise
price of the underlying securities. A Portfolio therefore forgoes the
opportunity of investing
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the segregated assets or writing calls against those assets. As long as the
obligation of a Portfolio as the put writer continues, it may be assigned
an exercise notice by the broker-dealer through whom such option was sold,
requiring a Portfolio to take delivery of the underlying security against
payment of the exercise price. A Portfolio has no control over when it may
be required to purchase the underlying security, since it may be assigned
an exercise notice at any time prior to the termination of its obligation
as the writer of the put. This obligation terminates upon expiration of the
put, or such earlier time at which a Portfolio effects a closing purchase
transaction by purchasing a put of the same series as that previously sold.
Once a Portfolio has been assigned an exercise notice, it is thereafter not
allowed to effect a closing purchase transaction.
The purchase of a spread option gives a Portfolio the right to
put, or sell, a security that it owns at a fixed dollar spread or fixed
yield spread in relationship to another security that the Portfolio does
not own, but which is used as a benchmark. The risk to a Portfolio in
purchasing covered spread options is the cost of the premium paid for the
spread option and any transaction costs. In addition, there is no assurance
that closing transactions will be available. The purchase of spread options
will be used to protect a Portfolio against adverse changes in prevailing
credit quality spreads, i.e., the yield spread between high quality and
lower quality securities. Such protection is provided only during the life
of the spread option.
Options on Foreign Currencies. Puts and calls are also written
and purchased on foreign currencies. A call written on a foreign currency
by a 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 put option is "covered" if the Portfolio deposits with its
custodian cash or liquid securities with a value at least equal to the
exercise price of the put option. A call written by a Portfolio on a
foreign currency is for cross-hedging purposes if it is not covered, but is
designed to provide a hedge against a decline in the U.S. dollar value of a
security the Portfolio owns or has the right to acquire and which is
denominated in the currency underlying the option due to an adverse change
in the exchange rate. In such circumstances, a Portfolio collateralizes the
option by maintaining in a segregated account with the Trust's custodian,
cash or liquid securities in an amount not less than the value of the
underlying foreign currency in U.S. dollars marked-to-market daily.
As with other kinds of option transactions, the writing of an
option on currency will constitute only a partial hedge, up to the amount
of the premium received. A Portfolio could be required to purchase or sell
currencies at disadvantageous exchange rates, thereby incurring losses. The
purchase of an option on currency may constitute an effective hedge against
exchange rate fluctuations; however, in the event of exchange rate
movements adverse to a Portfolio's position, the Portfolio may forfeit the
entire amount of the premium plus related transaction costs.
Options on Securities Indices. Puts and calls on broadly-based
securities indices are similar to puts and calls on securities except that
all settlements are in cash and gain or loss depends on changes in the
index in question (and thus on price movements in the securities market
generally)
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rather than on price movements in individual securities or Futures. When a
Portfolio buys a call on a securities index, it pays a premium. During the
call period, upon exercise of a call by a Portfolio, a seller of a
corresponding call on the same investment will pay the Portfolio an amount
of cash to settle the call if the closing level of the securities index
upon which the call is based is greater than the exercise price of the
call. That cash payment is equal to the difference between the closing
price of the index and the exercise price of the call times a specified
multiple (the "multiplier") which determines the total dollar value for
each point of difference. When a Portfolio buys a put on a securities
index, it pays a premium and has the right during the put period to require
a seller of a corresponding put, upon the Portfolio's exercise of its put,
to deliver to the Portfolio an amount of cash to settle the put if the
closing level of the securities index upon which the put is based is less
than the exercise price of the put. That cash payment is determined by the
multiplier, in the same manner as described above as to calls.
Yield curve options. The trading of yield curve options is
subject to all of the risks associated with the trading of other types of
options. In addition, however, such options present risk of loss even if
the yield of one of the underlying securities remains constant, if the
spread moves in a direction or to an extent not anticipated. Yield curve
options are traded over-the-counter and because they have been only
recently introduced, established trading markets for these securities have
not yet developed. Because these securities are traded over-the-counter,
the Securities and Exchange Commission ("SEC") has taken the position that
yield curve options are illiquid and, therefore, cannot exceed the SEC
illiquidity ceiling. Portfolio that may enter into yield curve options
transactions will cover such transactions as described above.
Futures. Interest rate futures contracts, foreign currency
futures contracts and stock and bond index futures contracts, including
futures on U.S. government securities (together, "Futures") are used
primarily for hedging purposes and from time to time for income
enhancement. Upon entering into a Futures transaction, a Portfolio will be
required to deposit an initial margin payment with the futures commission
merchant (the "futures broker"). Futures are also often used to adjust
exposure to various equity or fixed income markets or as a substitute for
investments in underlying cash markets. The initial margin will be
deposited with the Trust's custodian in an account registered in the
futures broker's name; however the futures broker can gain access to that
account only under specified conditions. As the Future is marked to market
to reflect changes in its market value, subsequent margin payments, called
variation margin, will be paid to or by the futures broker on a daily
basis. Prior to expiration of the Future, if a Portfolio elects to close
out its position by taking an opposite position, a final determination of
variation margin is made, additional cash is required to be paid by or
released to the Portfolio, and any loss or gain is realized for tax
purposes. All Futures transactions are effected through a clearinghouse
associated with the exchange on which the Futures are traded.
Interest rate futures contracts are purchased or sold
generally for hedging purposes to attempt to protect against the effects of
interest rate changes on a Portfolio's current or intended investments in
fixed-income securities. For example, if a Portfolio owned long-term bonds
and interest rates were expected to increase, that Portfolio might sell
interest rate futures contracts. Such a sale would have much the same
effect as selling some of the long-term bonds in that Portfolio's
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portfolio. However, since the Futures market is more liquid than the cash
market, the use of interest rate futures contracts as a hedging technique
allows a Portfolio to hedge its interest rate risk without having to sell
its portfolio securities. If interest rates did increase, the value of the
debt securities in the portfolio would decline, but the value of that
Portfolio's interest rate futures contracts would be expected to increase
at approximately the same rate, thereby keeping the net asset value of that
Portfolio from declining as much as it otherwise would have. On the other
hand, if interest rates were expected to decline, interest rate futures
contracts may be purchased to hedge in anticipation of subsequent purchases
of long-term bonds at higher prices. Since the fluctuations in the value of
the interest rate futures contracts should be similar to that of long-term
bonds, a Portfolio could protect itself against the effects of the
anticipated rise in the value of long-term bonds without actually buying
them until the necessary cash became available or the market had
stabilized. At that time, the interest rate futures contracts could be
liquidated and that Portfolio's cash reserves could then be used to buy
long-term bonds on the cash market.
Purchases or sales of stock or bond index futures contracts
are used for hedging purposes to attempt to protect a Portfolio's current
or intended investments from broad fluctuations in stock or bond prices.
For example, a Portfolio may sell stock or bond index futures contracts in
anticipation of or during a market decline to attempt to offset the
decrease in market value of the Portfolio's securities portfolio that might
otherwise result. If such decline occurs, the loss in value of portfolio
securities may be offset, in whole or part, by gains on the Futures
position. When a Portfolio is not fully invested in the securities market
and anticipates a significant market advance, it may purchase stock or bond
index futures contracts in order to gain rapid market exposure that may, in
part or entirely, offset increases in the cost of securities that the
Portfolio intends to purchase. As such purchases are made, the
corresponding positions in stock or bond index futures contracts will be
closed out.
Foreign currency futures contracts are generally entered into
for hedging or income enhancement purposes to attempt to protect a
Portfolio's current or intended investments from fluctuations in currency
exchange rates. Such fluctuations could reduce the dollar value of
portfolio securities denominated in foreign currencies, or increase the
cost of foreign-denominated securities to be acquired, even if the value of
such securities in the currencies in which they are denominated remains
constant. For example, a Portfolio may sell futures contracts on a foreign
currency when it holds securities denominated in such currency and it
anticipates a decline in the value of such currency relative to the dollar.
In the event such decline occurs, the resulting adverse effect on the value
of foreign-denominated securities may be offset, in whole or in part, by
gains on the Futures contracts. However, if the value of the foreign
currency increases relative to the dollar, the Portfolio's loss on the
foreign currency futures contract may or may not be offset by an increase
in the value of the securities since a decline in the price of the security
stated in terms of the foreign currency may be greater than the increase in
value as a result of the change in exchange rates.
Conversely, a Portfolio could protect against a rise in the
dollar cost of foreign-denominated securities to be acquired by purchasing
Futures contracts on the relevant currency, which could offset, in whole or
in part, the increased cost of such securities resulting from a rise in the
dollar value of the underlying currencies. When a Portfolio purchases
futures contracts under
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such circumstances, however, and the price of securities to be acquired
instead declines as a result of appreciation of the dollar, the Portfolio
will sustain losses on its futures position, which could reduce or
eliminate the benefits of the reduced cost of portfolio securities to be
acquired.
Options on Futures include options on interest rate futures
contracts, stock and bond index futures contracts and foreign currency
futures contracts.
The writing of a call option on a Futures contract constitutes
a partial hedge against declining prices of the securities in the
portfolio. If the Futures price at expiration of the option is below the
exercise price, the Portfolio will retain the full amount of the option
premium, which provides a partial hedge against any decline that may have
occurred in the portfolio holdings. The writing of a put option on a
Futures contract constitutes a partial hedge against increasing prices of
the securities or other instruments required to be delivered under the
terms of the Futures contract. If the Futures price at expiration of the
put option is higher than the exercise price, a Portfolio will retain the
full amount of the option premium that provides a partial hedge against any
increase in the price of securities the Portfolio intends to purchase. If a
put or call option a Portfolio has written is exercised, the Portfolio will
incur a loss, which will be reduced by the amount of the premium it
receives. Depending on the degree of correlation between changes in the
value of its portfolio securities and changes in the value of its Options
on Futures positions, a Portfolio's losses from exercised Options on
Futures may to some extent be reduced or increased by changes in the value
of portfolio securities.
A Portfolio may purchase Options on Futures for hedging
purposes, instead of purchasing or selling the underlying Futures contract.
For example, where a decrease in the value of portfolio securities is
anticipated as a result of a projected market-wide decline or changes in
interest or exchange rates, a Portfolio could, in lieu of selling a Futures
contract, purchase put options thereon. In the event that such decrease
occurs, it may be offset, in whole or part, by a profit on the option. If
the market decline does not occur, the Portfolio will suffer a loss equal
to the price of the put. Where it is projected that the value of securities
to be acquired by a Portfolio will increase prior to acquisition, due to a
market advance or changes in interest or exchange rates, a Portfolio could
purchase call Options on Futures, rather than purchasing the underlying
Futures contract. If the market advances, the increased cost of securities
to be purchased may be offset by a profit on the call. However, if the
market declines, the Portfolio will suffer a loss equal to the price of the
call but the securities the Portfolio intends to purchase may be less
expensive.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS ("Forward Contracts") involves
bilateral obligations of one party to purchase, and another party to 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
the contract is entered into. These contracts are traded in the interbank market
conducted directly between currency traders (usually large commercial banks) and
their customers. No price is paid or received upon the purchase or sale of a
Forward Contract. Portfolios may use Forward Contracts to reduce certain risks
of their respective investments and/or to attempt to enhance return.
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Forward Contracts are generally used to protect against uncertainty in the
level of future exchange rates. The use of Forward Contracts does not eliminate
fluctuations in the prices of the underlying securities a Portfolio owns or
intends to acquire, but it does fix a rate of exchange in advance. In addition,
although Forward Contracts limit the risk of loss due to a decline in the value
of the hedged currencies, at the same time they limit any potential gain that
might result should the value of the currencies increase.
Forward Contracts may also be entered into with respect to specific
transactions. For example, when a Portfolio enters into a contract for the
purchase or sale of a security denominated in (or affected by fluctuations in,
in the case of ADRs) a foreign currency, or when a Portfolio anticipates receipt
of dividend payments in a foreign currency, the Portfolio may desire to
"lock-in" the U.S. dollar price of the security or the U.S. dollar equivalent of
such payment by entering into a Forward Contract, for a fixed amount of U.S.
dollars per unit of foreign currency, for the purchase or sale of the amount of
foreign currency involved in the underlying transaction. A Portfolio will
thereby be able to protect itself against a possible loss resulting from an
adverse change in the relationship between the currency exchange rates during
the period between the date on which the security is purchased or sold, or on
which the payment is declared, and the date on which such payments are made or
received.
Forward Contracts are also used to lock in the U.S. dollar value of
portfolio positions ("position hedge"). In a position hedge, for example, when a
Portfolio believes that foreign currency may suffer a substantial decline
against the U.S. dollar, it may enter into a Forward Contract to sell an amount
of that foreign currency approximating the value of some or all of the portfolio
securities denominated in (or affected by fluctuations in, in the case of ADRs)
such foreign currency, or when a Portfolio believes that the U.S. dollar may
suffer a substantial decline against a foreign currency, it may enter into a
Forward Contract to buy that foreign currency for a fixed dollar amount. In this
situation a Portfolio may, in the alternative, enter into a Forward Contract to
sell a different foreign currency for a fixed U.S. dollar amount where the
Portfolio believes that the U.S. dollar value of the currency to be sold
pursuant to the forward contract will fall whenever there is a decline in the
U.S. dollar value of the currency in which portfolio securities of the Portfolio
are denominated ("cross-hedged"). A Portfolio may also hedge investments
denominated in a foreign currency by entering into forward currency contracts
with respect to a foreign currency that is expected to correlate to the currency
in which the investments are denominated ("proxy hedging").
The Portfolios will cover outstanding forward currency contracts by
maintaining either liquid portfolio securities denominated in the currency
underlying the forward contract or the currency being hedged, or by owning a
corresponding opposite forward position (long or short position, as the case may
be) in the same underlying currency with the same maturity date
("Covering/Closing Forwards"). To the extent that a Portfolio is not able to
cover its forward currency positions with either underlying portfolio securities
or with Covering/Closing Forwards, or to the extent to any portion of a position
is either not covered by a corresponding opposite position or is "out of the
money" in the case where settlement prices are different on the short and long
positions, the Trust's custodian will place cash or liquid securities in a
separate account of the Portfolio having a value equal to the aggregate amount
of the Portfolio's commitments under Forward Contracts entered into with respect
to position hedges and cross-hedges. If the value of the securities placed
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in a separate account declines, additional cash or securities will be placed in
the account on a daily basis so that the value of the account will equal the
amount of the Portfolio's commitments with respect to such contracts. As an
alternative to maintaining all or part of the separate account, a Portfolio may
purchase a call option permitting the Portfolio to purchase the amount of
foreign currency being hedged by a forward sale contract at a price no higher
than the Forward Contract price or the Portfolio may purchase a put option
permitting the Portfolio to sell the amount of foreign currency subject to a
forward purchase contract at a price as high or higher than the Forward Contract
price. Unanticipated changes in currency prices may result in poorer overall
performance for a Portfolio than if it had not entered into such contracts.
The precise matching of the Forward Contract amounts and the value of the
securities involved will not generally be possible because the future value of
such securities in foreign currencies will change as a consequence of market
movements in the value of these securities between the date the Forward Contract
is entered into and the date it is sold. Accordingly, it may be necessary for a
Portfolio to purchase additional foreign currency on the spot (i.e., cash)
market (and bear the expense of such purchase), if the market value of the
security is less than the amount of foreign currency a Portfolio is obligated to
deliver and if a decision is made to sell the security and make delivery of the
foreign currency. 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 a Portfolio is obligated
to deliver. The projection of short-term currency market movements is extremely
difficult, and the successful execution of a short-term hedging strategy is
highly uncertain. Forward Contracts involve the risk that anticipated currency
movements will not be accurately predicted, causing a Portfolio to sustain
losses on these contracts and transactions costs.
At or before the maturity of a Forward Contract requiring a Portfolio to
sell a currency, the Portfolio may either sell a portfolio security and use the
sale proceeds to make delivery of the currency or retain the security and offset
its contractual obligation to deliver the currency by purchasing a second
contract pursuant to which the Portfolio will obtain, on the same maturity date,
the same amount of the currency that it is obligated to deliver. Similarly, a
Portfolio may close out a Forward Contract requiring it to purchase a specified
currency by entering into a second contract entitling it to sell the same amount
of the same currency on the maturity date of the first contract. A Portfolio
would realize a gain or loss as a result of entering into such an offsetting
Forward Contract under either circumstance to the extent the exchange rate or
rates between the currencies involved moved between the execution dates of the
first contract and offsetting contract.
The cost to a Portfolio of engaging in Forward Contracts varies with
factors such as the currencies involved, the length of the contract period and
the market conditions then prevailing. Because Forward Contracts are usually
entered into on a principal basis, no fees or commissions are involved. Because
such contracts are not traded on an exchange, a Portfolio must evaluate the
credit and performance risk of each particular counterparty under a Forward
Contract.
Although a Portfolio values its assets daily in terms of U.S. dollars, it
does not intend to convert its holdings of foreign currencies into U.S. dollars
on a daily basis. A Portfolio may convert foreign currency
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from time to time, and investors should be aware of the costs of currency
conversion. Foreign exchange dealers do not charge a fee for conversion, but
they do seek to realize a profit based on the difference between the prices at
which they buy and sell various currencies. Thus, a dealer may offer to sell a
foreign currency to a Portfolio at one rate, while offering a lesser rate of
exchange should the Portfolio desire to resell that currency to the dealer.
PORTFOLIO TRADING. A Portfolio may engage in portfolio trading when it is
believed by the Manager that the sale of a security owned and the purchase of
another security of better value can enhance principal and/or increase income. A
security may be sold to avoid any prospective decline in market value in light
of what is evaluated as an expected rise in prevailing yields, or a security may
be purchased in anticipation of a market rise (a decline in prevailing yields).
A security also may be sold and a comparable security purchased coincidentally
in order to take advantage of what is believed to be a disparity in the normal
yield and price relationship between the two securities.
In addition, each Portfolio may invest in securities and other instruments
that do not presently exist but may be developed in the future, provided that
each such investment is consistent with the Portfolio's investment objectives,
policies and restrictions and is otherwise legally permissible under federal and
state laws. The Prospectus and SAI, as appropriate, will be amended or
supplemented as appropriate to discuss any such new investments.
SUPPLEMENTAL INFORMATION ABOUT DERIVATIVES AND THEIR USE
The Trust's custodian, or a securities depository acting for the custodian,
will act as the Portfolio's escrow agent, through the facilities of the Options
Clearing Corporation ("OCC"), as to the securities on which the Portfolio has
written options or as to other acceptable escrow securities, so that no margin
will be required for such transaction. OCC will release the securities on the
expiration of the option or upon a Portfolio's entering into a closing
transaction.
An option position may be closed out only on a market that provides
secondary trading for options of the same series and there is no assurance that
a liquid secondary market will exist for any particular option. A Portfolio's
option activities may affect its turnover rate and brokerage commissions. The
exercise by a Portfolio of puts on securities will result in the sale of related
investments, increasing portfolio turnover. Although such exercise is within a
Portfolio's control, holding a put might cause the Portfolio to sell the related
investments for reasons that would not exist in the absence of the put. A
Portfolio will pay a brokerage commission each time it buys a put or call, sells
a call, or buys or sells an underlying investment in connection with the
exercise of a put or call. Such commissions may be higher than those that would
apply to direct purchases or sales of such underlying investments. Premiums paid
for options are small in relation to the market value of the related
investments, and consequently, put and call options offer large amounts of
leverage. The leverage offered by trading in options could result in a
Portfolio's net asset value being more sensitive to changes in the value of the
underlying investments.
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In the future, each Portfolio may employ derivatives and strategies that
are not presently contemplated but which may be developed, to the extent such
investment methods are consistent with a Portfolio's investment objectives,
legally permissible and adequately disclosed.
Regulatory Aspects of Derivatives. Each Portfolio that utilizes such
instruments must operate within certain restrictions as to its long and short
positions in Futures and options thereon under a rule (the "CFTC Rule") adopted
by the Commodity Futures Trading Commission (the "CFTC") under the Commodity
Exchange Act (the "CEA"), which excludes the Portfolio from registration with
the CFTC as a "commodity pool operator" (as defined in the CEA) if it complies
with the CFTC Rule. In particular, the Portfolio may (i) purchase and sell
Futures and options thereon for bona fide hedging purposes, as defined under
CFTC regulations, without regard to the percentage of the Portfolio's assets
committed to margin and option premiums, and (ii) enter into non-hedging
transactions, provided that the Portfolio may not enter into such non-hedging
transactions if, immediately thereafter, the sum of the amount of initial margin
deposits on the Portfolio's existing Futures positions and option premiums would
exceed 5% of the fair value of its portfolio, after taking into account
unrealized profits and unrealized losses on any such transactions. Margin
deposits may consist of cash or securities acceptable to the broker and the
relevant contract market.
Transactions in options by a Portfolio are subject to limitations
established by each of the exchanges governing the maximum number of options
that may be written or held by a single investor or group of investors acting in
concert, regardless of whether the options were written or purchased on the same
or different exchanges or are held in one or more accounts or through one or
more exchanges or brokers. Thus, the number of options a Portfolio may write or
hold may be affected by options written or held by other entities, including
other investment companies having the same or an affiliated investment adviser.
Position limits also apply to Futures. An exchange may order the liquidation of
positions found to be in violation of those limits and may impose certain other
sanctions. Due to requirements under the 1940 Act, when a Portfolio purchases a
Future, the Portfolio will maintain, in a segregated account or accounts with
its custodian bank, cash or liquid securities in an amount equal to the market
value of the securities underlying such Future, less the margin deposit
applicable to it.
Possible Risk Factors in Derivatives. Participation in the options or
Futures markets and in currency exchange transactions involves investment risks
and transaction costs to which a Portfolio would not be subject absent the use
of these strategies. If the Adviser/Subadviser's predictions of movements in the
direction of the securities, foreign currency and interest rate markets are
inaccurate, the adverse consequences to a Portfolio may leave the Portfolio in a
worse position than if such strategies were not used. There is also a risk in
using short hedging by selling Futures to attempt to protect against decline in
value of the portfolio securities (due to an increase in interest rates) that
the prices of such Futures will correlate imperfectly with the behavior of the
cash (i.e., market value) prices of the Portfolio's securities. The ordinary
spreads between prices in the cash and Futures markets are subject to
distortions due to differences in the natures of those markets. First, all
participants in the Futures markets are subject to margin deposit and
maintenance requirements. Rather than meeting additional margin deposit
requirements, investors may close Futures contracts through offsetting
transactions, which could distort the normal relationship between the
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cash and Futures markets. Second, the liquidity of the Futures markets depends
on participants entering into offsetting transactions rather than making or
taking delivery. To the extent participants decide to make or take delivery,
liquidity in the Futures markets could be reduced, thus producing distortion.
Third, from the point-of-view of speculators, the deposit requirements in the
Futures markets are less onerous than margin requirements in the securities
markets. Therefore, increased participation by speculators in the Futures
markets may cause temporary price distortions.
If a Portfolio establishes a position in the debt securities markets as a
temporary substitute for the purchase of individual debt securities (long
hedging) by buying Futures and/or calls on such Futures or on debt securities,
it is possible that the market may decline; if the Adviser/Subadviser then
determines not to invest in such securities at that time because of concerns as
to possible further market decline or for other reasons, the Portfolio will
realize a loss that is not offset by a reduction in the price of the debt
securities purchased.
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.
SUPPLEMENTAL INFORMATION CONCERNING HIGH-YIELD, HIGH-RISK BONDS AND SECURITIES
RATINGS.
HIGH-YIELD, HIGH-RISK BONDS may present certain risks, which are discussed
below:
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 defaults on its obligations
to pay interest or principal or enters into bankruptcy proceedings, a
Portfolio may incur losses or expenses in seeking recovery of amounts owed
to it. In addition, periods of economic uncertainty and changes 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, a Portfolio would have to replace the
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security with a lower yielding security, resulting in a decreased return
for investors. Conversely, a high-yield bond's value will decrease in a
rising interest rate market, as will the value of the Portfolio's assets.
If the Portfolio experiences unexpected net redemptions, this may force it
to sell high-yield bonds without regard to their investment merits, thereby
decreasing the asset base upon which expenses can be spread and possibly
reducing the Portfolio's rate of return.
Liquidity and Valuation - There may be little trading in the secondary
market for particular bonds, which may affect adversely a 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.
SunAmerica Asset Management Corp. ("SAAMCo" or the "Adviser") or Subadviser
attempts to reduce these risks through diversification of the applicable
Portfolio and by credit analysis of each issuer, as well as by monitoring broad
economic trends and corporate and legislative developments. If a high-yield bond
previously acquired by a Portfolio is downgraded, the Adviser or Subadviser, as
appropriate, will evaluate the security and determine whether to retain or
dispose of it.
The following are additional restrictions and/or requirements concerning
the ratings of securities:
- 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
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<PAGE> 76
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.
- The STRATEGIC MULTI-ASSET PORTFOLIo may invest in junk bonds.
- 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.
- The GROWTH, MULTI-ASSET, MONEY MARKET SECURITIES, NATURAL
RESOURCES and CAPITAL APPRECIATION PORTFOLIOs will not invest
in junk bonds.
See the Appendix for a description of corporate bond and commercial paper
ratings.
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 nine Portfolios may:
1. Purchase any security (other than obligations of the U.S. government,
its agencies or instrumentalities) if as a result more than 5% of the
Portfolio's total assets (taken at current value) would then be
invested in securities of a single issuer, or more than 25% of its
total assets (taken at current value) would then be invested in a
single industry with the exception of the Money Market Portfolio
which intends to concentrate its investments in the banking industry.
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<PAGE> 77
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 or SunAmerica Asset Management Corp. 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.
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.
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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 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 and High Yield
Portfolios.
SUNAMERICA ASSET MANAGEMENT CORP.
SunAmerica Asset Management Corp. ("SAAMCo"), The SunAmerica Center, 733
Third Avenue, New York, New York 10017-3204, has been retained pursuant to an
Investment Advisory and Management Agreement (the "Advisory Agreement") to
supervise the management and investment programs of the Portfolios of the Trust.
SAAMCo is engaged in providing investment advice and management services to
the Trust, other mutual funds, pension funds, and related assets and programs
offered by affiliated companies. SAAMCo also provides investment advice to
individual companies and clients. SAAMCo provides investment advisory services,
office space, and other facilities for the management of the Trust's affairs,
and pays all compensation of officers and Trustees of the Trust who are
"interested persons" of SAAMCo. The Trust pays all other expenses incurred in
the operation of the Trust, including fees and expenses of disinterested
Trustees of the Trust, except those affirmatively undertaken by SAAMCo or
Wellington. SAAMCo 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.
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<PAGE> 79
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. 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 SAAMCo shall act as investment
adviser to the Trust, manage the Trust's investments, administer its business
affairs, furnish offices, necessary facilities and equipment, provide clerical,
bookkeeping and administrative services, and permit any of SAAMCo's officers or
employees to serve without compensation as Trustees or officers of the Trust if
duly elected to such positions. Under the Advisory Agreement, the Trust agrees
to assume and pay certain charges and expenses of its operations, including: the
compensation of the Trustees (other than those affiliated with SAAMCo or
Wellington), 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 notices to shareholders,
miscellaneous expenses and all taxes and fees to federal, state or other
governmental agencies.
Each Portfolio pays its actual expenses for custodian services and a
portion of the Custodian's costs determined by the ratio of portfolio assets to
the total assets of the Trust, brokerage commissions or transaction costs, and
registration fees. Subject to supervision of the Board of Trustees, fees for
independent accountants, legal counsel, costs of reports of notices to
shareholders will be allocated based on the relative net assets of each
Portfolio. With respect to audit or legal fees clearly attributable to one
Portfolio, they will be assessed, subject to review by the Board of Trustees,
against that Portfolio.
The Advisory Agreement continues in effect from year to year, in
accordance with its terms, only so long as such continuance is specifically
approved at least annually by the Board of Trustees or by vote of a majority of
the outstanding voting securities of the Trust. The Advisory Agreement may be
terminated, as to any Portfolio named therein at any time, without the payment
of any penalty, by the Trustees or by a vote of a majority of the outstanding
shares of the Trust or of any Portfolio of the Trust, on not less than thirty
(30) days or more than sixty (60) days' prior written notice to SAAMCo, or by
SAAMCo, on
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<PAGE> 80
ninety (90) days' prior written notice to the Trust. The Advisory Agreement
terminates automatically in the event of its assignment.
Under the terms of the Advisory Agreement, SAAMCo is not liable to the
Portfolios, or their shareholders, for any act or omission by it or for any
losses sustained by the Portfolios or their shareholders, except in the case of
willful misfeasance, bad faith, gross negligence or reckless disregard of duty.
With respect to the investment advisory fees, SAAMCo has agreed to
waive its fees to the extent necessary so that the fees actually collected
reflect the fee schedules set forth below at the following annual percentages of
each portfolio's average daily net assets (other than the Natural Resources
Portfolio, for which no fee waiver is in effect):
<TABLE>
<CAPTION>
AVERAGE DAILY MANAGEMENT
PORTFOLIO NET ASSETS FEE
- --------- ------------------------- ----------
<S> <C> <C>
Growth and Income $0-$100 million .700%
Greater Than $100 million .650%
Greater Than $250 million .600%
Greater Than $500 million .575%
Growth $0-$250 million .750%
Greater Than $250 million .675%
Greater Than $500 million .600%
Capital Appreciation $0-$100 million .750%
Greater Than $100 million .675%
Greater Than $250 million .625%
Greater Than $500 million .600%
Natural Resources net assets .750%
Multi-Asset, Strategic Multi-Asset $0-$200 million 1.000%
Greater Than $200 million .875%
Greater Than $500 million .800%
Money Market $0-$150 million .500%
Greater Than $150 million .475%
Greater Than $250 million .450%
Greater Than $500 million .425%
</TABLE>
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<PAGE> 81
<TABLE>
<S> <C> <C>
Government & Quality Bond $0-$200 million .625%
Greater Than $200 million .575%
Greater Than $500 million .500%
High Yield $0-$250 million .700%
Greater Than $250 million .575%
Greater Than $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, 1999, 1998 and 1997.
ADVISORY FEES
<TABLE>
<CAPTION>
FUND 1999 1998 1997
---- ---- ---- ----
<S> <C> <C> <C>
Growth and Income Portfolio $355,107 $331,720 $280,911
Growth Portfolio $4,904,393 $3,948,827 $3,049,207
Capital Appreciation Portfolio $8,167,469 $5,750,603 $4,366,046
Natural Resources Portfolio $376,120 $344,730 $380,856
Multi-Asset Portfolio $1,365,768 $1,457,255 $1,501,407
Strategic Multi-Asset Portfolio $588,576 $512,866 $563,207
Money Market Portfolio $342,592 $345,223 $383,800
Government and Quality Bond Portfolio $2,620,065 $1,819,571 $1,364,101
High Yield Portfolio $158,949 $226,072 $286,254
Fixed Income Portfolio+ $38,318* $110,791 $124,001
Foreign Securities Portfolio++ $86,547* $297,272 $404,182
</TABLE>
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<PAGE> 82
+ On August 6, 1999, the shares of the Fixed Income Portfolio were
substituted with shares of the Government and Quality Bond Portfolio.
The Advisory fee for the Fixed Income Portfolio was calculated at the
following annual rates: .625% on the first $200 million of average
daily net assets; .575% on the next $300 million; and .425% on assets
over $500 million.
++ On August 6, 1999, the shares of the Foreign Securities Portfolio were
substituted with shares of the Strategic Multi-Asset Portfolio. The
Advisory fee for the Foreign Securities Portfolio was calculated at the
following annual rates: .900% on the first $100 million of average
daily net assets; .825% on the next $150 million; .750% on the next
$250 million and .700% on assets over $500 million.
* For the period 1/1/99 through 8/6/99 (termination of operations)
PERSONAL SECURITIES TRADING
The Trust and SAAMCo 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 ("Wellington Management") serves as
Subadviser to all of the Portfolios of the Trust, pursuant to the Subadvisory
Agreement with SAAMCo. (See "Management" in 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 SAAMCo and discharges its responsibilities
subject to the policies of the Trustees and the oversight and supervision of
SAAMCo, which pays the Subadviser's fee. Wellington Management is a
Massachusetts limited liability partnership of which the following persons are
managing partners: Laurie A. Gabriel, 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
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<PAGE> 83
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
SAAMCo 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 SAAMCo 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, as reported to the Trust by SAAMCo, for each Portfolio pursuant to
the Subadvisory Agreement for the fiscal years ended December 31, 1999, 1998 and
1997.
<TABLE>
<CAPTION>
FEE RATE
PORTFOLIO (AS A % OF AVERAGE DAILY NET ASSET VALUE)
- --------- -----------------------------------------
<S> <C>
Money Market Portfolio .075% first $500 million
.02% over $500 million
Government and Quality Bond Portfolio .225% first $50 million
.125% next $50 million
.10% over $100 million
Growth Portfolio .325% first $50 million
.225% next $100 million
.20% next $350 million
.15% over $500 million
High Yield Portfolio .30% first $50 million
.225% next $100 million
.175% next $350 million
.15% over $500 million
Strategic Multi-Asset Portfolio .30% first $50 million
.20% next $100 million
.175% next $350 million
.15% over $500 million
Multi-Asset Portfolio .25% first $50 million
.175% next $100 million
.15% over $150 million
Capital Appreciation Portfolio .375% first $50 million
.275% next $100 million
.20% next $350 million
.15% over $500 million
</TABLE>
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<PAGE> 84
<TABLE>
<CAPTION>
FEE RATE
PORTFOLIO (AS A % OF AVERAGE DAILY NET ASSET VALUE)
- --------- -----------------------------------------
<S> <C>
Growth and Income Portfolio .325% first $50 million
.225% next $100 million
.20% next $350 million
.15% over $500 million
Natural Resources Portfolio .35% first $50 million
.25% next $100 million
.20% next $350 million
.15% over $500 million
</TABLE>
The following table sets forth the total Subadvisory fees received by
Wellington, as reported to the Trust by SAAMCo, for each Portfolio pursuant to
the Subadvisory Agreement for the fiscal years ended December 31, 1999, 1998 and
1997.
SUBADVISORY FEES
<TABLE>
<CAPTION>
FUND 1999 1998 1997
---- ---- ---- ----
<S> <C> <C> <C>
Growth and Income Portfolio $163,643 $153,906 $130,423
Growth Portfolio $1,422,973 $1,183,587 $910,003
Capital Appreciation Portfolio $2,373,117 $1,768,901 $1,429,761
Natural Resources Portfolio $172,202 $160,091 $175,784
Multi-Asset Portfolio $276,509 $292,376 $299,772
Strategic Multi-Asset Portfolio $167,089 $151,231 $162,641
Money Market Portfolio $51,389 $51,784 $57,570
Government and Quality Bond Portfolio $513,272 $374,056 $294,844
High Yield Portfolio $68,121 $96,888 $122,680
Fixed Income Portfolio+ $21,544* $39,885 $44,640
Foreign Securities Portfolio++ $69,238* $132,121 $179,429
</TABLE>
+ On August 6, 1999, the shares of the Fixed Income Portfolio were
substituted with shares of the Government and Quality Bond Portfolio.
The Subadvisory fee for the Fixed Income Portfolio was calculated at
the following annual rates: .225% on the first $50 million of average
daily net assets; .125% on the next $50 million; and .10% on assets
over $100 million.
++ On August 6, 1999, the shares of the Foreign Securities Portfolio were
substituted with shares of the Strategic Multi-Asset Portfolio. The
Subadvisory fee for the Foreign Securities Portfolio was calculated at
the following annual rates: .40% on the first $50 million of average
daily net assets; .275% on the next $100 million; .20% on the next $350
million and .15% on assets over $500 million.
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<PAGE> 85
* For the period 1/1/99 through 8/6/99 (termination of operations)
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. 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>
NAME, AGE AND ADDRESS POSITION WITH THE TRUST PRINCIPAL OCCUPATIONS
- ------------------------ ----------------------- DURING PAST 5 YEARS
---------------------
<S> <C> <C>
S. James Coppersmith, 67 Trustee Retired; formerly, President and General
7 Elmwood Road (since 1987) Manager, WCVB-TV, a division of the Hearst
Marblehead, MA 01945 Corporation (1982 to 1994); Director/Trustee
the SunAmerica Mutual Funds, SunAmerica Style
Select Series, Inc. ("Style Select") and
SunAmerica Strategic Investment Series, Inc.
Samuel M. Eisenstat, 60 Trustee and Attorney, solo practitioner; Of Counsel,
430 East 86 Street Chairman of the Board Kramer, Levin, Naftalis & Frankel; Director
New York, NY 10028 (since 1986) 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, Style Select and SunAmerica
Strategic Investment Series, Inc.
Stephen J. Gutman, 56 Trustee Partner and Managing Member of B.B.
515 East 79 Street (since 1986) Associates LLC (menswear specialty retailing
New York, NY 10021 and other activities) since June 1988;
Chairman of the Board, Chief Operating and
Executive Officer of Beau Brummel Casuals
Limited, Inc., a menswear special retailer
since May 1989; Director/Trustee of the
SunAmerica Mutual Funds, Style Select and
SunAmerica Strategic Investment
</TABLE>
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<PAGE> 86
<TABLE>
<S> <C> <C>
Series, Inc.
Peter A. Harbeck*, 46 Trustee and President Director/Trustee of SunAmerica Mutual Funds,
The SunAmerica Center (since 1994) Style Select and SunAmerica Strategic
733 Third Avenue Investment Series, Inc.; Director and
New York, NY 10017-3204 President of SAAMCo; 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 SAAMCo, from May
1988 to August 1995; Executive Vice
President, SACS, from November 1991 to
August 1995; and Director, Resources Trust
Company.
Peter C. Sutton, 35 Treasurer Senior Vice President, SAAMCo, since April
The SunAmerica Center (since 1994) 1997; Treasurer, SAAMCo Mutual Funds since
733 Third Avenue February 1996, Style Select since September
New York, NY 10017-3204 1996 and SunAmerica Strategic Investment
Series, Inc. since December 18, 1998; Vice
President, Treasurer and Controller
SunAmerica Series Trust, Anchor Pathway Fund
and Seasons Series Trust since February
2000; formerly, Vice President of SAAMCo
(1994-1997); Controller, SunAmerica Mutual
Funds (March 1993 - February 1996) and
Assistant Controller, SunAmerica Mutual
Funds (1990-1993); joined SAAMCo in 1990.
</TABLE>
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<PAGE> 87
<TABLE>
<S> <C> <C>
Secretary of SunAmerica Strategic Investment
Secretary and Chief Series, Inc., since 1998; Secretary and Chief
Robert M. Zakem, 42 Compliance Officer (since Compliance Officer of SunAmerica Mutual
The SunAmerica Center 1993) Funds, since 1993 and Style Select, since
733 Third Avenue 1996; Senior Vice President and General
New York, NY 10017-3204 Counsel of SAAMCo, 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.
</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 SAAMCo or its affiliates and receive no
compensation from the Trust.
In addition, each non-affiliated Trustee also serves on the Audit
Committee of the Board of Trustees. 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 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.
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The Trustees (and Directors) of the SunAmerica Mutual Funds, Style
Select, SunAmerica Strategic Investment Series, Inc. 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 APRIL 1, 2000, 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, 1999. Neither the Trustees who are interested persons of the
Trust nor any officers of the Trust receive any compensation.
COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL
PENSION OR COMPENSATION
AGGREGATE RETIREMENT ESTIMATED FROM REGISTRANT
COMPENSATION BENEFITS ACCRUED ANNUAL BENEFITS AND FUND
FROM AS PART OF FUND UPON COMPLEX PAID
TRUSTEE REGISTRANT EXPENSES* RETIREMENT TO TRUSTEES*
- ------- ---------- --------- ---------- ------------
<S> <C> <C> <C> <C>
S. James Coppersmith $22,036 - - $65,000
Samuel M. Eisenstat $24,036 - - $69,000
Stephen J. Gutman $22,036 - - $65,000
</TABLE>
* Information is as of December 31, 1999 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
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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, The Chrysler Building, 405 Lexington Avenue, New York,
New York 10174 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.
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 or SAAMCo exercises investment
discretion. Such service may include advice concerning the value of securities;
the advisability of investing in, purchasing or selling securities; the
availability of securities or the purchasers or sellers of securities;
furnishing 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.
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The receipt of research from brokers may be useful in rendering
investment management services to the Trust and other clients of Wellington and
SAAMCo; conversely, such information provided by brokers who have executed
transaction orders on behalf of other clients may be useful in carrying out
obligations to the Trust. The receipt of such research will not be substituted
for independent research and the expenses of Wellington or SAAMCo 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 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'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 will
find themselves contemporaneously engaged in purchasing or selling the same
securities from or to third parties. When this occurs, the transactions will be
averaged as to price and allocated as to amounts in accordance with an
allocation policy, which has been reviewed by the Board of Trustees and
considered to be equitable to the portfolios involved. It is recognized that in
some cases this system could have a detrimental effect on the price or volume of
the security as far as the Trust is concerned. However, it is the judgment of
the Board of Trustees of the Trust that the desirability of its advisory
arrangement with SAAMCo and the Subadvisory arrangement with Wellington
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.
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, 1999, 1998 and 1997.
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<PAGE> 91
1999 BROKERAGE COMMISSIONS
<TABLE>
<CAPTION>
PERCENTAGE OF PERCENTAGE OF
AGGREGATE AMOUNT COMMISSIONS PAID TO AMOUNT OF
BROKERAGE PAID TO AFFILIATED AFFILIATED TRANSACTIONS
PORTFOLIO COMMISSIONS BROKER-DEALERS BROKER-DEALERS INVOLVING
PAYMENT OF
COMMISSIONS PAID
TO AFFILIATED
BROKERS-DEALERS
- --------------------------- ------------ ------------------ -------------------- ----------------
<S> <C> <C> <C> <C>
Growth and Income Portfolio $24,080 -- -- --
Growth Portfolio $622,877 -- -- --
Capital Appreciation $1,327,347 -- -- --
Portfolio
Natural Resources Portfolio $153,021 -- -- --
Multi-Asset Portfolio $80,584 -- -- --
Strategic Multi-Asset $160,753 -- -- --
Portfolio
Money Market Portfolio -- -- -- --
Government and Quality Bond -- -- -- --
Portfolio
Foreign Securities $114,101 -- -- --
Portfolio*
Fixed Income -- -- -- --
Portfolio*
High Yield Portfolio -- -- -- --
</TABLE>
*For the period 1/1/99 through 8/6/99 (termination of operations)
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1998 BROKERAGE COMMISSIONS
<TABLE>
<CAPTION>
PERCENTAGE OF PERCENTAGE OF
AGGREGATE AMOUNT COMMISSIONS PAID TO AMOUNT OF
BROKERAGE PAID TO AFFILIATED AFFILIATED TRANSACTIONS
PORTFOLIO COMMISSIONS BROKER-DEALERS BROKER-DEALERS INVOLVING
PAYMENT OF
COMMISSIONS PAID
TO AFFILIATED
BROKERS-DEALERS
- ----------------------------- -------------------- -------------------- ------------------- ------------------
<S> <C> <C> <C> <C>
Growth and Income Portfolio $34,242 $399 1.17% .41%
Growth Portfolio $333,218 $10,350 3.11% .77%
Capital Appreciation $1,117,549 $18,102 1.62% .55%
Portfolio
Natural Resources Portfolio $97,752 -- -- --
Multi-Asset Portfolio $61,729 $2,382 3.86% .34%
Strategic Multi-Asset $157,819 -- -- --
Portfolio
Money Market Portfolio -- -- -- --
Government and Quality Bond -- -- -- --
Portfolio
Foreign Securities $245,890 -- -- --
Portfolio
Fixed Income -- -- -- --
Portfolio
High Yield Portfolio $125 -- -- --
</TABLE>
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1997 BROKERAGE COMMISSIONS
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE AMOUNT COMMISSIONS PAID TO
BROKERAGE PAID TO AFFILIATED AFFILIATED BROKER
PORTFOLIO COMMISSIONS BROKER-DEALERS
- ----------------------------------- ----------- ------------------ -------------------
<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%
Natural Resources Portfolio $82,069 0 0
Multi-Asset Portfolio $113,205 0 0
Strategic Multi-Asset Portfolio $110,345 $420 0.38%
Foreign Securities $213,438 0 0
Portfolio
Fixed Income $9 0 0
Portfolio
High Yield Portfolio $351 0 0
</TABLE>
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
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<PAGE> 94
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.
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. Rule 2a-7 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
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.
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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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For the fiscal year ended December 31, 1999, the Government and Quality
Bond, High Yield and Natural Resources Portfolios had capital loss
carry-forwards of $945,427, $4,763,765 and $4,072,622, respectively. To the
extent not yet utilized, such losses will be available to offset future gains
through 2007 for the Government and Quality Bond and High Yield Portfolios and
2006 for the Natural Resources Portfolio.
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."
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
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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
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
of Anchor National Life Insurance Company, First SunAmerica Life Insurance
Company, AIG Life Insurance Company and American International Life Assurance
Company of New York; and variable annuity contracts issued by Phoenix Home Life
Mutual Insurance Company and Presidential Life Insurance Company. All shares of
the Trusts are owned by Separate Accounts of the aforementioned life insurance
companies.
Anchor National Life Insurance Company, First SunAmerica Life Insurance Company,
AIG Life Insurance Company, and American Life Assurance Company of New York are
under common control with, and therefore are affiliated with, the Adviser.
Phoenix Home Life Mutual 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 materials
irreconcilable conflicts which may possibly arise and to determine what action,
if any, should be taken in response thereto. If such a conflict were to occur,
one or more insurance company separate accounts might withdraw their investments
in the Trust. This might force the Trust to sell portfolio securities at
disadvantageous prices.
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FINANCIAL STATEMENTS
The Trust's audited financial statements are incorporated into this
Statement of Additional Information by reference to its 1999 annual report to
shareholders. You may request a copy of the annual report at no charge by
calling (800) 858-8850 or writing the Trust at SunAmerica Fund Services, Inc.,
Mutual Fund Operations, The SunAmerica Center, 733 Third Avenue, New York, New
York 10017-3204.
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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.
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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 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
B-67
<PAGE> 101
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.
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.
B-68
<PAGE> 102
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.
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.
B-69
<PAGE> 103
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.
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.
B-70
<PAGE> 104
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.
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-71
<PAGE> 105
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) (1) Investment Advisory and Management Agreement
between Registrant and SunAmerica Asset Management
Corp. ("SunAmerica"). Incorporated herein by
reference to Post-Effective Amendment No. 30 to
the Registrant's Registration Statement on Form
N1-A filed on March 30, 1999.
(2) Subadvisory Agreement between SunAmerica and
Wellington Management Company, LLP. Incorporated
herein by reference to Post-Effective Amendment
No. 30 to the Registrant's Registration Statement
on Form N1-A filed on March 30, 1999.
(e) Inapplicable.
(f) Directors'/Trustees' Retirement Plan. Incorporated
herein by reference to Post-Effective Amendment No. 30
to the Registrant's Registration Statement on Form N1-A
filed on March 30, 1999.
(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.
(j) Consent of Independent Accountants.
(k) Inapplicable.
(l) Inapplicable.
(m) Inapplicable.
(n) Inapplicable.
(p) Code of Ethics.
<PAGE> 106
Item 24. Persons Controlled By or Under Common Control with Registrant.
There are no persons controlled by or under common control with
Registrant.
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 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
<PAGE> 107
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, 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 of Accounts and Records.
State Street Bank and Trust Company, 225 Franklin Street,
Boston, Massachusetts 02110, acts as Custodian, Transfer
Agent and Dividend Paying Agent. It maintains books, records
and accounts pursuant to the instructions of the Fund.
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> 108
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Post-Effective Amendment No. 31 to
the Registration Statement pursuant to Rule 485(b) under the Securities Act of
1933 and has duly caused this Post-Effective Amendment No. 31 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 12th day
of April, 2000.
ANCHOR SERIES TRUST
By:/s/Peter A. Harbeck
Peter A. Harbeck
President
Pursuant to the requirements of the Securities Act of 1933 this
Post-Effective Amendment No. 31 to the Registration Statement has been signed
below by the following persons in the capacities
and on the date indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
/s/Peter A. Harbeck President and Trustee April 12, 2000
Peter A. Harbeck (Principal Executive
Officer)
* Treasurer April 12, 2000
Peter C. Sutton (Principal Financial
and Accounting Officer)
* Trustee April 12, 2000
S. James Coppersmith
* Trustee April 12, 2000
Samuel M. Eisenstat
* Trustee April 12, 2000
Stephen J. Gutman
*By:/s/Robert M. Zakem
Attorney-in-Fact
Robert M. Zakem
</TABLE>
<PAGE> 109
ANCHOR SERIES TRUST
EXHIBIT INDEX
Exhibit No. Name
(i) Opinion and Consent of Counsel.
(j) Consent of Independent Accountants.
(p) Code of Ethics.
<PAGE> 1
April 12, 2000
Ladies and Gentlemen:
This opinion is being furnished in connection with the filing
by Anchor Series Trust, a Massachusetts business trust (the "Trust"), of
Post-Effective Amendment No. 31 (the "Amendment") to the Registration Statement
on Form N-1A (the "Registration Statement") which registers an indefinite number
of shares of beneficial interest of each series of the Trust having par value of
$.01 per Share, (the "Shares") under the Securities Act of 1933, as amended (the
"1933 Act"), pursuant to the Trust's Registration Statement.
As counsel for the Trust, I am familiar with the proceedings
taken by the Trust in connection with the authorization, issuance and sale of
the Shares. In addition, I have examined the Trust's Declaration of Trust,
By-Laws and such other documents that have been deemed relevant to the matters
referred to herein.
Based upon the foregoing, I am of the opinion that, upon
issuance and sale of the Shares in the manner referred to in the Amendment, the
Shares will be legally issued, fully paid and nonassessable shares of beneficial
interest of the Trust. However, I note that as set forth in the Registration
Statement, shareholders or contract owners of Anchor Series Trust might, under
certain circumstances, be liable for transactions effected by the Trust.
I hereby consent to the filing of this opinion with the
Securities and Exchange Commission as an exhibit to the Amendment, and to the
filing of this opinion under the securities laws of any state.
Very truly yours,
By: /s/ Robert M. Zakem
Name: Robert M. Zakem
Title: Senior Vice President and General Counsel
<PAGE> 1
Exhibit J
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in this Registration
Statement on Form N-1A of our report dated February 22, 2000, relating to the
financial statements and financial highlights which appears in the December 31,
1999 Annual Report to Shareholders of Money Market Portfolio, Government and
Quality Bond Portfolio, High Yield Portfolio, Growth and Income Portfolio,
Growth Portfolio, Capital Appreciation Portfolio, Natural Resources Portfolio,
Multi-Asset Portfolio and Strategic Multi-Asset Portfolio (constituting the
nine portfolios of Anchor Series Trust), which are also incorporated by
reference into the Registration Statement. We also consent to the references
to us under the headings "Financial Highlights" and "Independent Accountants
and Legal Counsel" in such Registration Statement.
/s/PricewaterhouseCoopers
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
April 13, 2000
<PAGE> 1
CODE OF ETHICS
FOR
SUNAMERICA ASSET MANAGEMENT CORP.
SUNAMERICA CAPITAL SERVICES, INC.
AND
ANCHOR SERIES TRUST
STYLE SELECT SERIES, INC.
SUNAMERICA EQUITY FUNDS
SUNAMERICA INCOME FUNDS
SUNAMERICA MONEY MARKET FUNDS, INC.
SUNAMERICA SERIES TRUST
SUNAMERICA STRATEGIC INVESTMENT SERIES, INC.
SEASONS SERIES TRUST
<PAGE> 2
I. PURPOSE
SunAmerica Asset Management Corp. has a fiduciary duty to Investment
Company and investment advisory clients which requires each employee to
act solely for the benefit of clients. This Code of Ethics (the "Code")
has been adopted in accordance with Rule 17j-1(b) under the Investment
Company Act of 1940, as amended (the "Act"). Rule 17j-1 under the Act
generally proscribes fraudulent or manipulative practices with respect
to purchases or sales of securities held or to be acquired by
investment companies, if effected by associated persons of such
companies. The purpose of this Code is to provide regulations and
procedures consistent with the Act, and Rule 17j-1 thereunder, designed
to give effect to the general prohibitions set forth in Rule 17j-1(a)
as follows:
A. It shall be unlawful for any affiliated person of or principal
underwriter for a registered investment company, or any
affiliated person of an investment adviser of or principal
underwriter for a registered investment company in connection
with the purchase or sale, directly or indirectly, by such
person of a security held or to be acquired, as defined in the
Rule, by such registered investment company --
1. To employ any device, scheme or artifice to defraud
such registered investment company;
2. To make to such registered investment company any
untrue statement of a material fact or omit to state
to such registered investment company a material fact
necessary in order to make the statements made, in
light of the circumstances under which they are made,
not misleading;
3. To engage in any act, practice, or course of business
which operates or would operate as a fraud or deceit
upon any such registered investment company; or
4. To engage in any manipulative practice with respect
to such registered investment company.
Also, each employee has a duty to act in the best interest of the firm.
In addition to the various laws and regulations covering our
activities, it is clearly in our best interest as a professional
investment advisory organization to avoid potential conflicts of
interest or even the appearance of such conflict with respect to the
conduct of our officers and employees. While it is not possible to
anticipate all instances of potential conflict, the standard is clear.
-2-
<PAGE> 3
II. GENERAL PRINCIPLES
In light of our professional and legal responsibilities, we believe it
is appropriate to restate and periodically distribute the firm's Code
to all employees. Our aim is to be as flexible as possible in our
organization and our internal procedures, while simultaneously
protecting our organization and our clients from the damage that could
arise from a situation involving a real or apparent conflict of
interest. While it is not possible to specifically define and prescribe
rules regarding all possible cases in which conflicts might arise, this
Code is designed to set forth our policy regarding employee conduct in
those situations in which conflicts are most likely to develop. As a
general principle, it is imperative that those who work for or on
behalf of an Investment Company, avoid any such situation that might
comprise, or call into question, their exercise of fully independent
judgement in the interests of shareholders. If you have any doubt as to
the propriety of any activity, you should consult the General Counsel.
III. DEFINITIONS
A. "Adviser" means SunAmerica Asset Management Corp.
B. "Investment Company" means a company registered as such under
the Act, any series thereof or any component of such series
for which the Adviser is an investment adviser.
C. "Access person" means any trustee, director, officer, general
partner or advisory person of the Investment Company or
Adviser. (For purposes of this Code, the term "Access Person"
shall mean only those trustees/directors, officers, general
partners or advisory persons of the Investment Company or
Adviser who, with respect to any Investment Company or
advisory client, make a recommendation, participate in the
determination of which recommendation shall be made, or whose
principal function or duties relate to the determination of
which recommendation shall be made to any Investment Company
or advisory client, or who, in connection with their duties,
obtain any information concerning such recommendations which
are being made to the Investment Company or advisory client.)
D. "Advisory person" means (i) any employee of the Investment
Company or Adviser or any company in a control relationship to
such Investment Company or the Adviser, who in connection with
his or her regular functions or duties, makes, participates
in, or obtains information regarding the purchase or sale of a
security by an Investment Company, or whose functions relate
to the making
-3-
<PAGE> 4
of any recommendations with respect to such purchases or
sales; and (ii) any natural person in a control relationship,
or deemed by the Review Officer to be in a control
relationship, to the Investment Company or Adviser who obtains
information concerning the recommendations made to an
Investment Company with regard to the purchase or sale of a
security.
E. A security is "being considered for purchase or sale" when a
recommendation to purchase or sell a security has been made
and communicated and, with respect to the person making the
recommendation, when such person seriously considers making
such a recommendation.
F. "Beneficial ownership" shall be interpreted to include any
person who, directly or indirectly, through any contract,
arrangement, understanding, relationship, or otherwise has or
shares a direct or indirect pecuniary interest in the
security. As set forth in Rule 16a-1(a)(2) of the Securities
Exchange Act of 1934, their term "pecuniary interest" in
securities shall mean the opportunity, directly or indirectly,
to profit or share in any profit derived from a transaction in
the subject securities.
G. "Control" shall have the same meaning as that set forth in
Section 2(a)(9) of the Act.
H. "Disinterested director or trustee" means a director or
trustee of an Investment Company who is not an "interested
person" of an Investment Company within the meaning of Section
2(a)(19) of the Act.
I. "Purchase or sale of a security" includes, inter alia, the
writing of an option to purchase or sell a security, the
conversion of a convertible security, and the exercise of a
warrant for the purchase of a security.
J. "Review Officer" means the officer of the Adviser designated
from time-to-time by the Adviser to receive and review reports
of purchases and sales by Access Persons.
K. "Security" shall have the meaning set forth in Section
2(a)(36) of the Act, except that it shall not include shares
of registered open-end investment companies, securities issued
by the United States Government, short-term debt securities
which are "government securities" within the meaning of
Section 2(a)(16) of the Act, bankers' acceptances, bank
certificates of deposit and commercial paper.
-4-
<PAGE> 5
L. "Security held or to be acquired" by a registered Investment
Company means any security as defined in Rule 17j-1(e) under
the Act which, within the most recent 15 days, (i) is or has
been held by such company, or (ii) is being or has been
considered by such company or its Adviser for purchase by such
company.
M. "Personal securities transaction" means (i) transactions for
your own account, including IRA's, or (ii) transactions for an
account in which you have indirect beneficial ownership,
unless you have no direct or indirect influence or control
over the account. Accounts involving family (including
husband, wife, minor children or other dependent relatives),
or accounts in which you have a beneficial interest (such as a
trust of which you are an income or principal beneficiary) are
included within the meaning of "indirect beneficial interest."
IV. INCORPORATION OF INVESTMENT SUB-ADVISERS' CODES OF ETHICS
Those provisions of an Investment Sub-Adviser's Code of Ethics
applicable to persons who, in connection with their regular functions
or duties, make, participate in, or obtain information regarding the
purchase or sale of a security, or whose functions relate to the making
of any recommendation with respect to such purchase or sale by
registered investment companies managed by such Investment Sub-Adviser
are hereby incorporated herein by reference as additional provisions of
this Code of Ethics (to the extent such provisions are in addition to
or more restrictive than the provision set forth in this Code)
applicable to those officers, trustees, directors and advisory
personnel of the Adviser or Investment Company who have direct
responsibility of investments of the Investment Company, except that
approval or disclosure required thereunder shall be obtained from or
made to the officer designated in Section IX. A violation of an
Investment Sub-Adviser's Code of Ethics shall constitute a violation of
this Code.
V. EXEMPTED TRANSACTIONS
A. Purchases or sales effected in any account over which the
Access Person has no direct or indirect influence or control;
B. Purchases or sales of securities which are not eligible for
purchase or sale by the Investment Company (e.g., SunAmerica
Inc.);
C. Purchases or sales which are non-volitional on the part of
either the Access Person or the Investment Company.
Non-volitional transactions include gifts
-5-
<PAGE> 6
to you over which you have no control of the timing or
transactions which result from corporate action applicable to
all similar security holders (such as splits, tender offers,
mergers, stock dividends, etc.);
D. Purchases which are part of an automatic dividend reinvestment
plan;
E. Purchases effected upon the exercise of rights issued by an
issuer pro rata to all holders of a class of its securities,
to the extent such rights were acquired from such issuer, and
sales of such rights so acquired;
F. Purchases or sales approved by a majority vote of those
trustees or directors having no interest in the transaction
upon a showing of good cause. Good cause will be deemed to
exist where unexpected hardship occasions the need for
additional funds. A change in investment objectives will not
be deemed "good cause;" and
G. Purchases or sales which receive the prior approval of the
Review Officer because they are only remotely potentially
harmful to the Investment Company because they would be very
unlikely to affect a highly institutional market, or because
they clearly are not related economically to the securities to
be purchased, sold or held by the Investment Company.
H. The Review Officer can grant exemptions from the personal
trading restrictions in this Code upon determining that the
transaction for which an exemption is requested would not
violate any policy embodied in this Code and that an exemption
is appropriate to avoid an injustice to the employee in the
particular factual situation presented. Factors to be
considered may include: the size and holding period of the
employee's position in the security, the market capitalization
of the issuer, the liquidity of the security, the reason for
the employee's requested transaction, the amount and timing of
client trading in the same or a related security, and other
relevant factors.
Any employee wishing an exemption should submit a written
request to the Review Officer setting forth the pertinent
facts and reasons why the employee believes that the exemption
should be granted. Employees are cautioned that exemptions are
intended to be exceptions, and repetitive exemptive
applications by an employee will not be well received.
VI. RESTRICTIONS AND PROCEDURES ON PERSONAL SECURITIES TRANSACTIONS
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A. Prohibited Purchases and Sales - Except as otherwise provided
in Section V hereof:
1. No Access Person shall purchase or sell, directly or
indirectly, any security in which he or she has, or
by reason of such transaction acquires, any direct or
indirect beneficial ownership and which to his or her
actual knowledge at the time of such purchase or
sale:
(a) is being considered for purchase or sale by
an Investment Company; or
(b) is being purchased or sold by an Investment
Company.(1)
2. No Access Person shall reveal to any other person
(except in the normal course of his or her duties on
behalf of an Investment Company) any information
regarding securities transactions by an Investment
Company or consideration by an Investment Company or
the Adviser of any such securities transaction.
3. No Access Person shall recommend any securities
transaction by an Investment Company without having
disclosed his or her interest, if any, in such
securities or the issuer thereof, including without
limitation (i) his or her direct or indirect
beneficial ownership of any securities or such
issuer, (ii) any contemplated transaction by such
person in such securities, (iii) any position with
such issuer or its affiliates and (iv) any present or
proposed business relationship between such issuer or
its affiliates, on the one hand, and such person or
any party in which such person has a significant
interest, on the other; provided, however, that in
the event the interest of such Access Person in such
securities or issuer is not material to his or her
personal net worth and any contemplated transaction
by such person in such securities cannot reasonably
be expected to have a material adverse effect on any
such transaction by the company or on the market for
the securities generally, such Access Person shall
not be required to disclose his or her interest in
the securities or issuer thereof in connection with
any such recommendation.
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(1) The Adviser, and any and all Access Persons or Advisory Persons
thereof, shall not be deemed to have actual knowledge, for purposes
hereof, of securities transactions effected for any company, series
thereof, or component of such series, for which the Adviser is the
investment adviser, but for which the portfolio management is performed
by an entity which is not an affiliate of SunAmerica Inc.
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B. Initial Public Offerings: No Access Person shall acquire any
securities in an initial public offering, in order to preclude
any possibility of their profiting improperly from their
positions on behalf of an Investment Company.
C. Private Placements: No Advisory Person shall acquire any
securities in a private placement without the prior approval
of the Review Person. This prior approval should take into
account, among other factors, whether the investment
opportunity should be reserved for an Investment Company and
its shareholders, and whether the opportunity is being offered
to an individual by virtue of his or her position with the
Investment Company. Advisory Persons who have been authorized
to acquire securities in a private placement should disclose
such private placement investment if he or she plays a
material role in an Investment Company's subsequent investment
decision regarding the same issuer. In the foregoing
circumstances, the Investment Company's decision to purchase
securities of the issuer shall be subject to an independent
review by Advisory Persons with no personal interest in such
issuer.
D. Blackout Periods: No Access Person shall execute a securities
transaction, other than an exempted transaction, on a day
during which any Investment Company in the complex has a
pending "buy" or "sell" order in that same security and no
Access Person shall execute such securities transaction until
one trading day after such Investment Company order is
executed or withdrawn. In addition, no portfolio manager shall
purchase or sell a security within at least seven calendar
days before and after an Investment Company that he or she
manages trades in that security.
E. Short-Term Trading Profits: Subject to the other provisions of
this Code, while there is no prohibition on short-term trading
profits, the Review Officer will monitor quarterly reports and
address abuses of short-term trading profits on a case-by-case
basis.
F. Gifts: No Access Person shall receive any gift or other thing
of more than de minimis value ($100) from any person or entity
that does business with or on behalf of the Investment
Company.
G. Service as a Director: No Access Person shall serve on the
boards of directors of publicly traded companies, absent prior
authorization based upon a determination that the board
service would be consistent with the interests of the
Investment Company and its shareholders. See "Other Conflicts
of Interest - Outside Activities."
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H. Other Conflicts of Interest: Employees should also be aware
that areas other than personal securities transactions or
gifts and sensitive payments may involve conflicts of
interest. The following should be regarded as examples of
situations involving real or potential conflicts rather than a
complete list of situations to avoid.
1. "INSIDE INFORMATION" - Specific reference is made to
the firm's policy of the use of "inside information"
which applies to personal securities transactions as
well as to client transactions.
2. "USE OF INFORMATION" - Information acquired in
connection with employment by the organization may
not be used in any way which might be contrary to or
in competition with the interests of clients.
Employees are reminded that certain clients have
specifically required their relationship with us to
be treated confidentially.
3. "DISCLOSURE OF INFORMATION" - Information regarding
actual or contemplated investment decisions, research
priorities or client interests should not be
disclosed to persons outside our organization and in
no way can be used for personal gain.
4. "OUTSIDE ACTIVITIES" - All outside relationships such
as directorships or trusteeships of any kind or
membership in investment organizations (e.g., an
investment club) should be discussed with the
President and/or General Counsel prior to the
acceptance of such position.
As a general matter, directorships in unaffiliated
public companies or companies which may reasonably be
expected to become public companies will not be
authorized because of the potential for conflicts
which may impede our freedom to act in the best
interests of clients. Service with charitable
organizations generally will be authorized, subject
to considerations related to time required during
working hours and use of proprietary information.
VII. DISINTERESTED DIRECTORS OR TRUSTEES
A director or trustee of an Investment Company who is not an officer of
such Investment Company or an officer, employee or director of the
Adviser need only report a transaction in a security if the director or
trustee, at the time of that transaction, knew
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or, in the ordinary course of fulfilling his official duties as a
director or trustee of the Investment Company, should have known that,
during the 15-day period immediately preceding the date of the
transaction by the director or trustee, the security was under active
consideration by the Investment Company.
VIII. COMPLIANCE PROCEDURES
A. Preclearance: All Advisory Persons are to "preclear" personal
securities investments prior to execution through the firm's
Head Trader, or such other person as is designated from
time-to-time by the Review Officer. This includes bonds,
stocks (including closed-end funds), convertibles, preferreds,
options on securities, warrants, rights, etc. for domestic and
foreign securities whether publicly traded or privately
placed. In addition, any portfolio manager wishing to effect a
personal securities transaction which might be viewed as
contrary to a position held in any portfolio for which he or
she serves as portfolio manager must preclear such transaction
with the firm's Review Officer, in addition to the normal
preclearance procedure. The only exceptions to this
requirement are automatic dividend reinvestment plan
acquisitions, financial futures and options on futures,
automatic employee stock purchase plan acquisitions,
transactions in open-end mutual funds, U.S. Government
securities, commercial paper, or exempted transactions. Please
note, however, that most of these transactions must be
reported even though they do not have to be precleared. The
Review Officer may require other persons to preclear personal
securities transactions as he or she may deem necessary and
appropriate for compliance with this Code. See the Section
"IX" for reporting obligations.
B. Records of Securities Transactions: All Advisory Persons are
to direct their brokers to supply to a designated compliance
official, on a timely basis, duplicate copies of confirmations
of all personal securities transactions and copies of periodic
statements for all securities accounts.
C. Post-Trade Monitoring: The Review Officer shall review all
personal securities transactions by Access Persons to ensure
that no conflict exists with Investment Company trades.
D. Disclosure of Personal Holdings: Access Persons are required
to disclose all personal securities holdings upon commencement
of employment and thereafter on an annual basis.
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E. Certification of Compliance With Code of Ethics: All Access
Persons are required to certify annually that they have read
and understand the Code and recognize that they are subject
thereto. Further, Access Persons are required to certify
annually that they have complied with the requirements of the
Code and that they have disclosed or reported all personal
securities transactions required to be disclosed or reported
pursuant to the requirements of the Code.
F. Review by the Board of Directors or Trustees: Management will
prepare a report to the Board of Directors or Trustees (1)
quarterly that identifies any violations requiring significant
remedial action during the past quarter; and (2) annually that
a) summarizes existing procedures concerning personal
investing and any changes in the procedures made during the
past year, and b) identifies any recommended changes in
existing restrictions or procedures based upon the Investment
Company's experience under the Code, evolving industry
practices, or developments in applicable laws or regulations.
The Board of Directors or Trustees will review the operations
of this policy and make recommendations if necessary, as
stated in Section "X" at least once a year.
IX. REPORTING
The Securities and Exchange Commission requires that a record of all
personal securities transactions be kept available for inspection, and
that these records be maintained on at least a quarterly basis. To
comply with these rules, it is necessary to have every Access Person
file a quarterly report (on the form attached hereto as Exhibit 1)
within 10 calendar days after the end of each calendar quarter(2).
Quarterly Report forms will be distributed to all employees on the last
business day of each quarter. Completed forms should be sent to the
Review Officer. The forms and transactions in all personal accounts
will be reviewed each quarter on a confidential basis.
The quarterly report must include the required information for all
personal securities transactions as defined above, except transactions
in open-end mutual funds, U.S. Government securities or commodities.
Except as noted above, exempted transactions must also be reported and
the nature of the transaction clearly specified in the report.
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(2) Advisory Persons who are required to provide copies of confirmations
and periodic statements pursuant to Section VIII.B hereof are only
required to certify in such report that no other transactions were
executed during the quarter.
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Quarterly reports must be filed by all Access Persons even if there
were no reportable transactions during the quarter. (Write "none" and
return with your signature.)
The report required by this section shall state: (i) the title and
amount of the security involved; (ii) the date and nature of the
transaction (i.e., purchase, sale or other acquisition or disposition);
(iii) the price at which the transaction was effected; and (iv) the
name of the broker, dealer or bank with or through whom the transaction
was effected. A copy of the broker's confirmation may be submitted in
lieu of the required report.
The report may also contain a statement declaring that the reporting or
recording of any transaction shall not be construed as an admission
that the Access Person making the report has any direct or indirect
Beneficial Ownership in the Security to which the report relates.
X. AUDIT BY REVIEW OFFICER
Adherence to the Code is considered a basic condition of employment
with our organization. The Review Officer will monitor compliance with
the Code and review such violations of the Code as may occur and
determine what action or sanctions are appropriate in the event of a
violation. The Review Officer will report, periodically and upon
request, to the Boards of Directors or Trustees of the various
Investment Companies for which the Adviser serves as investment
adviser.
Again, we emphasize the importance of Advisory Persons obtaining prior
clearance of all personal securities transactions, filing the quarterly
reports promptly and avoiding other situations which might involve even
the appearance of a conflict of interest. Questions regarding
interpretation of this policy or questions related to specific
situations should be directed to the Review Officer.
XI. SANCTIONS
Upon discovering a violation of this Code, the Adviser may impose such
sanctions as it deems appropriate, including, among other things, a
letter of censure or suspension or termination of the employment of the
violator. All material violations of this Code and any sanctions
imposed with respect thereto shall be reported periodically to the
Board of Directors or Trustees of the Investment Company with respect
to whose securities the violation occurred.
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XII. ADDITIONAL DISCLOSURE
General disclosure concerning Access Persons engaging in personal
securities transactions, restrictions and procedures as well as a
statement from the Investment Company addressing any conflicts of
interest that might arise has been incorporated into Investment
Company's Statement of Additional Information ("SAI").
XIII. EFFECTIVE DATE
This Code was adopted at a meeting of the Boards of Directors/Trustees
of the Investment Companies. This Code shall become effective on
February 26, 1997 and remain in effect until amended or replaced by the
Boards of Directors/Trustees by subsequent action.
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