<PAGE>
Rule 497(e) File Nos. 2-90518 and 811-4006
Prospectus March 2, 1998
As Supplemented June 15, 1998
CitiSelect(R) Folio 200
CitiSelect(R) Folio 300
CitiSelect(R) Folio 400
CitiSelect(R) Folio 500
This Prospectus describes four diversified mutual funds managed by Citibank,
N.A.: CitiSelect(R) Folio 200, CitiSelect(R) Folio 300, CitiSelect(R) Folio 400
and CitiSelect(R) 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.
This Prospectus concisely sets forth information about the Funds that a
prospective investor should know before investing. A Statement of Additional
Information dated March 2, 1998 (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 1-800-625-4554. The
Statement of Additional Information and other related materials are available on
the SEC's Internet web site (http://www.sec.gov).
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REMEMBER THAT SHARES OF THE FUNDS:
o ARE NOT INSURED BY THE FDIC OR ANY OTHER AGENCY;
o ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY,
CITIBANK OR ANY OF ITS AFFILIATES;
o ARE SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL
AMOUNT INVESTED.
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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.
INVESTORS SHOULD READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE REFERENCE.
<PAGE>
TABLE OF CONTENTS
Prospectus Summary 3
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Expense Summary 6
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Condensed Financial Information 8
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Investment Information 10
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Risk Considerations 16
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Valuation of Shares 18
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Purchases 19
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Exchanges 19
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Redemptions 20
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Dividends and Distributions 21
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Management 21
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Tax Matters 26
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Performance Information 27
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General Information 27
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Appendix -- Permitted Investments and Investment Practices 30
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<PAGE>
PROSPECTUS SUMMARY
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 multiple Portfolios, all references in this Prospectus to a Fund include
its underlying Portfolios, except as otherwise noted.
INVESTMENT OBJECTIVES: Each Fund is a total return fund that allocates its
investments among three primary classes of assets -- equity, fixed income and
money market securities. Each Fund's asset mix is designed to offer a different
level of potential return within a corresponding level of risk. The investment
objective of each Fund is as follows:
CitiSelect Folio 200: as high a total return over time as is consistent with a
primary emphasis on a combination of fixed income and money market securities,
and a secondary emphasis on equity securities.
CitiSelect Folio 300: as high a total return over time as is consistent with a
balanced emphasis on equity and fixed income securities.
CitiSelect Folio 400: as high a total return over time as is consistent with a
primary emphasis on equity securities, and a secondary emphasis on fixed income
securities.
CitiSelect Folio 500: as high a total return over time as is consistent with a
dominant emphasis on equity securities and a small allocation to fixed income
securities.
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 the
CitiSelect Portfolios.
INVESTMENT MANAGER: Citibank, N.A., a wholly-owned subsidiary of Citicorp, is
the investment manager. Citibank and its affiliates manage more than $88
billion in assets worldwide. See "Management."
PURCHASES AND REDEMPTIONS: Investors may purchase and redeem shares of the
Funds through a Service Agent on any day the New York Stock Exchange is open
for trading. 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 of each Fund may be exchanged for shares of each other Fund
and for shares of certain other CitiFunds.(SM) See "Exchanges."
DIVIDENDS: Dividends, if any, are declared and paid quarterly for CitiSelect
Folio 200 and 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 designed for investors seeking to reduce the
risks of investing in a single asset or asset class and to cushion the
volatility of financial markets through broad diversification of portfolio
holdings and the allocation of their assets across several classes of assets.
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 relatively lower risk provided by
substantial investments in fixed income and money market securities, but who
also seeks some capital growth. CitiSelect Folio 300 is designed for the
investor seeking a balanced approach by emphasizing stocks for their higher
capital appreciation potential but retaining a significant fixed income
investment 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 the investor who
can withstand greater market swings to seek potential long-term rewards.
CitiSelect Folio 400 is designed for the investor 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. Securities of small cap companies 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 a 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.
<PAGE>
EXPENSE SUMMARY
The following table summarizes estimated shareholder transaction and annual
operating expenses for each Fund and its underlying Portfolios*. For more
information on costs and expenses, see "Management" -- page 21 and "General
Information -- Expenses" -- page 29.**
<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
(AS A PERCENTAGE OF AVERAGE
NET ASSETS):
Management Fees 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 (after fee waivers and 0.25% 0.25% 0.35% 0.35%
reimbursements)(2)
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Total Fund Operating Expenses(2) 1.50% 1.50% 1.60% 1.60%
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</TABLE>
(1)Includes fees for distribution and shareholder servicing.
(2)Absent fee waivers and reimbursements, "Other Expenses" and "Total Fund
Operating Expenses" would be 0.50% and 1.75% for CitiSelect Folio 200 and
0.27% and 1.52% for CitiSelect Folio 300.
*Each Fund invests in multiple Portfolios which are series of separately
registered investment companies. Each Fund's "Total Fund Operating
Expenses" listed above includes the Fund's pro-rata share of each
Portfolio's expenses. The total operating expenses of each Portfolio are
estimated to be 0.49% for Short-Term Portfolio, 0.60% for Intermediate
Income Portfolio, 0.78% for Large Cap Value Portfolio, 0.89% for Small Cap
Value Portfolio, 0.97% for International Portfolio, 0.74% for Foreign Bond
Portfolio, 0.88% for Small Cap Growth Portfolio, and 0.71% for Large Cap
Growth Portfolio.
**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. Expenses in the table and in the Example below are based on
the Funds' fiscal year ended October 31, 1997, as adjusted for current year
operating expenses. There can be no assurance that the fee waivers and
reimbursements reflected in the table will continue. Long-term shareholders
in a Fund could pay more in distribution 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 THREE FIVE TEN
YEAR YEARS YEARS YEARS
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CITISELECT FOLIO 200 $15 $47 $82 $179
CITISELECT FOLIO 300 $15 $47 $82 $179
CITISELECT FOLIO 400 $16 $50 $87 $190
CITISELECT FOLIO 500 $16 $50 $87 $190
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The Example assumes a 5% annual return and that all dividends are reinvested and
reflects certain voluntary fee waivers and reimbursements. If fee waivers and
reimbursements were not made, the amounts in the example would be $18, $55, $95,
and $206 for CitiSelect Folio 200 and $15, $48, $83, and $181 for CitiSelect
Folio 300. 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.
<PAGE>
CONDENSED FINANCIAL INFORMATION
The following tables provide condensed financial information about the Funds for
the periods indicated. This information should be read in conjunction with the
financial statements appearing in the Funds' Annual Report to Shareholders,
which are incorporated by reference in the Statement of Additional Information.
The financial statements and notes, as well as the table below, have been
audited by Price Waterhouse LLP, independent accountants. The accountants'
reports are included in the Funds' Annual Report. Copies of the Annual Report
may be obtained without charge from an investor's Service Agent or by calling
1-800-625-4554.
<TABLE>
<CAPTION>
CITISELECT FOLIO 200 CITISELECT FOLIO 300 CITISELECT FOLIO 400 CITISELECT FOLIO 500
TEN MONTHS JUNE 17, TEN MONTHS JUNE 17, TEN MONTHS JUNE 17, TEN MONTHS SEPT. 3,
ENDED 1996+ TO ENDED 1996+ TO ENDED 1996+ TO ENDED 1996+ TO
OCT. 31, DEC. 31, OCT. 31, DEC. 31, OCT. 31, DEC. 31, OCT. 31, DEC. 31,
1997(B) 1996 1997(B) 1996 1997(B) 1996 1997(B) 1996
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<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 10.50 $ 10.00 $ 10.66 $ 10.00 $ 10.82 $ 10.00 $ 10.69 $ 10.00
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INCOME FROM
OPERATIONS:
Net investment
income ............ 0.138 0.128 0.101 0.088 0.037 0.042 0.044 0.019
Net realized and
unrealized gain on
investments . 0.722 0.506 0.974 0.671 1.183 0.841 1.346 0.701
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Total from
operations ...... 0.860 0.634 1.075 0.759 1.220 0.883 1.390 0.720
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LESS DISTRIBUTIONS FROM:
Net investment
income ............ (0.007) (0.112) (0.002) (0.075) (0.003) (0.029) -- (0.019)
Net realized gain on
investments ....... (0.023) (0.022) (0.023) (0.024) (0.027) (0.034) -- --
In excess of net
income ............ -- -- -- -- -- -- -- (0.001)
In excess of
realized gains on
investments ....... -- -- -- -- -- -- -- (0.010)
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Total
distributions ... (0.030) (0.134) (0.025) (0.099) (0.030) (0.063) -- (0.030)
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Net Asset Value, end
of period .......... $ 11.33 $ 10.50 $ 11.71 $ 10.66 $ 12.01 $ 10.82 $ 12.08 $ 10.69
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RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of
period (000's
omitted) ............ $166,203 $102,775 $325,193 $195,428 $455,747 $253,556 $202,823 $85,072
Ratio of expenses to
average net assets(A) 1.50%* 1.50%* 1.50%* 1.50%* 1.65%* 1.75%* 1.72%* 1.75%*
Ratio of net
investment income
to average net
assets ............ 2.88%* 2.84%* 2.30%* 2.38%* 1.39%* 1.39%* 0.88%* 1.09%*
Total return ....... 8.21%** 6.38%** 10.09%** 7.61%** 11.28%** 8.84%** 13.00%** 7.20%**
Note: If agents of the Funds and the agents of Asset Allocation Portfolios had not voluntarily agreed to waive a portion of
their fees, and the Sub-administrator not assumed expenses for the periods indicated, the net investment income per share
and the ratios would have been as follows:
Net investment
income (loss) per
share ............. $ 0.126 $ 0.076 $ 0.100 $ 0.060 $ 0.037 $ 0.028 $ 0.040 $ 0.001
Ratios:
Expenses to average
net assets (A) .... 1.75%* 2.66%* 1.52%* 2.26%* 1.65%* 2.20%* 1.80%* 2.80%*
Net investment
income to average
net assets ........ 2.63%* 1.68%* 2.28%* 1.62%* 1.39%* 0.93%* 0.80%* 0.04%*
(A) Includes allocated expenses for the periods indicated, for CitiSelect Folio 200, CitiSelect Folio 300, CitiSelect Folio 400,
and CitiSelect Folio 500 share of Asset Allocation Portfolio 200, Asset Allocation Portfolio 300, Asset Allocation Portfolio
400 and Asset Allocation Portfolio 500, respectively.
(B) The Fund changed its fiscal year end from December 31 to October 31.
* Annualized.
** Not annualized.
+ Commencement of Operations.
</TABLE>
<PAGE>
INVESTMENT INFORMATION
INVESTMENT OBJECTIVES: Each Fund is a total return fund that allocates its
investments among three primary classes of assets -- equity, fixed income and
money market securities. Each Fund's asset mix is designed to offer a different
level of potential return within a corresponding level of risk. The investment
objective of each Fund is as follows:
The investment objective of CitiSelect Folio 200 is as high a total return over
time as is consistent with a primary emphasis on a combination of fixed income
and money market securities, and a secondary emphasis on equity securities.
The investment objective of CitiSelect Folio 300 is as high a total return over
time as is consistent with a balanced emphasis on equity and fixed income
securities.
The investment objective of CitiSelect Folio 400 is as high a total return over
time as is consistent with a primary emphasis on equity securities, and a
secondary emphasis on fixed income securities.
The investment objective of CitiSelect Folio 500 is as high a total return over
time as is consistent with a dominant emphasis on equity securities and a small
allocation to fixed income securities.
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
CitiSelect Folio 200 is expected to be the least volatile of the four Funds and
is designed for the investor who is seeking relatively lower risk provided by
substantial investments in fixed income and money market securities, but who
also seeks some capital growth. CitiSelect Folio 300 is designed for the
investor seeking a balanced approach by emphasizing stocks for their higher
capital appreciation potential but retaining a significant fixed income
investment 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 the investor who
can withstand greater market swings to seek potential long-term rewards.
CitiSelect Folio 400 is designed for the investor 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. As the Funds' investment
manager, Citibank allocates each Fund's assets among these three classes of
investments to seek to achieve certain risk and return objectives. 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. 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 typically 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 asset 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
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%
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 a Fund with the potential for higher
returns with lower overall volatility.
From time to time the Funds 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.
The following Subadvisers are responsible for the daily management of the
following kinds of securities: 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.
Each Fund invests in multiple Portfolios. Each Portfolio invests directly in
securities in a particular asset class, such as large capitalization growth
securities and related investments, or foreign government securities and related
investments. As a result, all of the Funds' securities in a particular asset
class are managed in a single pool.
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
within the top 1,000 stocks of the equity market. 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 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 Ratings 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 30. 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. For the periods
June 17, 1996 (September 3, 1996 for CitiSelect Folio 500) (commencement of
operations) through December 31, 1996 and January 1, 1997 through October 31,
1997, the portfolio turnover rates for the Funds were as follows: CitiSelect
Folio 200, 147% and 177%, respectively; CitiSelect Folio 300, 132% and 154%,
respectively; CitiSelect Folio 400, 130% and 151%, respectively; and CitiSelect
Folio 500, 27% and 92%, respectively. 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. Each Fund is 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 the Fund 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
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 a 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 30.
VALUATION OF SHARES
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 Portfolios), 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 generally 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 asset 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.
Service Agents may receive certain fees from the Distributor and/ or the Funds.
See "Management -- Distribution Arrangements." Customers should contact their
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.
From time to time the Distributor may make payments for distribution and/or
shareholder servicing activities out of its past profits and other sources
available to it. The Distributor also may make payments for marketing,
promotional or related expenses to dealers who engage in marketing efforts on
behalf of the Funds. The amounts of these payments will be determined by the
Distributor in its sole discretion and may vary among different dealers.
EXCHANGES
Shares of each Fund may be exchanged without charge for shares of each other
Fund and for shares of certain other CitiFunds,(SM) and may be acquired through
an exchange of shares of those funds.
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 is received and accepted 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 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, if any, from dividends and interest
is paid to its shareholders of record as a dividend as follows:
For CitiSelect Folio 200 and CitiSelect Folio 300, quarterly on or about the
last day of March, June, September and December.
For CitiSelect Folio 400 and CitiSelect Folio 500, annually on or about the last
day of 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
CitiFunds Trust I. Each Portfolio is supervised by the Board of Trustees of
Asset Allocation Portfolios or The Premium Portfolios, as the case may be. 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: 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 $88 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 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 since 1995, 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. Prior to joining Citibank in 1995, Mr. Keblusek, who has 25 years
experience in the investment management industry, was 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.
The following individuals at Citibank are responsible for daily management of
the following kinds of securities of the Funds (and related investments).
LARGE CAPITALIZATION GROWTH SECURITIES
Grant D. Hobson and Richard Goldman, Vice Presidents, have been responsible for
the daily management of large cap growth securities since November, 1997. Since
joining Citibank in 1993, Mr. Hobson has been responsible for managing U.S.
equity portfolios for mutual funds, trust and pension accounts of Citibank
Global Asset Management and currently manages, or co-manages, more than $4
billion of total assets at Citibank. Prior to joining Citibank, Mr. Hobson was a
securities analyst and sector manager for pension accounts and mutual funds for
Axe Houghton, formerly a division of USF&G. Since 1994, Mr. Goldman has been
responsible for managing U.S. equity portfolios for mutual funds and
institutional accounts, and for quantitative equity research for the U.S.
institutional business of Citibank Global Asset Management. He currently
manages, or co-manages, approximately $4 billion of total assets at Citibank. He
joined Citicorp's Investment Management Division in 1985 and from 1988 to 1994
was responsible for running Citicorp's Institutional Investor Relations
Department.
SMALL CAPITALIZATION GROWTH SECURITIES
Linda J. Intini, Vice President, has been responsible for the daily management
of small cap growth securities since February 1997. Ms. Intini has over nine
years of experience specializing in the management of small cap equities,
including over $300 million of Citibank's small cap portfolios for trusts and
individuals. Prior to joining Citibank as a portfolio manager in 1992, she was a
Portfolio Manager and Research Analyst with Manufacturers Hanover in the Special
Equity area. She also specialized in equity research at Eberstadt Fleming.
DOMESTIC FIXED INCOME SECURITIES
Mark Lindbloom, Vice President, has been responsible for the daily management of
domestic fixed income securities since the Funds' inception, and has been a
portfolio manager for fixed income securities since joining Citibank in 1986.
Mr. Lindbloom has more than 12 years of investment management experience. Prior
to joining Citibank, 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 has managed
the Liquidity Management Unit of the U.S. Fixed Income Department of Citibank
Global Asset Management since joining Citibank in 1993. Prior to joining
Citibank, 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.
The following Subadvisers are responsible for the daily management of the
following kinds of securities of the Funds (and related investments).
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. Miller Anderson is an indirect, wholly-owned subsidiary of Morgan
Stanley, Dean Witter, Discover & Co., a financial services company with three
major businesses: full service brokerage, credit services and asset management.
Robert Marcin, CFA, has been responsible for the daily management of large cap
value securities since the Funds' inception. Mr. Marcin has been an investment
professional with Miller Anderson since 1988.
SMALL CAPITALIZATION VALUE SECURITIES
Franklin Advisory Services, Inc., One Parker Plaza, 16th Floor, Fort Lee, New
Jersey 07024. Franklin Advisory Services, a wholly-owned subsidiary of
Franklin Resources, Inc., is a registered investment adviser. William J.
Lippman, President of Franklin Advisory Services or its predecessor since
1988, has been responsible for the daily management of U.S. small
capitalization value securities since the Funds' inception. Mr. Lippman also
serves as Senior Vice President of Franklin Resources, Inc. and Franklin
Advisers, Inc. He has been in the securities industry for over 30 years and
with the Franklin Templeton Group since 1988.
INTERNATIONAL EQUITY SECURITIES
Hotchkis and Wiley, 800 West Sixth Street, Fifth Floor, Los Angeles, California
90017. Hotchkis and Wiley is a division of the Merrill Lynch Capital Management
Group, which is an operating business unit of Merrill Lynch Asset Management,
L.P., 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 has served on the Investment Policy Committee at
Hotchkis and Wiley since joining the firm. Prior to joining the predecessor of
Hotchkis and Wiley in 1994, Mr. Hartford was with The Investment Bank of
Ireland, as a Senior Manager, where he gained 10 years of experience in both
international and global equity management. Prior to joining the predecessor of
Hotchkis and Wiley in 1990, 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's discussion of each Fund's performance is included in the Funds'
Annual Report to Shareholders, which investors may obtain without charge by
calling 1-800-625-4554.
Management Fees. For the services of Citibank under the Management Agreements
and the services of the Subadvisers, the Funds pay an aggregate 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.
The management fee is allocated among the Subadvisers at the annual rates equal
to the percentages specified below of the aggregate assets managed by the
particular Subadviser. Citibank retains any management fee in excess of amounts
payable to the Subadvisers. Citibank pays the Subadvisers' fees to the extent
they exceed the aggregate fee stated above.
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
For the period from January 1, 1997 to October 31, 1997, the management fees
paid to Citibank by CitiSelect Folio 200, CitiSelect Folio 300, CitiSelect Folio
400 and CitiSelect Folio 500 were 0.50%, 0.73%, 0.75% and 0.70% of the
applicable Fund's average daily net assets for that period, respectively.
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 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: CFBDS, Inc., 21 Milk Street, Boston, MA 02109
(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
as compensation for 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. In those states where CFBDS is not a registered
broker-dealer, shares of the Funds are sold through Signature Broker-Dealer
Services, Inc., as dealer.
The amounts paid by the Distributor to each Service Agent and other recipient
may vary based upon certain factors, including, among other things, the levels
of sales of Fund shares and/or shareholder services provided by the Service
Agent.
The Funds and the Distributor provide to the Trustees quarterly a written report
of amounts expended pursuant to the 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
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 and state income or federal excise taxes. Each Fund may pay
withholding or other taxes to foreign governments during the year, however, and
these taxes may 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. Such capital gains may be taxable to
shareholders that are individuals, estates or trusts at maximum rates of 20%,
25% or 28%, depending on the source of the gains.
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
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
ORGANIZATION: Each Fund is a series of CitiFunds Trust I. CitiFunds Trust 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. Prior
to March 2, 1998, CitiFunds Trust I was called Landmark Funds I.
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 Fund invests in multiple Portfolios. Each Portfolio is a series of Asset
Allocation Portfolios or The Premium Portfolios, New York trusts which are also
investment companies registered under the 1940 Act. Each Portfolio invests
directly in securities in a particular asset class, such as large capitalization
growth securities and related investments, or foreign government securities and
related investments. As a result, all of the Funds' securities in a particular
asset class are managed in a single pool.
VOTING AND OTHER RIGHTS: CitiFunds Trust 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 CitiFunds Trust I have equal voting rights except that, in
matters affecting only a particular series or class, only shares of that
particular series or class 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.
As a Massachusetts business trust, CitiFunds Trust I is 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
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 or the Fund's distributor, government
fees, taxes, accounting and legal fees, expenses of communicating with
shareholders, interest expense, and insurance premiums.
For the period from June 17, 1996 (September 3, 1996, for CitiSelect Folio 500),
commencement of operations of the Funds, through December 31, 1996, the
annualized expenses of each Fund (expressed as a percentage of the Fund's
average daily net assets for that period) were 1.50% for CitiSelect Folio 200
and CitiSelect Folio 300; and 1.75% for CitiSelect Folio 400 and CitiSelect
Folio 500. For the period from January 1, 1997 to October 31, 1997, the
annualized expenses of each Fund (expressed as a percentage of the Fund's
average daily net assets for that period) were 1.50% for CitiSelect Folio 200
and CitiSelect Folio 300, 1.65% for CitiSelect Folio 400 and 1.72% for
CitiSelect Folio 500.
All fee waivers and reimbursements are voluntary and may be reduced or
terminated at any time.
COUNSEL AND INDEPENDENT AUDITOR: Bingham Dana LLP, 150 Federal Street, Boston,
MA 02110, is counsel for each Fund. Price Waterhouse LLP, 160 Federal Street,
Boston MA 02110, 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, and (vi) 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
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 reverse repurchase agreement, a Fund could experience
delays in recovering either the securities or cash. To the extent that, in the
meantime, the value of the securities loaned or sold has increased or the value
of the securities purchased has decreased, the Fund could experience a loss.
Convertible Securities. Each Fund may invest in convertible securities. A
convertible security is a fixed-income security (a bond or preferred stock)
which may be converted at a stated price within a specified period of time into
a certain quantity of common stock or other equity securities of the same or a
different issuer. Convertible securities rank senior to common stock in a
corporation's capital structure but are usually subordinated to similar
non-convertible securities. While providing a fixed-income stream (generally
higher in yield than the income derivable from common stock but lower than that
afforded by a similar non-convertible security), a convertible security also
affords an investor the opportunity, through its conversion feature, to
participate in the capital appreciation attendant upon a market price advance in
the convertible security's underlying common stock. Convertible securities
purchased are not subject to the rating requirements applicable to the Funds'
purchase of fixed income investments.
In general, the market value of a convertible security is at least the higher of
its "investment value" (i.e., its value as a fixed-income security) or its
"conversion value" (i.e., its value upon conversion into its underlying stock).
As a fixed-income security, a convertible security tends to increase in market
value when interest rates decline and tends to decrease in value when interest
rates rise. However, the price of a convertible security is also influenced by
the market value of the security's underlying common stock. The price of a
convertible security tends to increase as the market value of the underlying
stock rises, whereas it tends to decrease as the market value of the underlying
stock declines. While no securities investment is without some risk, investments
in convertible securities generally entail less risk than investments in the
common stock of the same issuer.
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, 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.
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.
Each Fund may also enter into proxy hedges and cross hedges. In a proxy hedge,
which generally is less costly than a direct hedge, a Fund, having purchased a
security, will sell a currency whose value is believed to be closely linked to
the currency in which the security is denominated. Interest rates prevailing in
the country whose currency was sold would be expected to be closer to those in
the U.S. and lower than those of securities denominated in the currency of the
original holding. This type of hedging entails greater risk than a direct hedge
because it is dependent on a stable relationship between the two currencies
paired as proxies and the relationships can be very unstable at times. A Fund
may enter into a cross hedge if a particular currency is expected to decrease
against another currency. The Fund would sell the currency expected to decrease
and purchase a currency which is expected to increase against the currency sold
in an amount equal to some or all of the Fund's holdings denominated in the
currency sold.
Entering into 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 and securities of comparable quality, 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. When interest rates go
up, mortgage-backed securities experience lower rates of prepayment. This has
the effect of lengthening the expected maturity of a mortgage-backed security.
As a result, prices of mortgage-backed securities may decrease more than prices
of other debt obligations when interest rates go up.
Additionally mortgage-backed securities are also subject to maturity extension
risk, that is, the possibility that rising interest rates may cause prepayments
to occur at a slower than expected rate. This particular risk may effectively
convert a security that was considered short or intermediate-term at the time of
purchase into a long-term security. Long-term securities generally fluctuate
more widely in response to changes in interest rates than short or
intermediate-term securities. Thus, a rising interest rate would not only likely
decrease the value of a Fund's securities, but would also increase the inherent
volatility of the Fund by effectively converting short term debt instruments
into long term debt instruments.
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.
Swaps and Related Transactions. Each Fund may enter into swap agreements with
other institutional investors with respect to foreign currencies, interest rates
and securities indexes and may enter into other types of available swap
agreements, such as caps, collars and floors, for the purpose of attempting to
obtain a particular desired return at a lower cost to the Fund than if the Fund
had invested directly in an instrument that yielded that desired return. In a
standard swap agreement, two parties agree to exchange the returns (or
differentials in rates of return) earned or realized on a particular
predetermined investment or investments.
Each Fund may also purchase and sell caps, floors and collars. In a typical cap
or floor agreement, one party agrees to make payments only under specified
circumstances, usually in return for payment of a fee by the counterparty. For
example, the purchase of an interest rate cap entitles the buyer, to the extent
that a specified index exceeds a predetermined interest rate, to receive
payments of interest on a contractually-based principal amount from the
counterparty selling such interest rate cap. The sale of an interest rate floor
obligates the seller to make payments to the extent that a specified interest
rate falls below an agreed-upon level. A collar arrangement combines elements of
buying and selling a floor.
Swap agreements are subject to each Fund's overall limit that not more than 10%
of its net assets may be invested in illiquid securities, and no Fund will enter
into a swap agreement with any single party if the net amount owed or to be
received under existing contracts with that party would exceed 5% of the Fund's
assets.
Futures. Because the value of a futures contract changes based on the price of
the underlying security or other asset, futures contracts are considered to be
"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
the Fund'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
the Fund'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. Purchases 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 SEC 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.
Options, futures contracts, options on futures contracts, forward contracts and
swaps may be used alone or in combinations in order to create synthetic exposure
to securities in which a Fund otherwise invests, such as non-U.S. government
securities. In such instances, the Fund will also be subject to the risks
associated with these types of securities, such as counterparty risk in swap
transactions.
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