<PAGE>
Rule 497(c)
File Nos. 2-90518 and 811-4006
PROSPECTUS
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JANUARY 2, 1997
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CITISELECT(SM) FOLIO 200 CITISELECT(SM) FOLIO 400
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CITISELECT(SM) FOLIO 300 CITISELECT(SM) FOLIO 500
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This Prospectus describes four diversified mutual funds managed by Citibank,
N.A.: CitiSelectSM Folio 200, CitiSelectSM Folio 300, CitiSelectSM Folio 400 and
CitiSelectSM Folio 500. Each Fund has its own investment objective and policies.
The Funds are asset allocation funds that offer investors a convenient way to
own a professionally managed portfolio tailored to specific investment goals.
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UNLIKE OTHER MUTUAL FUNDS WHICH DIRECTLY ACQUIRE AND MANAGE THEIR OWN
PORTFOLIOS OF SECURITIES, THE FUNDS SEEK THEIR INVESTMENT OBJECTIVES BY
INVESTING ALL OF THEIR INVESTABLE ASSETS IN DIFFERENT SERIES OF ASSET ALLOCATION
PORTFOLIOS. EACH PORTFOLIO HAS THE SAME INVESTMENT OBJECTIVE AND POLICIES AS ITS
CORRESPONDING FUND. SEE "SPECIAL INFORMATION CONCERNING INVESTMENT STRUCTURE" ON
PAGE 12.
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REMEMBER THAT SHARES OF THE FUNDS:
[] ARE NOT INSURED BY THE FDIC OR ANY OTHER AGENCY
[] ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, CITIBANK
OR ANY OF ITS AFFILIATES
[] ARE SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL
AMOUNT INVESTED
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This Prospectus concisely sets forth information about the Funds that a
prospective investor should know before investing. A Statement of Additional
Information dated January 2, 1997 (and incorporated by reference in this
Prospectus) has been filed with the Securities and Exchange Commission. Copies
of the Statement of Additional Information may be obtained without charge, and
further inquiries about the Funds may be made, by calling 1-800-846-5200
(customers in New York City may call 212-820-2380).
TABLE OF CONTENTS
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Prospectus Summary ...................................................... 2
Expense Summary ......................................................... 4
Condensed Financial Information ......................................... 5
Investment Information .................................................. 6
Risk Considerations ..................................................... 11
Valuation of Shares ..................................................... 13
Purchases ............................................................... 13
Exchanges ............................................................... 14
Redemptions ............................................................. 14
Dividends and Distributions ............................................. 15
Management .............................................................. 15
Tax Matters ............................................................. 18
Performance Information ................................................. 19
General Information ..................................................... 19
Appendix -- Permitted Investments and Investment Practices .............. 21
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
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INVESTORS SHOULD READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE REFERENCE.
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PROSPECTUS SUMMARY
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See the body of the Prospectus for more information on the topics discussed
in this summary.
THE FUNDS: This Prospectus describes four diversified mutual funds:
CITISELECT FOLIO 200, CITISELECT FOLIO 300, CITISELECT FOLIO 400 and
CITISELECT FOLIO 500. Each Fund has its own investment objective and policies.
There can be no assurance that any Fund will achieve its objective. Because each
Fund invests through a Portfolio, all references in this Prospectus to a Fund
include its corresponding Portfolio, except as otherwise noted.
INVESTMENT OBJECTIVES:
CITISELECT FOLIO 200: high total return over time consistent with a primary
emphasis on income and a secondary emphasis on capital appreciation.
CITISELECT FOLIO 300: high total return over time consistent with a balanced
emphasis on income and capital appreciation.
CITISELECT FOLIO 400: high total return over time consistent with a primary
emphasis on capital appreciation and a secondary emphasis on income for risk
reduction purposes.
CITISELECT FOLIO 500: highest total return over time consistent with a primary
emphasis on capital appreciation and a secondary emphasis on income for risk
reduction purposes.
PRINCIPAL INVESTMENTS: Each Fund is a carefully selected and professionally
managed diversified mix of equity, fixed income and money market investments
that are structured to achieve specific risk and return objectives. CITISELECT
FOLIO 200 invests primarily in fixed income and money market securities.
CITISELECT FOLIO 300 emphasizes both equity securities and fixed income
securities. CITISELECT FOLIO 400 and CITISELECT FOLIO 500 invest primarily in
equity securities. Current income is not a primary consideration for these
Funds.
INVESTMENT MANAGER: Citibank, N.A., a wholly-owned subsidiary of Citicorp, is
the investment manager. Citibank and its affiliates manage more than $83
billion in assets worldwide. See "Management."
PURCHASES AND REDEMPTIONS: Investors may purchase and redeem shares of the
Funds through a Service Agent on any Business Day. See "Purchases" and
"Redemptions."
PRICING: Shares of the Funds are purchased and redeemed at net asset value,
without a sales load or redemption fees. Shares of each Fund are subject to a
fee of up to 0.50% per annum of the Fund's average daily net assets for
distribution, sales and marketing and shareholder services. See "Purchases"
and "Management -- Distribution Arrangements."
EXCHANGES: Shares may be exchanged for shares of each other Fund. See
"Exchanges."
DIVIDENDS: Dividends are declared and paid monthly for CitiSelect Folio 200,
quarterly for CitiSelect Folio 300 and annually for CitiSelect Folio 400 and
CitiSelect Folio 500. Net capital gains, if any, are distributed annually. See
"Dividends and Distributions."
REINVESTMENT: All dividends and capital gains distributions may be received
either in cash or in Fund shares at net asset value. See "Dividends and
Distributions."
WHO SHOULD INVEST: The Funds are asset allocation funds. Asset allocation funds
are a basic tool of investment professionals and are differentiated by the use
of investment management strategies and techniques that range from the least
aggressive to the most aggressive. The Funds offer a convenient way to own a
diversified professionally managed portfolio tailored to specific investment
goals and expectations of risk and return. While time horizon is a factor, it is
not necessarily the determinative factor in choosing to invest in one of the
Funds. Investment goals, such as buying a home, educating children or saving for
retirement, all determine the appropriate asset allocation and amount of risk
that an investor seeks. See "Investment Information" and "Risk Considerations."
CITISELECT FOLIO 200 is expected to be the least volatile of the four Funds and
is designed for the investor who is seeking lower risk provided by substantial
investments in income-producing securities, but who also seeks some capital
growth. CITISELECT FOLIO 300 offers a blend of capital appreciation and income
for the investor seeking a balanced approach by emphasizing stocks for their
higher capital appreciation potential but retaining a significant income
component to temper volatility. CITISELECT FOLIO 400 and CITISELECT FOLIO 500
are designed for the investor willing and able to take higher risks in the
pursuit of long-term capital appreciation. CitiSelect Folio 500 is expected to
be the most volatile of the four Funds and is designed for investors who can
withstand greater market swings to seek potential long-term rewards. CitiSelect
Folio 400 is designed for investors seeking long-term rewards, but with less
volatility.
RISK FACTORS: There can be no assurance that any Fund will achieve its
investment objective, and each Fund's net asset value will fluctuate based on
changes in the values of the underlying portfolio securities. Equity securities
fluctuate in value based on many factors, including actual and anticipated
earnings, changes in management, political and economic developments and the
potential for takeovers and acquisitions. The value of debt securities generally
fluctuates based on changes in the actual and perceived creditworthiness of
issuers. Also, the value of debt securities generally goes down when interest
rates go up, and vice versa. As a result, shares may be worth more or less at
redemption than at the time of purchase.
Each Fund may invest a portion of its assets in securities of companies with
small market capitalizations, which may have more risks than the securities of
other companies. Small cap companies may be more susceptible to market downturns
or setbacks because they may have limited product lines, markets, distribution
channels, and financial and management resources. There is often less publicly
available information about small cap companies than about more established
companies. As a result of these and other factors, the prices of securities
issued by small cap companies may be volatile. Shares of the Funds, therefore,
may be subject to greater fluctuation in value than shares of an equity fund
with more of its investments in securities of larger, more established
companies.
Each Fund may invest a portion of its assets in non-U.S. securities. The
special risks of investing in non-U.S. securities include possible adverse
political, social and economic developments abroad, differing regulations to
which non-U.S. issuers are subject and different characteristics of non-U.S.
economies and markets. The Funds' non-U.S. securities often will trade in non-
U.S. currencies, which can be volatile and may be subject to governmental
controls or intervention. In addition, securities of non-U.S. issuers may be
less liquid and their prices more volatile than those of comparable U.S.
issuers.
Each Fund may invest in securities of issuers in developing countries.
Investors in the Funds should be able to assume the heightened risks and
volatility associated with investment in developing countries, including greater
risks of expropriation, confiscatory taxation and nationalization and less
social, political and economic stability; smaller (and, in many cases, new)
markets resulting in price volatility and illiquidity; national policies which
may restrict investment opportunities; and the absence of developed legal
structures.
Certain investment practices, such as the use of forward non-U.S. currency
exchange contracts, also may entail special risks. See "Risk Considerations"
and the Appendix for more information.
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EXPENSE SUMMARY
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The following table summarizes estimated shareholder transaction and annual
operating expenses for each Fund and for its corresponding Portfolio.* For more
information on costs and expenses, see "Management" -- page 15 and "General
Information -- Expenses" -- page 20.
<TABLE>
<CAPTION>
CITISELECT CITISELECT CITISELECT CITISELECT
FOLIO 200 FOLIO 300 FOLIO 400 FOLIO 500
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<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES .................. None None None None
ANNUAL FUND OPERATING EXPENSES AFTER FEE WAIVERS
(AS A PERCENTAGE OF NET ASSETS):
Management Fee .................................... 0.75% 0.75% 0.75% 0.75%
12b-1 Fees (including service fees)(1) ............ 0.50% 0.50% 0.50% 0.50%
Other Expenses(2) ................................. 0.25% 0.25% 0.50% 0.50%
Total Fund Operating Expenses(2) .................. 1.50% 1.50% 1.75% 1.75%
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</TABLE>
(1) Includes fees for distribution and shareholder servicing.
(2) After reimbursement. Absent reimbursement, "Other Expenses" and "Total Fund
Operating Expenses" would have been 1.07% and 2.32% for CitiSelect Folio
200, 1.08% and 2.33% for CitiSelect Folio 300, 2.00% and 3.25% for
CitiSelect Folio 400 and 2.15% and 3.40% for CitiSelect Folio 500.
* This table is intended to assist investors in understanding the various costs
and expenses that a shareholder of a Fund will bear, either directly or
indirectly. Because the Funds are newly organized, Other Expenses in the
table are based on estimated amounts for the current fiscal year. There can
be no assurance that the fee waivers reflected in the table will continue.
Long-term shareholders in a Fund could pay more in sales charges than the
economic equivalent of the maximum front-end sales charges permitted by the
National Association of Securities Dealers, Inc.
EXAMPLE: A shareholder would pay the following expenses on a $1,000
investment, assuming redemption at the end of each period indicated below:
ONE YEAR THREE YEARS
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CITISELECT FOLIO 200 ................... $15 $47
CITISELECT FOLIO 300 ................... $15 $47
CITISELECT FOLIO 400 ................... $18 $55
CITISELECT FOLIO 500 ................... $18 $55
The Example assumes a 5% annual return and that all dividends are reinvested and
reflects certain voluntary expense reimbursements. If expense reimbursements
were not made, the amounts in the example would be $24 and $72 for CitiSelect
Folio 200, $24 and $73 for CitiSelect Folio 300, $33 and $100 for CitiSelect
Folio 400 and $34 and $104 for CitiSelect Folio 500. Expenses are estimated
because the Funds are newly organized. The assumption of a 5% annual return is
required by the Securities and Exchange Commission for all mutual funds, and is
not a prediction of any Fund's future performance. THE EXAMPLE SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR RETURNS OF ANY FUND.
ACTUAL EXPENSES AND RETURNS MAY BE GREATER OR LESS THAN THOSE SHOWN.
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CONDENSED FINANCIAL INFORMATION
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The following table provides condensed financial information about the Funds
for the periods indicated. This information is unaudited and should be read in
conjunction with the financial statements and notes thereto which are
incorporated by reference in the Statement of Additional Information.
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS (UNAUDITED)
CITISELECT CITISELECT CITISELECT CITISELECT
FOLIO 200+ FOLIO 300+ FOLIO 400+ FOLIO 500(++)
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<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD ......................... $ 10.00 $ 10.00 $ 10.00 $ 10.00
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INCOME FROM OPERATIONS:
Net investment income ........................................ 0.12 0.09 0.04 0.02
Net realized and unrealized gain (loss) on investments ....... 0.57 0.72 0.85 0.67
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Total from operations ....................................... 0.69 0.81 0.89 0.69
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LESS DISTRIBUTIONS FROM:
Net investment income ........................................ (0.11) (0.04) -- --
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Net realized gain on investments ............................. -- -- -- --
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Total distributions ......................................... (0.11) (0.04) -- --
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Net Asset Value, end of period ............................... $ 10.58 $ 10.77 $ 10.89 $ 10.69
======= ======= ======= =======
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted) .................... $93,966 $176,147 $222,767 $70,941
Ratio of expenses to average net assets (A) .................. 1.50%* 1.50%* 1.75%* 1.75%*
Ratio of net investment income to average net assets ......... 2.94%* 2.52%* 1.54%* 1.50%*
Total return ................................................. 6.84%** 8.07%** 8.90%** 6.90%**
Note: If Agents of the Funds and the Agents of Asset Allocation Portfolios had not voluntarily agreed to waive a portion of their
fees, the sub-administrator not assumed expenses and had expenses been limited to that required by certain state securities laws,
for the periods indicated, the net investment income per share and the ratios would have been as follows:
Net investment income per share .............................. $ 0.12 $ 0.08 $ 0.05 $ 0.02
Ratios:
Expenses to average net assets (A) ........................... 2.50%* 2.25%* 1.93%* 2.50%*
Net investment income to average net assets .................. 1.94%* 1.77%* 1.36%* 0.75%*
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(A) Includes the Fund's share of its corresponding Portfolio's allocated expenses.
+ For the period June 17, 1996 (commencement of operations) to November 30, 1996.
++ For the period September 3, 1996
(commencement of operations) to November 30, 1996.
* Annualized.
** Not annualized.
</TABLE>
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INVESTMENT INFORMATION
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INVESTMENT OBJECTIVES:
The investment objective of CITISELECT FOLIO 200 is high total return over
time consistent with a primary emphasis on income and a secondary emphasis on
capital appreciation. This Fund invests all of its investable assets in Asset
Allocation Portfolio 200.
The investment objective of CITISELECT FOLIO 300 is high total return over
time consistent with a balanced emphasis on income and capital appreciation.
This Fund invests all of its investable assets in Asset Allocation Portfolio
300.
The investment objective of CITISELECT FOLIO 400 is high total return over
time consistent with a primary emphasis on capital appreciation and a secondary
emphasis on income for risk reduction purposes. This Fund invests all of its
investable assets in Asset Allocation Portfolio 400.
The investment objective of CITISELECT FOLIO 500 is highest total return
over time consistent with a primary emphasis on capital appreciation and a
secondary emphasis on income for risk reduction purposes. This Fund invests all
of its investable assets in Asset Allocation Portfolio 500.
The investment objective of each Fund may be changed by its Trustees without
approval by that Fund's shareholders, but shareholders will be given written
notice at least 30 days before any change is implemented. Of course, there can
be no assurance that any Fund will achieve its investment objective.
INVESTMENT POLICIES:
THE FUNDS
The Funds are asset allocation funds. Asset allocation funds are a basic
tool of investment professionals and are differentiated by the use of investment
management strategies and techniques that range from the least aggressive to the
most aggressive. The Funds offer a convenient way to own a diversified
professionally managed portfolio tailored to specific investment goals and
expectations of risk and return. While time horizon is a factor, it is not
necessarily the determinative factor in choosing to invest in one of the Funds.
Investment goals, such as buying a home, educating children or saving for
retirement, all determine the appropriate asset allocation and amount of risk
that an investor seeks. See "Investment Information" and "Risk Considerations."
CITISELECT FOLIO 200 is expected to be the least volatile of the four Funds and
is designed for the investor who is seeking lower risk provided by substantial
investments in income-producing securities, but who also seeks some capital
growth. CITISELECT FOLIO 300 offers a blend of capital appreciation and income
for the investor seeking a balanced approach by emphasizing stocks for their
higher capital appreciation potential but retaining a significant income
component to temper volatility. CITISELECT FOLIO 400 and CITISELECT FOLIO 500
are designed for the investor willing and able to take higher risks in the
pursuit of long-term capital appreciation. CitiSelect Folio 500 is expected to
be the most volatile of the four Funds, and is designed for investors who can
withstand greater market swings to seek potential long-term rewards. CitiSelect
Folio 400 is designed for investors seeking long-term rewards, but with less
volatility.
INVESTMENT STRATEGY
Each Fund is a carefully selected and professionally managed diversified mix
of equity, fixed income and money market investments that are structured to
achieve certain risk and return objectives. Citibank allocates each Fund's
assets among the equity class of investments, the fixed income class of
investments and the money market class of investments. In making asset
allocations, Citibank considers long-term performance and valuation measures
within and between asset classes and the effects of market and economic
variables on those relationships. It uses this information to determine the
overall mix of each Fund's assets among the three general asset classes. Each
Fund's allocation or asset mix is determined by Citibank to be an optimal
combination of stocks, bonds and money market instruments that reduces risk and
maximizes potential return for that Fund's distinct investment objective.
The Funds' asset allocations generally correlate to different levels of
investment risk and return. Equity securities have the potential to outperform
fixed income securities over the long term. Equity securities have the greatest
potential for growth of capital, yet are generally the most volatile of the
three asset types. Fixed income and money market securities sometimes move in
the opposite direction of equity securities and may provide investment balance
to a Fund. The risks of each asset class will vary.
Citibank expects that, in general, each Fund's assets will be allocated
among the equity, fixed income and money market classes as provided in the
following chart. However, cash flows of a Fund or changes in market valuations
could produce different results. Citibank will review each Fund's asset
allocation quarterly and expects, in general, to rebalance the Fund's
investments, if necessary, at that time. Rebalancing may be accomplished over a
period of time and may be limited by tax and regulatory requirements.
ASSET CLASS RANGE
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FIXED MONEY
EQUITY INCOME MARKET
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CITISELECT FOLIO 200 25-45% 35-55% 10-30%
CITISELECT FOLIO 300 40-60% 35-55% 1-10%
CITISELECT FOLIO 400 55-85% 15-35% 1-10%
CITISELECT FOLIO 500 70-95% 5-20% 1-10%
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Each asset class includes other investments described in the Appendix or
elsewhere in this Prospectus that are deemed related to the management of that
asset class. Percentage ranges shown for the equity and fixed income classes
include investment positions that seek equivalent asset class exposure or to
enhance income for that asset class. When money market instruments are used in
connection with these positions they will be counted towards the assets of the
applicable asset class and not towards the money market class.
Citibank will diversify the equity class of each Fund by allocating the
Fund's portfolio of equity securities among large capitalization securities,
small capitalization securities and international securities. Citibank will
diversify the fixed income class of each Fund by allocating the Fund's portfolio
of fixed income securities among U.S. and foreign government and corporate
bonds. There is no requirement that Citibank allocate a Fund's assets among all
of the foregoing types of equity and fixed income securities at all times. These
types of securities have been selected because Citibank believes that this
additional level of asset diversification will provide each Fund with the
potential for higher returns with lower overall volatility.
From time to time Citibank may employ Subadvisers to perform the daily
management of a particular asset class for the Funds or of specific types of
securities within a particular asset class. Citibank will monitor and supervise
the activities of the Subadvisers and may terminate the services of any
Subadviser at any time. See "Management." In allocating each Fund's investments
among various asset classes and in supervising the Subadvisers, Citibank employs
a multi-style and multi-manager diversification strategy. Citibank believes that
there are periods when securities with particular characteristics, or an
investment style, outperform other types of securities in the same asset class.
For example, at certain times, equity securities with growth characteristics
outperform equities with income characteristics, and vice versa. Citibank will
seek to take advantage of this by blending asset classes and investment styles
on a complementary basis in an effort to maximize the consistency of returns
over longer time periods, and to reduce volatility.
In supervising the Subadvisers, Citibank will also be taking into account
the expertise they have demonstrated in particular areas and the historical
results they have achieved within selected asset classes or investment styles.
By combining these attributes with selected asset classes and styles, Citibank
will seek to increase returns.
Citibank has delegated the responsibility for the daily management of the
following kinds of securities to the following Subadvisers: large capitalization
value securities, Miller Anderson & Sherrerd, LLP; small capitalization value
securities, Franklin Advisory Services, Inc.; international equity securities,
Hotchkis and Wiley; and foreign government securities, Pacific Investment
Management Company. Citibank is responsible for the daily management of all
other kinds of securities of the Funds, including large capitalization growth
securities, small capitalization growth securities, fixed income securities and
money market securities.
INITIAL ASSET ALLOCATIONS
Initially one or more of the Funds may be of such a size that it is not
practicable for the Fund to invest in all of the above-mentioned asset classes
and types of securities. Until in Citibank's judgment a Fund has sufficient
assets to fully employ an investment strategy, Citibank may allocate assets
across fewer of the asset classes and fewer of the types of securities
identified above than it otherwise would. As a Fund's asset size increases,
Citibank will add asset classes and types of securities until the desired asset
allocation is reached. There may also be a delay in investing in asset classes
or types of securities due to market conditions and availability of suitable
investments.
THE EQUITY CLASS
Equity securities include common stocks, securities convertible into common
stocks, preferred stocks, warrants for the purchase of stock and depositary
receipts (receipts which represent the right to receive the securities of
non-U.S. issuers deposited in a U.S. or correspondent bank). While equity
securities historically have experienced a higher level of volatility risk than
fixed income securities, they also historically have produced higher levels of
total return. Longer term, investors with diversified equity portfolios have a
higher probability of achieving their investment goals with lower levels of
volatility than those who have not diversified.
Each Fund will diversify its equity portfolio by investing those assets
which are allocated to the equity class among equity securities issued by large
capitalization issuers, small capitalization issuers and international issuers.
The mix of equity securities will vary from Fund to Fund. For example, the
equity class of CitiSelect Folio 400 will emphasize securities of small cap
issuers. The equity class of CitiSelect Folio 300 will emphasize securities of
large cap and small cap issuers. There is no requirement that each Fund invest
in each type of equity security.
LARGE CAP ISSUERS. Large cap issuers are those with market capitalizations
typically of $1 billion or more. In the selection of equity securities of large
cap issuers, securities issued by established companies with stable operating
histories are emphasized.
SMALL CAP ISSUERS. Small cap issuers are those with market capitalizations below
the top 1,000 stocks that comprise the large and midrange capitalization sector
of the equity market. These stocks are comparable to, but not limited to, the
stocks comprising the Russell 2000 Index, an index of small capitalization
stocks. Small cap companies are generally represented in new or rapidly changing
industries. They may offer more profit opportunity in growing industries and
during certain economic conditions than do large and medium sized companies.
However, small cap companies also involve special risks. Often, liquidity and
overall business stability of a small cap company may be less than that
associated with larger capitalized companies. Small cap stocks frequently
involve smaller, rapidly growing companies with high growth rates, negligible
dividend yields and extremely high levels of volatility.
INTERNATIONAL ISSUERS. International issuers are those based outside the United
States. In the selection of equity securities of international issuers,
securities included in the Morgan Stanley Capital International Europe,
Australia and Far East Index (called the EAFE Index) are emphasized. The EAFE
Index contains approximately 1,100 equity securities of companies located in
Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong,
Ireland, Italy, Japan, Malaysia, The Netherlands, Norway, Singapore, Spain,
Sweden, Switzerland and the United Kingdom. In addition, securities of issuers
located in emerging markets may be selected. The U.S. investor may benefit from
exposure to international equity securities and foreign economies, which may be
influenced by distinctly different factors impacting a country's rate of
economic growth, interest rate structure, currency, industry and local stock
market environment. In addition, investments in the non-U.S. equity markets
allow for further diversification as many countries and regions have risk/reward
characteristics and market performance that are not highly correlated to each
other or to the U.S. market. International investments, however, particularly in
emerging countries, are subject to special risks not generally present in
domestic equity investments.
See "Risk Considerations" for certain risks associated with investing in
equity securities.
THE FIXED INCOME CLASS
Fixed income securities include bonds and short-term obligations. Fixed
income securities, in general, offer a fixed stream of cash flow and may provide
good to moderate relative total return benefits over time. Most bond investments
focus on generating income, while the potential for capital appreciation is a
secondary objective. The bond markets provide diversification benefits to a
holder of equity securities depending upon the characteristics of the bonds
comprising the fixed income class of each Fund. The value of fixed income
securities generally fluctuates inversely with changes in interest rates, and
also fluctuates based on other market and credit factors as well.
Each Fund will diversify its fixed income portfolio by investing those
assets which are allocated to the fixed income class among investment grade
corporate debt obligations and securities issued by the U.S. Government and its
agencies and instrumentalities and by foreign governments. Investment grade
securities are those rated Baa or better by Moody's Investors Service, Inc. or
BBB or better by Standard & Poor's Rating Group or securities which are not
rated by these rating agencies, but which Citibank or a Subadviser believes to
be of comparable quality. Securities rated Baa or BBB and securities of
comparable quality may have speculative characteristics.
The mix of fixed income securities may vary from Fund to Fund. There is no
requirement that each Fund invest in each type of fixed income security. The
Funds may invest in securities with all maturities, including long bonds (10+
years), intermediate notes (3 to 10 years) and short-term notes (1 to 3 years).
GOVERNMENT SECURITIES. U.S. Government securities may provide opportunities
for income with minimal credit risk. U.S. Treasury securities are considered
the safest of all government securities. U.S. Government securities are high
quality instruments issued or guaranteed as to principal and interest by the
U.S. Government or by an agency or instrumentality of the U.S. Government.
Securities issued or guaranteed as to principal and interest by foreign
governments or agencies or instrumentalities of foreign governments (which
include securities of supranational agencies) also may provide opportunities
for income with minimal credit risk. Government securities are, however, not
immune from the market risk of principal fluctuation associated with changing
interest rates.
CORPORATE BONDS. Investment in bonds of U.S. and foreign corporate issuers may
provide relatively higher levels of current income. These bonds are used by U.S.
and foreign corporate issuers to borrow money from investors, and may have
varying maturities. Corporate bonds have varying degrees of quality and varying
degrees of sensitivity to changes in interest rates. The value of these
investments fluctuates based on changes in interest rates and in the underlying
credit quality of the bond issuers represented in the portfolio.
See "Risk Considerations" for certain risks associated with investing in
fixed income securities.
THE MONEY MARKET CLASS
Each Fund will invest those assets which are allocated to the money market
class in cash and in U.S. dollar-denominated high quality money market and
short-term instruments. These instruments include short-term obligations of the
U.S. Government and repurchase agreements covering these obligations, commercial
paper of U.S. and foreign issuers, bank obligations (such as certificates of
deposit, bankers' acceptances and fixed time deposits) of U.S. and non-U.S.
banks and obligations issued or guaranteed by the governments of Western Europe,
Scandinavia, Australia, Japan and Canada. These investments provide
opportunities for income with low credit risk, and may result in a lower yield
than would be available from investments with a lower quality or a longer term.
CERTAIN ADDITIONAL INVESTMENT POLICIES:
FUTURES. Each of the Funds may use financial futures in order to protect the
Fund from fluctuations in interest rates (sometimes called "hedging") without
actually buying or selling debt securities, or to manage the effective maturity
or duration of fixed income securities in the Fund's portfolio in an effort to
reduce potential losses or enhance potential gain. The Funds also may purchase
stock index and foreign currency futures in order to protect against declines in
the value of portfolio securities or increases in the cost of securities or
other assets to be acquired and, subject to applicable law, to enhance potential
gain. Futures contracts provide for the future sale by one party and purchase by
another party of a specified amount of a security at a specified future time and
price, or for making payment of a cash settlement based on changes in the value
of a security, an index of securities or other assets. In many cases, the
futures contracts that may be purchased by the Funds are standardized contracts
traded on commodities exchanges or boards of trade. See the Appendix for more
information.
TEMPORARY INVESTMENTS. During periods of unusual economic or market conditions
or for temporary defensive purposes or liquidity, each Fund may invest without
limit in cash and in U.S. dollar-denominated high quality money market and
short-term instruments. These investments may result in a lower yield than would
be available from investments with a lower quality or longer term.
OTHER PERMITTED INVESTMENTS. For more information regarding the Funds' permitted
investments and investment practices, see the Appendix -- Permitted Investments
and Investment Practices on page 21. The Funds will not necessarily invest or
engage in each of the investments and investment practices in the Appendix but
reserve the right to do so.
INVESTMENT RESTRICTIONS. The Statement of Additional Information contains a list
of specific investment restrictions which govern the investment policies of the
Funds, including a limitation that each Fund may borrow money from banks in an
amount not to exceed 1/3 of the Fund's net assets for extraordinary or emergency
purposes (e.g., to meet redemption requests). Except as otherwise indicated, the
Funds' investment objectives and policies may be changed without shareholder
approval. If a percentage or rating restriction (other than a restriction as to
borrowing) is adhered to at the time an investment is made, a later change in
percentage or rating resulting from changes in a Fund's securities will not be a
violation of policy.
PORTFOLIO TURNOVER. Securities of each Fund will be sold whenever it is
appropriate to do so in light of the Fund's investment objective, without regard
to the length of time a particular security may have been held. The turnover
rates for CitiSelect Folio 200 and CitiSelect Folio 300 are not expected to
exceed 175% annually; the turnover rates for CitiSelect Folio 400 and CitiSelect
Folio 500 are not expected to exceed 100% annually. The amount of brokerage
commissions and realization of taxable capital gains will tend to increase as
the level of portfolio activity increases.
BROKERAGE TRANSACTIONS. In connection with the selection of brokers or dealers
for securities transactions for the Funds and the placing of such orders,
brokers or dealers may be selected who also provide brokerage and research
services to the Funds or the other accounts over which Citibank, the Subadvisers
or their affiliates exercise investment discretion. Citibank and the Subadvisers
are authorized to pay a broker or dealer who provides such brokerage and
research services a commission for executing a portfolio transaction for a Fund
which is in excess of the amount of commission another broker or dealer would
have charged for effecting that transaction if Citibank or the applicable
Subadviser determines in good faith that such amount of commission is reasonable
in relation to the value of the brokerage and research services provided by such
broker or dealer.
RISK CONSIDERATIONS
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The risks of investing in each Fund vary depending upon the nature of the
securities held, and the investment practices employed, on its behalf. Certain
of these risks are described below.
CHANGES IN NET ASSET VALUE. Each Fund's net asset value will fluctuate based on
changes in the values of the underlying portfolio securities. This means that an
investor's shares may be worth more or less at redemption than at the time of
purchase. Equity securities fluctuate in response to general market and economic
conditions and other factors, including actual and anticipated earnings, changes
in management, political developments and the potential for takeovers and
acquisitions. During periods of rising interest rates the value of debt
securities generally declines, and during periods of falling rates the value of
these securities generally increases. Changes by recognized rating agencies in
the rating of any debt security, and actual or perceived changes in an issuer's
ability to make principal or interest payments, also affect the value of these
investments.
CREDIT RISK OF DEBT SECURITIES. Investors should be aware that securities
offering above average yields may at times involve above average risks.
Securities rated Baa by Moody's or BBB by S&P and equivalent securities may have
speculative characteristics. Adverse economic or changing circumstances are more
likely to lead to a weakened capacity to make principal and interest payments
than is the case for higher grade obligations.
NON-U.S. SECURITIES. Investments in non-U.S. securities involve risks relating
to political, social and economic developments abroad, as well as risks
resulting from the differences between the regulations to which U.S. and non-
U.S. issuers and markets are subject. These risks may include expropriation,
confiscatory taxation, withholding taxes on dividends and interest,
limitations on the use or transfer of portfolio assets and political or social
instability. Enforcing legal rights may be difficult, costly and slow in non-
U.S. countries, and there may be special problems enforcing claims against
non-U.S. governments. In addition, non-U.S. companies may not be subject to
accounting standards or governmental supervision comparable to U.S. companies,
and there may be less public information about their operations. Non-U.S.
markets may be less liquid and more volatile than U.S. markets, and may offer
less protection to investors such as the Funds. Prices at which a Fund may
acquire securities may be affected by trading by persons with material non-
public information and by securities transactions by brokers in anticipation
of transactions by the Fund.
Because non-U.S. securities often are denominated in currencies other than
the U.S. dollar, changes in currency exchange rates will affect a Fund's net
asset value, the value of dividends and interest earned and gains and losses
realized on the sale of securities. In addition, some non-U.S. currency values
may be volatile and there is the possibility of governmental controls on
currency exchanges or governmental intervention in currency markets.
The Funds may invest in issuers located in developing countries, which are
generally defined as countries in the initial stages of their industrialization
cycles with low per capita income. All of the risks of investing in non-U.S.
securities are heightened by investing in developing countries. Shareholders
should be aware that investing in the equity and fixed income markets of
developing countries involves exposure to economic structures that are generally
less diverse and mature, and to political systems which can be expected to have
less stability, than those of developed countries. Historical experience
indicates that the markets of developing countries have been more volatile than
the markets of developed countries with more mature economies; such markets
often have provided higher rates of return, and greater risks, to investors.
These heightened risks include (i) greater risks of expropriation, confiscatory
taxation and nationalization, and less social, political and economic stability;
(ii) the small current size of markets for securities of issuers based in
developing countries and the currently low or non-existent volume of trading,
resulting in a lack of liquidity and in price volatility; (iii) certain national
policies which may restrict a Fund's investment opportunities including
restrictions on investing in issuers or industries deemed sensitive to relevant
national interests; and (iv) the absence of developed legal structures. Such
characteristics can be expected to continue in the future.
Equity securities traded in certain foreign countries may trade at
price-earnings multiples higher than those of comparable companies trading on
securities markets in the United States, which may not be sustainable. Rapid
increases in money supply in certain countries may result in speculative
investment in equity securities which may contribute to volatility of trading
markets.
The costs attributable to non-U.S. investing, such as the costs of
maintaining custody of securities in non-U.S. countries, frequently are higher
than those involved in U.S. investing. As a result, the operating expense
ratios of the Funds may be higher than those of investment companies investing
exclusively in U.S. securities.
SMALL CAP COMPANIES. Investors in the Funds should be aware that the securities
of companies with small market capitalizations may have more risks than the
securities of other companies. Small cap companies may be more susceptible to
market downturns or setbacks because they may have limited product lines,
markets, distribution channels, and financial and management resources. Further,
there is often less publicly available information about small cap companies
than about more established companies. As a result of these and other factors,
the prices of securities issued by small cap companies may be volatile. Shares
of the Funds, therefore, may be subject to greater fluctuation in value than
shares of an equity fund with more of its investments in securities of larger,
more established companies.
INVESTMENT PRACTICES. Certain of the investment practices employed for the Funds
may entail certain risks. These risks are in addition to the risks described
above and are described in the Appendix. See the Appendix -- Permitted
Investments and Investment Practices on page 21.
SPECIAL INFORMATION CONCERNING INVESTMENT STRUCTURE. The Funds do not invest
directly in securities. Instead, the Funds invest all of their investable assets
in their corresponding Portfolios, which are mutual funds having the same
investment objectives and policies as the Funds. The Portfolios, in turn, buy,
hold and sell securities in accordance with these objectives and policies. Of
course, there can be no assurance that the Funds or the Portfolios will achieve
their objectives. The Trustees of the Funds believe that the aggregate per share
expenses of each Fund and its corresponding Portfolio will be less than or
approximately equal to the expenses that the Fund would incur if the assets of
the Fund were invested directly in the types of securities held by its
Portfolio. Each Fund may withdraw its investment in its Portfolio at any time,
and will do so if the Trustees believe it to be in the best interest of the
Fund's shareholders. If a Fund were to withdraw its investment in its Portfolio,
the Fund could either invest directly in securities in accordance with the
investment policies described above or invest in another mutual fund or pooled
investment vehicle having the same investment objectives and policies. If a Fund
were to withdraw, the Fund could receive securities from the Portfolio instead
of cash, causing the Fund to incur brokerage, tax and other charges or leaving
it with securities which may or may not be readily marketable or widely
diversified.
Each Portfolio may change its investment objective and certain of its
investment policies and restrictions without approval by its investors, but the
Portfolio will notify its corresponding Fund (which in turn will notify its
shareholders) and its other investors at least 30 days before implementing any
change in its investment objective. A change in investment objective, policies
or restrictions may cause a Fund to withdraw its investment in its Portfolio.
Certain investment restrictions of each Portfolio cannot be changed without
approval by the investors in that Portfolio. These policies are described in the
Statement of Additional Information. When a Fund is asked to vote on matters
concerning its Portfolio (other than a vote to continue the Portfolio following
the withdrawal of an investor), the Fund will hold a shareholder meeting and
vote in accordance with shareholder instructions. Of course, the Fund could be
outvoted, or otherwise adversely affected, by other investors in its Portfolio.
The Portfolios may sell interests to investors in addition to the Funds.
These investors may be mutual funds which offer shares to their shareholders
with different costs and expenses than the Funds. Therefore, the investment
returns for all investors in funds investing in a Portfolio may not be the same.
These differences in returns are also present in other mutual fund structures.
Information about other holders of interests in the Portfolios is
available from the Funds' distributor (telephone: (617) 423-1679).
VALUATION OF SHARES
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Net asset value per share of each Fund is determined each day the New York
Stock Exchange is open for trading (a "Business Day"). This determination is
made once each day as of the close of regular trading on the Exchange (normally
4:00 p.m. Eastern time) by adding the market value of all securities and other
assets of a Fund (including the Fund's interest in its Portfolio), then
subtracting the liabilities charged to that Fund, and then dividing the result
by the number of outstanding shares of the Fund. The net asset value per share
is effective for orders received and accepted by the Transfer Agent prior to its
calculation.
Portfolio securities and other assets are valued primarily on the basis of
market quotations, or if quotations are not available, by a method believed to
accurately reflect fair value. Non-U.S. securities are valued based on
quotations from the primary market in which they are traded and are translated
from the local currency into U.S. dollars using current exchange rates. In light
of the non-U.S. nature of some of each Fund's investments, trading may take
place in securities held by the Funds on days which are not Business Days and on
which it will not be possible to purchase or redeem shares of the Funds.
PURCHASES
- ------------------------------------------------------------------------------
Shares of the Funds are offered continuously and may be purchased on any
Business Day without a sales load at the shares' net value next determined after
an order in proper form is received and accepted by the Transfer Agent. Each
Fund and the Transfer Agent reserve the right to reject any purchase order and
to suspend the offering of Fund shares for a period of time.
Shares may be purchased through certain financial institutions (which may
include banks), securities dealers and other industry professionals (called
Service Agents) that have entered into service agreements with the Distributor.
Customers of Citicorp Investment Services (CIS), a Service Agent, will purchase
shares through an account with CIS and should contact CIS at 1-800-846-5200
(customers in New York City may call 212-820-2380) for details. Customers of
other Service Agents should contact those Service Agents for information on
purchases. Each Service Agent may establish its own terms, conditions and
charges with respect to services it offers to its customers. Charges for these
services may include fixed annual fees and account maintenance fees. The effect
of any such fees will be to reduce the net return on the investment of customers
of that Service Agent. Each Service Agent has agreed to transmit to its
customers who are shareholders of a Fund appropriate prior written disclosure of
any fees that it may charge them directly. Each Service Agent is responsible for
transmitting promptly orders of its customers.
The Distributor, at its expense, may from time to time provide promotional
incentives to brokers who sell shares of a Fund. In some instances, these
incentives may be offered to certain brokers who have sold or may sell
significant numbers of shares of a Fund. From time to time the Distributor may
make payments for distribution and/or shareholder servicing activities out of
its past profits and any other sources available to it.
EXCHANGES
- ------------------------------------------------------------------------------
Shares of each Fund may be exchanged for shares of each other Fund without
charge. Shareholders may place exchange orders through the Transfer Agent or, if
they are customers of a Service Agent, through their Service Agent, and may do
so by telephone if their account applications so permit. For more information on
telephone transactions see "Redemptions." All exchanges will be effected based
on the relative net asset values per share next determined after the exchange
order in proper form is received by the Transfer Agent. See "Valuation of
Shares." Shares of the Funds may be exchanged only after payment in federal
funds for the shares has been received by the Transfer Agent. This exchange
privilege may be modified or terminated at any time, upon at least 60 days'
notice when such notice is required by SEC rules, and is available only in those
jurisdictions where such exchanges legally may be made. See the Statement of
Additional Information for further details. An exchange is treated as a sale of
the shares exchanged and could result in taxable gain or loss to the shareholder
making the exchange.
REDEMPTIONS
- ------------------------------------------------------------------------------
Fund shares may be redeemed at their net asset value next determined after a
redemption request in proper form is received by the Transfer Agent. Each
Service Agent is responsible for the prompt transmission of redemption orders to
the Funds on behalf of its customers. A Service Agent may establish requirements
or procedures regarding submission of redemption requests by its customers that
are different from those described below. Investors should consult their Service
Agents for details. A redemption is treated as a sale of the shares redeemed and
could result in taxable gain or loss to the shareholder making the redemption.
REDEMPTIONS BY MAIL. Shareholders may redeem Fund shares by sending written
instructions in proper form (as determined by the Transfer Agent or a
shareholder's Service Agent) to the Transfer Agent or, if shareholders are
customers of a Service Agent, their Service Agent. Shareholders are responsible
for ensuring that a request for redemption is in proper form.
REDEMPTIONS BY TELEPHONE. Shareholders may redeem or exchange Fund shares by
telephone, if their account applications so permit, by calling the Transfer
Agent or, if they are customers of a Service Agent, their Service Agent. During
periods of drastic economic or market changes or severe weather or other
emergencies, shareholders may experience difficulties implementing a telephone
exchange or redemption. In such an event, another method of instruction, such as
a written request sent via an overnight delivery service, should be considered.
The Funds, the Transfer Agent and each Service Agent will employ reasonable
procedures to confirm that instructions communicated by telephone are genuine.
These procedures may include recording of the telephone instructions and
verification of a caller's identity by asking for his or her name, address,
telephone number, Social Security number, and account number. If these or other
reasonable procedures are not followed, the Fund, the Transfer Agent or the
Service Agent may be liable for any losses to a shareholder due to unauthorized
or fraudulent instructions. Otherwise, the shareholder will bear all risk of
loss relating to a redemption or exchange by telephone.
PAYMENT OF REDEMPTIONS. The proceeds of a redemption are paid in federal funds
normally on the next Business Day, but in any event within seven days. If a
shareholder requests redemption of shares which were purchased recently, a Fund
may delay payment until it is assured that good payment has been received. In
the case of purchases by check, this can take up to ten days. See "Determination
of Net Asset Value; Valuation of Securities; Additional Purchase and Redemption
Information" in the Statement of Additional Information regarding the Funds'
right to pay the redemption price in kind with securities (instead of cash).
Questions about redemption requirements should be referred to the Transfer
Agent or, for customers of a Service Agent, their Service Agent. The right of
any shareholder to receive payment with respect to any redemption may be
suspended or the payment of the redemption price postponed during any period in
which the New York Stock Exchange is closed (other than weekends or holidays) or
trading on the Exchange is restricted or if an emergency exists.
DIVIDENDS AND DISTRIBUTIONS
- ------------------------------------------------------------------------------
Substantially all of each Fund's net income from dividends and interest is
paid to its shareholders of record as a dividend as follows:
For CITISELECT FOLIO 200, monthly on or about the last day of each MONTH.
For CITISELECT FOLIO 300, quarterly on or about the last day of each MARCH,
JUNE, SEPTEMBER and DECEMBER.
For CITISELECT FOLIO 400 and CITISELECT FOLIO 500, annually on or about the
last day of each DECEMBER.
Each Fund's net realized short-term and long-term capital gains, if any,
will be distributed to the Fund's shareholders at least annually, in December.
Each Fund may also make additional distributions to its shareholders to the
extent necessary to avoid the application of the 4% non-deductible excise tax on
certain undistributed income and net capital gains of mutual funds.
A shareholder may elect to receive dividends and capital gains distributions
in either cash or additional shares of the same Fund issued at net asset value.
MANAGEMENT
- ------------------------------------------------------------------------------
TRUSTEES AND OFFICERS: Each Fund is supervised by the Board of Trustees
of Landmark Funds I. The Portfolios are supervised by the Board of Trustees of
Asset Allocation Portfolios. In each case, a majority of the Trustees are not
affiliated with Citibank. In addition, a majority of the disinterested Trustees
of the Funds are different from a majority of the disinterested Trustees of the
Portfolios. More information on the Trustees and officers of the Funds and the
Portfolios appears under "Management" in the Statement of Additional
Information.
INVESTMENT MANAGER: Each Fund draws on the strength and experience of Citibank.
Citibank offers a wide range of banking and investment services to customers
across the United States and throughout the world, and has been managing money
since 1822. Its portfolio managers are responsible for investing in money
market, equity and fixed income securities. Citibank and its affiliates manage
more than $83 billion in assets worldwide. Citibank is a wholly-owned subsidiary
of Citicorp. Citibank also serves as investment adviser to other registered
investment companies. Citibank's address is 153 East 53rd Street, New York, New
York 10043.
Subject to policies set by the Trustees, Citibank is responsible for overall
management of the Funds' business affairs, and has a separate Management
Agreement with each Fund. Citibank also provides certain administrative services
to the Funds. These administrative services include providing general office
facilities and supervising the overall administration of the Funds. Pursuant to
sub-administrative services agreements, the Distributor performs such
sub-administrative duties for the Funds as from time to time are agreed upon by
Citibank and the Distributor. The Distributor's compensation as
sub-administrator is paid by Citibank.
Lawrence P. Keblusek, U.S. Chief Investment Officer of Citibank, has been
the overall portfolio manager of the Funds since their inception and is
responsible for determining asset allocations, supervising and monitoring the
performance of the Citibank personnel described below who are responsible for
the Funds' securities, and supervising and monitoring the performance of the
Subadvisers. Mr. Keblusek's investment experience is discussed below.
The following individuals at Citibank are responsible for daily management
of the following kinds of securities of each Fund (and related investments).
LARGE CAPITALIZATION GROWTH SECURITIES
Lawrence P. Keblusek, U.S. Chief Investment Officer, has been responsible for
the daily management of large cap growth securities since the Funds' inception.
Mr. Keblusek, who has 25 years experience in the investment management industry,
was most recently Senior Vice President and Director of Portfolio Management for
The Northern Trust Company with responsibility for investment performance in the
organization's High Net Worth, Corporate and Institutional and Mutual Fund
Group. Earlier in his career, Mr. Keblusek held senior investment positions with
Maryland National Bank and the National Bank of Washington.
SMALL CAPITALIZATION GROWTH SECURITIES
David N. Pearl, Vice President, has been responsible for the daily management
of small cap growth securities since the Funds' inception. Mr. Pearl is a
portfolio manager of U.S. equity assets for institutional clients, and joined
Citibank in 1994. Prior to joining Citibank he worked as a portfolio manager
at Fleming Capital Management and Bankers Trust Company.
DOMESTIC FIXED INCOME SECURITIES
Mark Lindbloom, Vice President, has been responsible for the daily management of
domestic fixed income securities since the Funds' inception. Mr. Lindbloom has
more than 12 years of investment management experience. Prior to joining
Citibank in 1986, Mr. Lindbloom was a Fixed Income Portfolio Manager with Brown
Brothers Harriman & Co., where he managed fixed income assets for discretionary
corporate portfolios.
MONEY MARKET SECURITIES
Kevin Kennedy, Vice President, has been responsible for the daily management
of money market securities since the Funds' inception. Mr. Kennedy is
responsible for managing the Liquidity Management Unit of the U.S. Fixed
Income Department of Citibank Global Asset Management. Prior to joining
Citibank in March 1993, Mr. Kennedy was with the Metropolitan Life Insurance
Company as the Managing Trader of the Treasurer's Division. He was responsible
for the management of more than $9 billion in short duration fixed income
assets. Mr. Kennedy has more than 15 years of fixed income management
experience.
Citibank has delegated the daily management of the following kinds of
securities of each Fund (and related investments) to the following Subadvisers.
Citibank pays all Subadviser compensation.
LARGE CAPITALIZATION VALUE SECURITIES
Miller Anderson & Sherrerd, LLP, One Tower Bridge, West Conshohocken,
Pennsylvania 19428. Miller Anderson has been a registered investment adviser
since 1974. Morgan Stanley Asset Management Holdings, Inc., an indirect
wholly-owned subsidiary of Morgan Stanley Group Inc., owns 95% of the interests
in Miller Anderson. Robert Marcin, CFA, Partner, has been responsible for the
daily management of large cap value securities since the Funds' inception. Mr.
Marcin has been with Miller Anderson since 1988.
SMALL CAPITALIZATION VALUE SECURITIES
Franklin Advisory Services, Inc., 777 Mariners Island Blvd., San Mateo,
California 94404. Franklin Advisory Services, a wholly-owned subsidiary of
Franklin Resources, Inc., is a registered investment adviser. William P.
Lippman, senior vice president of Franklin Advisory Services or its predecessor
since June, 1988, has been responsible for the daily management of small
capitalization value securities since the Funds' inception. Prior to joining
Franklin Advisory Services, Mr. Lippman was president of L.F.
Rothschild Fund Management, Inc.
INTERNATIONAL EQUITY SECURITIES
Hotchkis and Wiley, 800 West Sixth Street, Fifth Floor, Los Angeles, California
90017. Hotchkis and Wiley, a division of Merrill Lynch Asset Management, Inc.,
is a registered investment adviser. Harry W. Hartford and Sarah H. Ketterer have
been responsible for the daily management of international equity securities
since the Funds' inception. Mr. Hartford and Ms. Ketterer manage international
equity accounts and are also responsible for international investment research.
Each serves on the Investment Policy Committee at Hotchkis and Wiley. Prior to
joining Hotchkis and Wiley, Mr. Hartford was with The Investment Bank of
Ireland, where he gained 10 years of experience in both international and global
equity management. Prior to joining Hotchkis and Wiley, Ms. Ketterer was an
associate with Bankers Trust and an analyst at Dean Witter.
FOREIGN GOVERNMENT SECURITIES
Pacific Investment Management Company, 840 Newport Center Drive, Suite 360, P.O.
Box 6430, Newport Beach, California 92658-9030. PIMCO is a registered investment
adviser and is a subsidiary partnership of PIMCO Advisors L.P. A majority
interest of PIMCO Advisors L.P. is held by PIMCO Partners, G.P., a general
partnership between Pacific Investment Management Company, a California
corporation and indirect wholly-owned subsidiary of Pacific Mutual Life
Insurance Company, and PIMCO Partners, L.L.C., a limited liability company
controlled by the Managing Directors of PIMCO. Lee R. Thomas, III, Senior
International Portfolio Manager, has been responsible for the daily management
of foreign government securities since the Funds' inception. He joined PIMCO in
1995. Previously he was a member of Investcorp's Management Committee, where he
was responsible for global securities and foreign exchange trading. Prior to
Investcorp, he was associated with Goldman Sachs, where he was an Executive
Director in the fixed income division of the London office.
MANAGEMENT FEES. For its services under the Management Agreements, Citibank
receives a fee, which is accrued daily and paid monthly, of 0.75% of each Fund's
average daily net assets on an annualized basis for that Fund's then-current
fiscal year. This fee is higher than the management fee paid by most mutual
funds. Citibank may voluntarily agree to waive a portion of its management fee
from any Fund.
For their services to the Funds, Citibank pays the Subadvisers the following
fees, which are accrued daily and payable monthly and are at the annual rates
equal to the percentages specified below of the aggregate assets of the Funds
allocated to the particular Subadviser:
Miller Anderson & Sherrerd, LLP
0.625% on first $25 million
0.375% on next $75 million
0.250% on next $400 million
0.20% on assets in excess of $500 million
Franklin Advisory Services, Inc.
0.55% on first $250 million
0.50% on remaining assets
Hotchkis and Wiley
0.60% on first $10 million
0.55% on next $40 million
0.45% on next $100 million
0.35% on next $150 million
0.30% on remaining assets
PIMCO
0.35% on first $200 million
0.30% on remaining assets
BANKING RELATIONSHIPS. Citibank and its affiliates may have deposit, loan and
other relationships with the issuers of securities purchased on behalf of the
Funds, including outstanding loans to such issuers which may be repaid in whole
or in part with the proceeds of securities so purchased. Citibank has informed
the Funds that, in making its investment decisions, it does not obtain or use
material inside information in the possession of any division or department of
Citibank or in the possession of any affiliate of Citibank.
BANK REGULATORY MATTERS. The Glass-Steagall Act prohibits certain financial
institutions, such as Citibank, from underwriting securities of open-end
investment companies, such as the Funds. Citibank believes that its services
under the Management Agreements and the activities performed by it or its
affiliates as Service Agents are not underwriting and are consistent with the
Glass-Steagall Act and other relevant federal and state laws. However, there is
no controlling precedent regarding the performance of the combination of
investment advisory, shareholder servicing and administrative activities by
banks. State laws on this issue may differ from applicable federal law, and
banks and financial institutions may be required to register as dealers pursuant
to state securities laws. Changes in either federal or state statutes or
regulations, or in their interpretations, could prevent Citibank or its
affiliates from continuing to perform these services. If Citibank or its
affiliates were to be prevented from acting as the investment manager or a
Service Agent, the Funds would seek alternative means for obtaining these
services. The Funds do not expect that shareholders would suffer any adverse
financial consequences as a result of any such occurrence.
TRANSFER AGENT, CUSTODIAN AND FUND ACCOUNTANT: State Street Bank and Trust
Company acts as transfer agent, dividend disbursing agent and custodian for each
Fund. Securities may be held by a sub-custodian bank approved by the Trustees.
State Street also provides certain fund accounting services and calculates the
daily net asset value for the Funds. The principal business address of State
Street is 225 Franklin Street, Boston, Massachusetts 02110.
DISTRIBUTION ARRANGEMENTS: The Landmark Funds Broker-Dealer Services, Inc., 6
St. James Avenue, Boston, MA 02116 (telephone: (617) 423-1679), is the
distributor of shares of each Fund. Under a Service Plan which has been adopted
in accordance with Rule 12b-1 under the 1940 Act, the Funds may pay monthly fees
at an annual rate not to exceed 0.50% of the average daily net assets of each
Fund. These fees may be used to make payments to the Distributor for
distribution services, and to Service Agents and others in respect of the sale
of shares of the Funds, and to make payments for advertising, marketing or other
promotional activity, and payments for preparation, printing, and distribution
of prospectuses, statements of additional information and reports for recipients
other than regulators and existing shareholders. The Funds also may make
payments to the Distributor, Service Agents and others for providing personal
service or the maintenance of shareholder accounts. The Funds and the
Distributor provide to the Trustees quarterly a written report of amounts
expended pursuant to each Service Plan and the purposes for which the
expenditures were made.
During the period they are in effect, the Service Plan and related
Distribution Agreement obligate the Funds to pay fees to the Distributor,
Service Agents and others as compensation for their services, not as
reimbursement for specific expenses incurred. Thus, even if their expenses
exceed the fees provided for under the Service Plan for any Fund, the Fund will
not be obligated to pay more than those fees and, if their expenses are less
than the fees paid to them, they will realize a profit. Each Fund will pay the
fees to the Distributor, Service Agents and others until the Service Plan or
Distribution Agreement is terminated or not renewed. In that event, the
Distributor's or Service Agent's expenses in excess of fees received or accrued
through the termination date will be the Distributor's or Service Agent's sole
responsibility and not obligations of the Fund. In their annual consideration of
the continuation of the Service Plan for each Fund, the Trustees will review the
Plan and the expenses for each Fund separately.
TAX MATTERS
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This discussion of taxes is for general information only. Investors should
consult their own tax advisers about their particular situations.
Each Fund intends to meet the requirements of the Internal Revenue Code
applicable to regulated investment companies so that it will not be liable for
any federal income or excise taxes. Each Fund may pay withholding or other taxes
to foreign governments during the year, however, and these taxes will reduce
those Funds' dividends.
Fund dividends and capital gains distributions are subject to federal income
tax and may also be subject to state and local taxes. Dividends and
distributions are treated in the same manner for federal tax purposes whether
they are paid in cash or as additional shares. Generally, distributions from a
Fund's net investment income and short-term capital gains will be taxed as
ordinary income. A portion of distributions from net investment income may be
eligible for the dividends-received deduction available to corporations.
Distributions of long-term net capital gains will be taxed as such regardless of
how long the shares of a Fund have been held.
Fund distributions will reduce the distributing Fund's net asset value per
share. Shareholders who buy shares just before a Fund makes a distribution may
thus pay the full price for the shares and then effectively receive a portion of
the purchase price back as a taxable distribution.
Early each year, each Fund will notify its shareholders of the amount and
tax status of distributions paid to shareholders for the preceding year.
Investors should consult their own tax advisers regarding the status of their
accounts under state and local laws.
PERFORMANCE INFORMATION
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Fund performance may be quoted in advertising, shareholder reports and other
communications in terms of total rate of return. All performance information is
historical and is not intended to indicate future performance. Total rates of
return fluctuate in response to market conditions and other factors, and the
value of a Fund's shares when redeemed may be more or less than their original
cost.
Each Fund may provide its period and average annualized "total rates of
return." The "total rate of return" refers to the change in the value of an
investment in the Fund over a stated period and reflects any change in net asset
value per share and is compounded to include the value of any shares purchased
with any dividends or capital gains declared during such period. Period total
rates of return may be "annualized." An "annualized" total rate of return
assumes that the period total rate of return is generated over a one-year
period.
Of course, any fees charged by a shareholder's Service Agent will reduce
that shareholder's net return on investment. See the Statement of Additional
Information for more information concerning the calculation of total rate of
return quotations for the Funds.
GENERAL INFORMATION
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ORGANIZATION: Each Fund is a series of Landmark Funds I. Landmark Funds
I is a Massachusetts business trust which was organized on April 13,1984; it
also is an open-end management investment company registered under the 1940 Act.
Landmark Funds I currently has five active series.
Each Fund is a diversified mutual fund. Under the 1940 Act, a diversified
mutual fund must invest at least 75% of its assets in cash and cash items, U.S.
Government securities, investment company securities and other securities
limited as to any one issuer to not more than 5% of the total assets of the
mutual fund and not more than 10% of the voting securities of the issuer.
Under Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for the trust's
obligations. However, the risk of a shareholder incurring financial loss on
account of shareholder liability is limited to circumstances in which both
inadequate insurance existed and the trust itself was unable to meet its
obligations.
Each Portfolio is a series of Asset Allocation Portfolios, a New York trust.
The Declaration of Trust of Asset Allocation Portfolios provides that a Fund and
other entities investing in a Portfolio are each liable for all obligations of
that Portfolio. It is not expected that the liabilities of a Portfolio would
ever exceed its assets.
VOTING AND OTHER RIGHTS: Landmark Funds I may issue an unlimited number of
shares, may create new series of shares and may divide shares in each series
into classes. Each share of each Fund gives the shareholder one vote in Trustee
elections and other matters submitted to shareholders for vote. All shares of
each series of Landmark Funds I have equal voting rights except that, in matters
affecting only a particular Fund, only shares of that particular Fund are
entitled to vote.
At any meeting of shareholders of any Fund, a Service Agent may vote any
shares of which it is the holder of record and for which it does not receive
voting instructions proportionately in accordance with the instructions it
receives for all other shares of which that Service Agent is the holder of
record.
Each Fund's activities are supervised by Landmark Funds I's Board of
Trustees. Because Landmark Funds I is a Massachusetts business trust, the Funds
are not required to hold annual shareholder meetings. Shareholder approval will
usually be sought only for changes in a Fund's or Portfolio's fundamental
investment restrictions and for the election of Trustees under certain
circumstances. Trustees may be removed by shareholders under certain
circumstances. Each share of each Fund is entitled to participate equally in
dividends and other distributions and the proceeds of any liquidation of that
Fund.
CERTIFICATES: The Funds' Transfer Agent maintains a share register for
shareholders of record. Share certificates are not issued.
RETIREMENT PLANS: Investors may be able to establish new accounts in a Fund
under one of several tax-sheltered plans. Such plans include IRAs, Keogh or
Corporate Profit-Sharing and Money-Purchase Plans, 403(b) Custodian Accounts,
and certain other qualified pension and profit-sharing plans. Investors should
consult with their Service Agent and their tax and retirement advisers.
EXPENSES: In addition to amounts payable under its Management Agreement and the
Service Plan, each Fund is responsible for its own expenses, including, among
other things, the costs of securities transactions, the compensation of Trustees
that are not affiliated with Citibank, government fees, taxes, accounting and
legal fees, expenses of communicating with shareholders, interest expense, and
insurance premiums.
All fee waivers are voluntary and may be reduced or terminated at any time.
COUNSEL AND INDEPENDENT AUDITORS: Bingham, Dana & Gould LLP, Boston,
Massachusetts, is counsel for each Fund. Price Waterhouse LLP, Boston,
Massachusetts, serves as independent auditor for each Fund.
------------------------
The Statement of Additional Information dated the date hereof contains more
detailed information about the Funds and the Portfolios, including information
relating to (i) investment policies and restrictions, (ii) the Trustees,
officers and investment manager, (iii) securities transactions, (iv) the Funds'
shares, including rights and liabilities of shareholders, (v) the method used to
calculate performance information, (vi) programs for the purchase of shares, and
(vii) the determination of net asset value.
No person has been authorized to give any information or make any
representations not contained in this Prospectus or the Statement of Additional
Information in connection with the offering made by this Prospectus and, if
given or made, such information or representations must not be relied upon as
having been authorized by the Funds or their distributor. This Prospectus does
not constitute an offering by the Funds or their distributor in any jurisdiction
in which such offering may not lawfully be made.
<PAGE>
APPENDIX
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PERMITTED INVESTMENTS AND
INVESTMENT PRACTICES
REPURCHASE AGREEMENTS. Each Fund may enter into repurchase agreements in order
to earn a return on temporarily available cash. Repurchase agreements are
transactions in which an institution sells the Fund a security at one price,
subject to the Fund's obligation to resell and the selling institution's
obligation to repurchase that security at a higher price normally within a seven
day period. There may be delays and risks of loss if the seller is unable to
meet its obligation to repurchase.
REVERSE REPURCHASE AGREEMENTS. Each Fund may enter into reverse repurchase
agreements. Reverse repurchase agreements involve the sale of securities held by
the Fund and the agreement by the Fund to repurchase the securities at an
agreed-upon price, date and interest payment. When a Fund enters into reverse
repurchase transactions, securities of a dollar amount equal in value to the
securities subject to the agreement will be maintained in a segregated account
with the Fund's custodian. The segregation of assets could impair the Fund's
ability to meet its current obligations or impede investment management if a
large portion of the Fund's assets are involved. Reverse repurchase agreements
are considered to be a form of borrowing.
LENDING OF PORTFOLIO SECURITIES. Consistent with applicable regulatory
requirements and in order to generate additional income, each Fund may lend its
portfolio securities to broker-dealers and other institutional borrowers. Such
loans must be callable at any time and continuously secured by collateral (cash
or U.S. Government securities) in an amount not less than the market value,
determined daily, of the securities loaned. It is intended that the value of
securities loaned by a Fund would not exceed 30% of the Fund's total assets.
In the event of the bankruptcy of the other party to a securities loan,
repurchase agreement or a reverse repurchase agreement, a Fund could experience
delays in recovering either the securities lent or cash. To the extent that, in
the meantime, the value of the securities lent has increased or the value of the
securities purchased has decreased, the Fund could experience a loss.
RULE 144A SECURITIES. Each Fund may purchase restricted securities that are not
registered for sale to the general public if it is determined that there is a
dealer or institutional market in the securities. In that case, the securities
will not be treated as illiquid for purposes of the Fund's investment
limitations. The Trustees will review these determinations. These securities are
known as "Rule 144A securities," because they are traded under SEC Rule 144A
among qualified institutional buyers. Institutional trading in Rule 144A
securities is relatively new, and the liquidity of these investments could be
impaired if trading in Rule 144A securities does not develop or if qualified
institutional buyers become, for a time, uninterested in purchasing Rule 144A
securities.
PRIVATE PLACEMENTS AND ILLIQUID INVESTMENTS. Each Fund may invest up to 10% of
its net assets in securities for which there is no readily available market.
These illiquid securities may include privately placed restricted securities for
which no institutional market exists. The absence of a trading market can make
it difficult to ascertain a market value for illiquid investments. Disposing of
illiquid investments may involve time-consuming negotiation and legal expenses,
and it may be difficult or impossible for a Fund to sell them promptly at an
acceptable price.
"WHEN-ISSUED" SECURITIES. In order to ensure the availability of suitable
securities, each Fund may purchase securities on a "when-issued" or on a
"forward delivery" basis, which means that the securities would be delivered to
the Fund at a future date beyond customary settlement time. Under normal
circumstances, the Fund takes delivery of the securities. In general, the Fund
does not pay for the securities until received and does not start earning
interest until the contractual settlement date. While awaiting delivery of the
securities, the Fund establishes a segregated account consisting of cash, cash
equivalents or high quality debt securities equal to the amount of the Fund's
commitments to purchase "when-issued" securities. An increase in the percentage
of the Fund's assets committed to the purchase of securities on a "when-issued"
basis may increase the volatility of its net asset value.
DOLLAR ROLLS. The Funds also may enter into "dollar rolls." A dollar roll is a
transaction pursuant to which a Fund sells mortgage-backed securities for
delivery in the current month and simultaneously contracts to repurchase
substantially similar (same type, coupon and maturity) securities on a specified
future date. During the roll period, the Fund foregoes principal and interest
paid on the mortgage-backed securities. The Fund 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. A "covered roll" is a specific
type of dollar roll for which a Fund establishes a segregated account with
liquid high grade debt securities equal in value to the securities subject to
repurchase by the Fund. The Funds will invest only in covered rolls.
COMMERCIAL PAPER. Each Fund may invest in commercial paper, which is unsecured
debt of corporations usually maturing in 270 days or less from its date of
issuance.
DEPOSITARY RECEIPTS FOR SECURITIES. American Depositary Receipts ("ADRs"),
European Depositary Receipts ("EDRs"), Global Depositary Receipts ("GDRs") and
other forms of depositary receipts for securities of non-U.S. issuers provide an
alternative method for a Fund to make non-U.S. investments. These securities are
not usually traded in the same currency as the securities into which they may be
converted. Generally, ADRs, in registered form, are designed for use in U.S.
securities markets and EDRs and GDRs, in bearer form, are designed for use in
European and global securities markets. ADRs are receipts typically issued by a
U.S. bank or trust company evidencing ownership of the underlying securities.
EDRs and GDRs are European and global receipts, respectively, evidencing a
similar arrangement.
OTHER INVESTMENT COMPANIES. Subject to applicable statutory and regulatory
limitations, assets of each Fund may be invested in shares of other investment
companies. Each Fund may invest up to 5% of its assets in closed-end
investment companies which primarily hold securities of non-U.S. issuers.
CURRENCY EXCHANGE CONTRACTS. Forward currency exchange contracts may be entered
into for each Fund for the purchase or sale of non-U.S. currency to hedge
against adverse rate changes or otherwise to achieve the Fund's investment
objectives. A currency exchange contract allows a definite price in dollars to
be fixed for securities of non-U.S. issuers that have been purchased or sold
(but not settled) for the Fund. Entering into such exchange contracts may result
in the loss of all or a portion of the benefits which otherwise could have been
obtained from favorable movements in exchange rates. In addition, entering into
such contracts means incurring certain transaction costs and bearing the risk of
incurring losses if rates do not move in the direction anticipated.
SECURITIES RATED Baa OR BBB. Each Fund may purchase securities rated Baa by
Moody's or BBB by S&P, which may have poor protection of payment of principal
and interest. These securities are often considered to be speculative and
involve greater risk of default or price changes than securities assigned a
higher quality rating due to changes in the issuer's creditworthiness. The
market prices of these securities may fluctuate more than higher-rated
securities and may decline significantly in periods of general economic
difficulty which may follow periods of rising interest rates.
ASSET-BACKED SECURITIES. Each Fund may invest in corporate asset-backed
securities. These securities, issued by trusts and special purpose corporations,
are backed by a pool of assets, such as credit card or automobile loan
receivables, representing the obligations of a number of different parties.
Corporate 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.
Each Fund also may purchase mortgage-backed securities issued or guaranteed
as to payment of principal and interest by the U.S. Government or one of its
agencies and backed by the full faith and credit of the U.S. Government,
including direct pass-through certificates of GNMA, as well as mortgage-backed
securities for which principal and interest payments are backed by the credit of
particular agencies of the U.S. Government. Mortgage- backed securities are
generally backed or collateralized by a pool of mortgages. These securities are
sometimes called collateralized mortgage obligations or CMOs.
Even if the U.S. Government or one of its agencies guarantees principal and
interest payments of a mortgage-backed security, the market price of a
mortgage-backed security is not insured and may be subject to market volatility.
When interest rates decline, mortgage-backed securities experience higher rates
of prepayment, because the underlying mortgages are refinanced to take advantage
of the lower rates. Thus the prices of mortgage-backed securities may not
increase as much as prices of other debt obligations when interest rates
decline, and mortgage-backed securities may not be an effective means of locking
in a particular interest rate. In addition, any premium paid for a
mortgage-backed security may be lost when it is prepaid.
FUTURES. Because the value of a futures contract changes based on the price of
the underlying security or other asset, futures contracts are commonly referred
to as "derivatives." Futures contracts are a generally accepted part of modern
portfolio management and are regularly utilized by many mutual funds and other
institutional investors. When a Fund purchases or sells a futures contract, it
is required to make an initial margin deposit. Although the amount may vary,
initial margin can be as low as 1% or less of the face amount of the contract.
Additional margin may be required as the contract fluctuates in value. Since the
amount of margin is relatively small compared to the value of the securities
covered by a futures contract, the potential for gain or loss on a futures
contract is much greater than the amount of a Fund's initial margin deposit.
None of the Funds currently intends to enter into a futures contract if, as a
result, the initial margin deposits on all of that Fund's futures contracts
would exceed approximately 5% of the Fund's net assets. Also, each Fund intends
to limit its futures contracts so that the value of the securities covered by
its futures contracts would not generally exceed 50% of the Fund's other assets
and to segregate sufficient assets to meet its obligations under outstanding
futures contracts.
The ability of a Fund to utilize futures contracts successfully will depend
on Citibank's or a Subadviser's ability to predict interest rate, stock price or
currency movements, which cannot be assured. In addition to general risks
associated with any investment, the use of futures contracts entails the risk
that, to the extent Citibank's or the Subadviser's view as to interest rate,
stock price or currency movements is incorrect, the use of futures contracts,
even for hedging purposes, could result in losses greater than if they had not
been used. This could happen, for example, if there is a poor correlation
between price movements of futures contracts and price movements in a Fund's
related portfolio position. Also, the futures markets may not be liquid in all
circumstances. As a result, in certain markets, a Fund might not be able to
close out a transaction without incurring substantial losses, if at all. When
futures contracts are used for hedging, even if they are successful in
minimizing the risk of loss due to a decline in the value of the hedged
position, at the same time they limit any potential gain which might result from
an increase in value of such position. As noted, each Fund may also enter into
transactions in futures contracts for other than hedging purposes (subject to
applicable law), including speculative transactions, which involve greater risk.
In particular, in entering into such transactions, a Fund may experience losses
which are not offset by gains on other portfolio positions, thereby reducing its
gross income. In addition, the markets for such instruments may be extremely
volatile from time to time, which could increase the risks incurred by the Fund
in entering into such transactions.
The use of futures contracts potentially exposes a Fund to the effects of
"leveraging," which occurs when futures are used so that the Fund's exposure to
the market is greater than it would have been if the Fund had invested directly
in the underlying securities. "Leveraging" increases a Fund's potential for both
gain and loss. As noted above, each of the Funds intends to adhere to certain
policies relating to the use of futures contracts, which should have the effect
of limiting the amount of leverage by the Fund.
OPTIONS. Each Fund may write (sell) covered call and put options and purchase
call and put options on securities. A Fund will write options on securities for
the purpose of increasing its return on such securities and/or to protect the
values of its portfolio. In particular, where the Fund writes an option which
expires unexercised or is closed out by the Fund at a profit, it will retain the
premium paid for the option which will increase its gross income and will offset
in part the reduced value of the portfolio security underlying the option, or
the increased cost of portfolio securities to be acquired. If the price of the
underlying security moves adversely to the Fund's position, the option may be
exercised and the Fund will be required to purchase or sell the underlying
security at a disadvantageous price, which may only be partially offset by the
amount of the premium.
By writing a call option on a security, a Fund limits its opportunity to
profit from any increase in the market value of the underlying security, since
the holder will usually exercise the call option when the market value of the
underlying security exceeds the exercise price of the call. However, the Fund
retains the risk of depreciation in value of securities on which it has written
call options.
Each of the Funds also may purchase options on a non-U.S. currency in
order to protect against currency rate fluctuations. If a Fund purchases a put
option on a non-U.S. currency and the value of the U.S. currency declines, the
Fund will have the right to sell the non-U.S. currency for a fixed amount in
U.S. dollars and will thereby offset, in whole or in part, the adverse effect
on the Fund which otherwise would have resulted. Conversely, where a rise in
the U.S. dollar value of another currency is projected, and where the Fund
anticipates investing in securities traded in such currency, the Fund may
purchase call options on the non-U.S. currency. Each Fund also may buy and
write options on stock indices.
Each Fund may purchase and write options to buy or sell interest rate
futures contracts and options on stock index futures contracts. Such investment
strategies will be used for hedging and non-hedging purposes, subject to
applicable law. Put and call options on futures contracts may be traded by a
Fund in order to protect against declines in values of portfolio securities or
against increases in the cost of securities to be acquired. Purchase of options
on futures contracts may present less risk in hedging the portfolio of a Fund
than the purchase or sale of the underlying futures contracts since the
potential loss is limited to the amount of the premium plus related transaction
costs. The writing of such options, however, does not present less risk than the
trading of futures contracts and will constitute only a partial hedge, up to the
amount of the premium received. In addition, if an option is exercised, the Fund
may suffer a loss on the transaction.
Each Fund may enter into forward foreign currency contracts for the purchase
or sale of a fixed quantity of a foreign currency at a future date at a price
set at the time of the contract. A Fund may enter into forward contracts for
hedging and non-hedging purposes including transactions entered into for the
purpose of profiting from anticipated changes in foreign currency exchange
rates. Each Fund has established procedures consistent with statements of the
Securities and Exchange Commission and its staff regarding the use of forward
contracts by registered investment companies, which requires use of segregated
assets or "cover" in connection with the purchase and sale of such contracts.
Forward contracts are traded over-the-counter, and not on organized
commodities or securities exchanges. As a result, such contracts operate in a
manner distinct from exchange-traded instruments, and their use involves certain
risks beyond those associated with transactions in the futures and options
contracts described herein.
Transactions in options may be entered into on U.S. exchanges regulated by
the SEC, in the over-the-counter market and on foreign exchanges, while forward
contracts may be entered into only in the over-the-counter market. Futures
contracts and options on futures contracts may be entered into on U.S. exchanges
regulated by the Commodity Futures Trading Commission and on foreign exchanges.
The securities underlying options and futures contracts traded by a Fund may
include domestic as well as foreign securities. Investors should recognize that
transactions involving foreign securities or foreign currencies, and
transactions entered into in foreign countries, may involve considerations and
risks not typically associated with investing in U.S.
markets.
Transactions in options, futures contracts, options on futures contracts and
forward contracts entered into for non-hedging purposes involve greater risk and
could result in losses which are not offset by gains on other portfolio assets.
For example, a Fund may sell futures contracts on an index of securities in
order to profit from any anticipated decline in the value of the securities
comprising the underlying index. In such instances, any losses on the futures
transactions will not be offset by gains on any portfolio securities comprising
such index, as might occur in connection with a hedging transaction.
