<PAGE>
Rule 497(c) File Nos. 2-90518 and 811-4006
MARCH 1, 1999
PROSPECTUS
CitiSelect(R) Portfolios
A FAMILY OF ASSET ALLOCATION MUTUAL FUNDS
MANAGED BY CITIBANK, N.A.
CITISELECT(R) FOLIO 200
CITISELECT(R) FOLIO 300
CITISELECT(R) FOLIO 400
CITISELECT(R) FOLIO 500
CLASS A AND CLASS B SHARES
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the accuracy of this prospectus, and any
representation to the contrary is a criminal offense.
<PAGE>
Table of Contents
FUNDS AT A GLANCE ...................................................... 3
YOUR CITISELECT ACCOUNT ................................................ 23
CHOOSING A SHARE CLASS .............................................. 23
HOW TO BUY SHARES ................................................... 31
HOW THE PRICE OF YOUR SHARES IS CALCULATED 32
HOW TO SELL SHARES .................................................. 32
REINSTATING RECENTLY SOLD SHARES .................................... 34
EXCHANGES ........................................................... 34
DIVIDENDS ........................................................... 36
TAX MATTERS ......................................................... 36
MANAGEMENT OF THE FUNDS ................................................ 38
MANAGER ............................................................. 38
MANAGEMENT FEES ..................................................... 43
MORE ABOUT THE FUNDS ................................................... 44
PRINCIPAL INVESTMENT STRATEGIES ..................................... 44
RISKS ............................................................... 55
FINANCIAL HIGHLIGHTS ................................................... A-1
APPENDIX ............................................................... B-1
<PAGE>
FUNDS AT A GLANCE
Funds at a Glance
The four diversified mutual funds described in this prospectus
are asset allocation funds. Each Fund invests in a carefully
selected mix of equity, fixed income and money market
securities that is designed by Citibank to offer a different
level of potential return with a corresponding amount of risk.
For example, CitiSelect Folio 200 is designed to provide the
lowest relative risk, but with a lower level of potential
return. CitiSelect Folio 500 is designed to provide the
highest potential for return, but with the highest risk. Your
investment objective, your investment time frame and your
comfort level with risk will help you decide which Fund to
consider.
Each Fund has its own investment goal and its own mix of
investments. Of course, there is no assurance that any Fund
will achieve its goal.
This summary briefly describes each of the Funds and the
principal risks of investing. Please note that each Fund
invests in securities through several underlying mutual funds.
For more information, see "More About the Funds" on page 44.
FUND GOALS
CITISELECT FOLIO 200
This Fund's goal 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.
CITISELECT FOLIO 300
This Fund's goal is as high a total return over time as is
consistent with a balanced emphasis on equity and fixed income
securities.
CITISELECT FOLIO 400
This Fund's goal 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.
CITISELECT FOLIO 500
This Fund's goal 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.
MAIN INVESTMENT STRATEGIES
Each Fund invests in a mix of equity, fixed income and money
market securities that is designed by Citibank to offer a
different level of potential return with a different amount of
risk. The Funds' equity securities may include common stocks,
preferred stocks, securities convertible into common stocks,
warrants and depositary receipts (receipts representing the
right to receive securities of foreign issuers deposited in a
U.S. bank or a local branch of a foreign bank). The Funds'
fixed income and money market securities may include bonds,
short-term notes, mortgage-backed and asset-backed securities,
certificates of deposit and repurchase agreements.
Please note that these Funds seek high total returns over
time. Current income is not a primary consideration.
o CITISELECT FOLIO 200 invests primarily in fixed income and money
market securities. A smaller allocation to equity securities gives
the potential for some capital growth. This Fund is expected to be
the least volatile of the Funds.
o CITISELECT FOLIO 300 emphasizes both equity and fixed income
securities. This balanced mix offers the growth potential of stocks
with the lower volatility of fixed income securities.
o CITISELECT FOLIO 400 and CITISELECT FOLIO 500 invest primarily in
equity securities. They may invest more of their assets in
international securities and small cap securities. CitiSelect Folio
500 is expected to be the most volatile of the Funds.
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ASSET CLASS RANGE*
FIXED MONEY
EQUITY INCOME MARKET
..............................................................................
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%
- --------------------------------------------------------------------------------
*If derivatives or other investment techniques are used in managing the assets
of an asset class, those derivatives or other investment techniques will be
counted as part of the assets in that asset class. Similarly, if cash is
received by the underlying funds in the equity or fixed income asset class,
and the cash is temporarily invested in short-term money market instruments,
those instruments will be included in the percentage limitations for that
asset class, rather than the money market asset class.
Each Fund's assets are allocated among the broad asset classes
(equity, fixed income and money market) as shown in the chart
above. Citibank may further allocate assets among various sub-
categories of the equity and fixed income asset classes,
seeking to minimize risk and volatility and to maximize
returns. There are no restrictions on the amount of a Fund's
assets that may be allocated to any particular sub-category
and Citibank is not required to allocate each Fund's assets
among all of these types of equity and fixed income securities
at all times.
Equity securities may be allocated among:
o large cap growth securities
o large cap value securities
o small cap growth securities
o small cap value securities
o international securities
Fixed income securities may be allocated among:
o U.S. government and corporate bonds
o foreign government bonds
o short-term debt
While Citibank generally allocates each Fund's assets within
the percentage ranges shown in the chart above, cash flows
into or out of a Fund, or market fluctuations, could produce
different results. Citibank monitors each Fund's asset mix
daily and conducts quarterly reviews to determine whether to
rebalance the Fund's investments. Rebalancing may be
accomplished over a period of time, subject to any regulatory
restrictions.
Citibank invests at least 25%, and possibly up to 100%, of the
assets in the money market class in bank obligations.
Citibank also allocates assets among different subadvisers who
specialize in managing particular kinds of securities or
managing in a particular style. This may help the Funds
benefit from different investment cycles, such as periods when
equities with different characteristics (i.e., growth or
value) perform differently. Citibank monitors and supervises
all of the Funds' subadvisers and may terminate the services
of any subadviser at any time.
The Funds may use derivatives in order to protect (or "hedge")
against changes in interest rates, currency fluctuations or
the prices of securities held or to be bought. The Funds may
also use a wide variety of derivatives for non-hedging
purposes, to enhance potential gains or generate income. In
addition, the Funds may use derivatives to manage the maturity
or duration of fixed income securities. Derivatives that the
Funds may use include futures (including bond, interest rate
and stock index futures), options on securities and on futures
(including options on interest rate and stock index futures),
interest rate swaps, equity swaps, and other types of
available swap agreements, including caps, collars and floors.
The Funds may also enter into foreign currency exchange
contracts, purchase or sell foreign currency futures, or
purchase or write options on foreign currencies, or enter into
currency swaps and other similar transactions. Derivatives may
be used alone or in combination with other derivatives.
The Funds' use of derivatives may involve leveraging. Under
leveraging, a relatively small investment may produce
substantial losses or gains for a Fund, well beyond the Fund's
initial investment.
The Funds may use other investment techniques, such as short
sales, which also may entail leveraging, in that a Fund's
losses from short sales may be unlimited.
MAIN RISKS
As with all mutual funds, you may lose money if you invest in
these Funds. The principal risks of investing in CitiSelect
Portfolios are described below. Please remember that the risks
of investing in each Fund depend on the securities it holds
and the investment strategies it uses. For example, Funds
investing more of their assets in fixed income securities may
be more susceptible to interest rate risk and credit risk than
Funds investing more of their assets in equity securities.
Conversely, Funds investing more of their assets in equity
securities may be susceptible to greater price volatility than
Funds investing more of their assets in fixed income
securities. See page 55 for more information about risks.
o MARKET RISK. This is the risk that the prices of securities will
rise or fall due to changing economic, political or market
conditions, or due to a company's individual situation. The value
of the Funds' shares will change daily as the value of their
underlying securities change. This means that your shares may be
worth more or less when you sell them than when you bought them.
It is also possible that the Funds will not perform as intended.
For example, CitiSelect Folio 200 is expected to be the least
volatile of the Funds. However, under certain market conditions
this Fund could be the most volatile.
o EQUITY SECURITIES. Equity securities are subject to market risk
that historically has resulted in greater price volatility than
exhibited by fixed income securities.
o INTEREST RATE RISK. In general, the prices of debt securities rise
when interest rates fall, and fall when interest rates rise.
Longer term obligations are usually more sensitive to interest
rate changes. A change in interest rates could cause the Funds'
share prices to go down.
o CREDIT RISK. Some issuers may not make payments on debt securities
held by the Funds, causing a loss. Or, an issuer's financial
condition may deteriorate, lowering the credit quality of a
security and leading to greater volatility in the price of the
security and in shares of a Fund. The prices of lower rated
securities often are more volatile than those of higher rated
securities.
o FOREIGN SECURITIES. Investments in foreign securities involve
risks relating to adverse political, social and economic
developments abroad, as well as risks resulting from the
differences between the regulations to which U.S. and foreign
issuers and markets are subject. These risks may include
expropriation of assets, confiscatory taxation, withholding taxes
on dividends and interest paid on Fund investments, fluctuations
in currency exchange rates, currency exchange controls and other
limitations on the use or transfer of assets by a Fund or issuers
of securities, and political or social instability. There may be
rapid changes in the value of foreign currencies or securities,
causing the Funds' share prices to be volatile. Also, in certain
circumstances, the Funds could realize reduced or no value in U.S.
dollars from their investments in foreign securities, causing the
Funds' share prices to go down.
Each Fund may invest in issuers located in emerging, or
developing, markets. All of the risks of investing in foreign
securities are heightened by investing in these markets.
o BANK OBLIGATIONS. Banks, and thus bank obligations, are sensitive
to changes in money market and general economic conditions, as
well as decisions by regulators that can affect banks'
profitability.
o SMALLER COMPANIES. The securities of smaller capitalized companies
may have more risks than those of larger, more seasoned companies.
They may be particularly susceptible to market downturns and their
prices may be more volatile, causing the Funds' share prices to be
volatile.
o PREPAYMENT RISK. The issuers of debt securities held by a Fund may
be able to prepay principal due on the securities, particularly
during periods of declining interest rates. A Fund may not be able
to reinvest that principal at attractive rates, reducing income to
the Fund, and the Fund may lose any premium paid. On the other
hand, rising interest rates may cause prepayments to occur at
slower than expected rates. This effectively lengthens the
maturities of the affected securities, making them more sensitive
to interest rate changes and a Fund's share price more volatile.
Mortgage-backed securities are particularly susceptible to
prepayment risk and their prices may be very volatile.
o SPECIAL CHARACTERISTICS OF CONVERTIBLE SECURITIES. Convertible
securities, which are debt securities that may be converted into
stock, are subject to the market risk of stocks, and, like other
debt securities, are also subject to interest rate risk and the
credit risk of their issuers.
o DERIVATIVES. The Funds' use of derivatives, particularly for
non-hedging purposes, may be risky. This practice could result in
losses that are not offset by gains on other portfolio assets,
causing the Funds' share prices to go down. Each Fund's ability to
use derivatives successfully depends on the ability of the Fund's
portfolio managers to accurately predict movements in stock
prices, interest rates, currency exchange rates or other economic
factors. If these predictions are wrong, the Fund could suffer
greater losses than if the Fund had not used derivatives.
Some of the Funds' use of derivatives may involve leveraging.
Leveraging adds increased risks to a Fund, because the Fund's
losses may be out of proportion to the amount invested in the
instrument -- a relatively small investment may lead to much
greater losses.
o SHORT SALES. The Funds may engage in short sales. Losses from
short sales may be unlimited.
Please note that an investment in the Funds is not a deposit
of Citibank and is not insured or guaranteed by the Federal
Deposit Insurance Corporation or any other government agency.
WHO MAY WANT TO INVEST
You should keep in mind that an investment in CitiSelect
Portfolios is not a complete investment program.
You should consider investing in CitiSelect Portfolios if your
investment horizon is long term -- typically at least five
years -- and you are seeking to reduce the risks of investing
in a single asset or type of asset, and to cushion the
volatility of financial markets by investing in diversified
portfolios of several types of assets. The Funds offer a
convenient way to own a portfolio tailored to specific
investment goals.
o CITISELECT FOLIO 200 is designed for investors seeking relatively
lower risk provided by substantial investments in fixed income and
money market securities, but who also seek some capital growth.
o CITISELECT FOLIO 300 is designed for investors seeking a balanced
approach by emphasizing stocks for their higher capital
appreciation potential but retaining a significant fixed income
component to temper volatility.
o CITISELECT FOLIO 400 and CITISELECT FOLIO 500 are designed for
investors willing and able to take higher risks in the pursuit of
long-term capital appreciation. CitiSelect Folio 500 is designed
for investors who can withstand greater market swings to seek
potential long-term rewards. CitiSelect Folio 400 is designed for
investors seeking long-term rewards, but with less volatility.
Don't invest in CitiSelect Portfolios if:
o You are not prepared to accept daily share price fluctuations and
possible losses.
o You are seeking current income.
<PAGE>
Fund Performance
The following bar charts and tables can help you evaluate the
risks of investing in each Fund, and how its returns have
varied over time.
o The bar charts show changes in the Funds' performance from year to
year. The charts and related information do not take into account
any sales charges that you may be required to pay. Any sales
charges will reduce your return.
o The tables show how the Funds' average annual returns for the
periods indicated compare, in each case, to several broad measures
of stock performance and bond performance. Please remember that,
unlike the Funds, the market indexes do not include the costs of
buying and selling securities and other Fund expenses.
o In both the charts and tables, the returns shown for the Funds are
for periods before the creation of share classes on January 4,
1999. All existing Fund shares were designated Class A shares on
that date. Prior to that date, there were no sales charges on the
purchase or sale of Fund shares. The returns for Class A in the
tables, but not the bar charts, have been adjusted to reflect the
maximum front-end sales charge currently applicable to the Class A
shares.
o The Class B shares are newly offered commencing January 4, 1999.
Class B performance would have been lower than that shown for
Class A shares, because of higher fund expenses and the effects of
the contingent deferred sales charge.
When you consider this information, please remember that the
Funds' past performance is not necessarily an indication of
how they will perform in the future.
<PAGE>
CITISELECT FOLIO 200
TOTAL RETURN
(per calendar year -- Class A)
- --------------------------------------------------------------------------------
CITISELECT FOLIO 200
1997 .................... 8.03%
1998 .................... 6.94%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
HIGHEST AND LOWEST RETURNS
FOR CALENDAR QUARTERS COVERED BY THE BAR CHART
..............................................................................
Quarter Ending
..............................................................................
Highest 6.71% June 30, 1997
..............................................................................
Lowest (4.27%) September 30, 1998
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- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
AS OF DECEMBER 31, 1998
..............................................................................
Life of Fund
Since
1 Year June 17, 1996
..............................................................................
Class A 2.13% 3.57%
..............................................................................
Class B N/A N/A
..............................................................................
Lehman Aggregate Bond Index 8.69% *
..............................................................................
S&P 500 Index 28.58% 29.58%
..............................................................................
Russell 2000 Index (2.55%) 8.59%
..............................................................................
MSCI-EAFE Index 20.33% 9.31%
..............................................................................
Salomon Bros. Non-$ World Gov't Bond Index 17.80% 7.28%
- --------------------------------------------------------------------------------
*Information regarding performance for this period is not available.
<PAGE>
CITISELECT FOLIO 300
TOTAL RETURN
(per calendar year -- Class A)
- --------------------------------------------------------------------------------
CITISELECT FOLIO 300
1997 .................... 9.86%
1998 .................... 6.59%
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HIGHEST AND LOWEST RETURNS
FOR CALENDAR QUARTERS COVERED BY THE BAR CHART
..............................................................................
Quarter Ending
..............................................................................
Highest 8.71% December 31, 1998
..............................................................................
Lowest (7.51%) September 30, 1998
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- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
AS OF DECEMBER 31, 1998
..............................................................................
Life of Fund
Since
1 Year June 17, 1996
..............................................................................
Class A 1.79% 4.60%
..............................................................................
Class B N/A N/A
..............................................................................
Lehman Aggregate Bond Index 8.69% *
..............................................................................
S&P 500 Index 28.58% 29.58%
..............................................................................
Russell 2000 Index (2.55%) 8.59%
..............................................................................
MSCI-EAFE Index 20.33% 9.31%
..............................................................................
Salomon Bros. Non-$ World Gov't Bond Index 17.80% 7.28%
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*Information regarding performance for this period is not available.
<PAGE>
CITISELECT FOLIO 400
TOTAL RETURN
(per calendar year -- Class A)
- --------------------------------------------------------------------------------
CITISELECT FOLIO 400
1997 .................... 10.25%
1998 .................... 4.54%
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HIGHEST AND LOWEST RETURNS
FOR CALENDAR QUARTERS COVERED BY THE BAR CHART
..............................................................................
Quarter Ending
..............................................................................
Highest 11.99% December 31, 1998
..............................................................................
Lowest (12.76%) September 30, 1998
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AVERAGE ANNUAL TOTAL RETURNS
AS OF DECEMBER 31, 1998
..............................................................................
Life of Fund
Since
1 Year June 17, 1996
..............................................................................
Class A (0.69%) 3.86%
..............................................................................
Class B N/A N/A
..............................................................................
Lehman Aggregate Bond Index 8.69% *
..............................................................................
S&P 500 Index 28.58% 29.58%
..............................................................................
Russell 2000 Index (2.55%) 8.59%
..............................................................................
MSCI-EAFE Index 20.33% 9.31%
..............................................................................
Salomon Bros. Non-$ World Gov't Bond Index 17.80% 7.28%
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*Information regarding performance for this period is not available.
<PAGE>
CITISELECT FOLIO 500
TOTAL RETURN
(per calendar year -- Class A)
- --------------------------------------------------------------------------------
CITISELECT FOLIO 500
1997 .................... 11.99%
1998 .................... 1.59%
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- --------------------------------------------------------------------------------
HIGHEST AND LOWEST RETURNS
FOR CALENDAR QUARTERS COVERED BY THE BAR CHART
..............................................................................
Quarter Ending
..............................................................................
Highest 13.92% December 31, 1998
..............................................................................
Lowest (17.57%) September 30, 1998
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AVERAGE ANNUAL TOTAL RETURNS
AS OF DECEMBER 31, 1998
..............................................................................
Life of Fund
Since
1 Year September 3, 1996
..............................................................................
Class A (3.49%) 3.46%
..............................................................................
Class B N/A N/A
..............................................................................
Lehman Aggregate Bond Index 8.69% *
..............................................................................
S&P 500 Index 28.58% 33.76%
..............................................................................
Russell 2000 Index (2.55%) 12.17%
..............................................................................
MSCI-EAFE Index 20.33% 11.49%
..............................................................................
Salomon Bros. Non-$ World Gov't Bond Index 17.80% 6.39%
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*Information regarding performance for this period is not available.
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Fund Fees and Expenses
These tables describe the fees and expenses that you may pay if you
buy and hold shares of the Funds.
- --------------------------------------------------------------------------------
SHAREHOLDER FEES
FEES PAID DIRECTLY FROM CITISELECT CITISELECT
YOUR INVESTMENT FOLIO 200 FOLIO 300
..............................................................................
SHARE CLASS
(Class descriptions begin on page 23) Class A Class B Class A Class B
..............................................................................
Maximum Sales Charge (Load)
Imposed on Purchases 4.50% None 4.50% None
..............................................................................
Maximum Deferred Sales Charge (Load) None(1) 4.50%(2) None(1) 4.50%(2)
- --------------------------------------------------------------------------------
ANNUAL FUND
OPERATING EXPENSES(3)
EXPENSES THAT ARE DEDUCTED
FROM FUND ASSETS
..............................................................................
Management Fees 0.75% 0.75% 0.75% 0.75%
..............................................................................
Distribution (12b-1) Fees 0.50% 0.75% 0.50% 0.75%
..............................................................................
Other Expenses (administrative, shareholder
servicing and other expenses) 0.25% 0.25% 0.25% 0.25%
..............................................................................
TOTAL ANNUAL FUND
OPERATING EXPENSES 1.50% 1.75% 1.50% 1.75%
- --------------------------------------------------------------------------------
(1) Except for investment of $500,000 or more.
(2) Class B shares have a contingent deferred sales charge (CDSC) which is
deducted from your sale proceeds if you sell your Class B shares within
five years of your original purchase of the shares. In the first year
after purchase, the CDSC is 4.50% of the price at which you purchased
your shares, or the price at which you sold your shares, whichever is
less, declining to 1.00% in the fifth year after purchase.
(3) Each Fund invests in multiple underlying mutual funds. This table
reflects the expenses of each Fund and the underlying funds in which it
invests.
<PAGE>
- --------------------------------------------------------------------------------
SHAREHOLDER FEES
FEES PAID DIRECTLY FROM CITISELECT CITISELECT
YOUR INVESTMENT FOLIO 400 FOLIO 500
..............................................................................
SHARE CLASS
(Class descriptions begin on page 23) Class A Class B Class A Class B
..............................................................................
Maximum Sales Charge (Load)
Imposed on Purchases 5.00% None 5.00% None
..............................................................................
Maximum Deferred Sales Charge (Load) None(1) 5.00%(2) None(1) 5.00%(2)
- --------------------------------------------------------------------------------
ANNUAL FUND
OPERATING EXPENSES(3)
EXPENSES THAT ARE DEDUCTED
FROM FUND ASSETS
..............................................................................
Management Fees 0.75% 0.75% 0.75% 0.75%
..............................................................................
Distribution (12b-1) Fees 0.50% 1.00% 0.50% 1.00%
..............................................................................
Other Expenses (administrative, shareholder
servicing and other expenses) 0.25% 0.25% 0.25% 0.25%
..............................................................................
TOTAL ANNUAL FUND
OPERATING EXPENSES 1.50% 2.00% 1.50% 2.00%
- --------------------------------------------------------------------------------
(1) Except for investment of $500,000 or more.
(2) Class B shares have a contingent deferred sales charge (CDSC) which is
deducted from your sale proceeds if you sell your Class B shares within
five years of your original purchase of the shares. In the first year
after purchase, the CDSC is 5.00% of the price at which you purchased
your shares, or the price at which you sold your shares, whichever is
less, declining to 1.00% in the fifth year after purchase.
(3) Each Fund invests in multiple underlying mutual funds. This table
reflects the expenses of each Fund and the underlying funds in which it
invests.
<PAGE>
EXAMPLE
These examples are intended to help you compare the cost of
investing in a Fund to the cost of investing in other mutual
funds. The examples assume that:
o you invest $10,000 in a Fund for the time periods indicated;
o you pay the maximum applicable sales charge;
o you reinvest all dividends; and
o you then sell all your shares at the end of those periods, if you
own Class A shares.
If you own Class B shares, two numbers are given, one showing
your expenses if you sold (redeemed) all your shares at the
end of each time period and one if you held onto your shares.
The examples also show the effects of the conversion of Class
B shares to Class A shares after 8 years.
The examples also assume that:
o each investment has a 5% return each year -- the assumption of a
5% return is required by the SEC for the purpose of these examples
and is not a prediction of any Fund's future performance; and
o the Funds' operating expenses shown in the Fund Fees and Expenses
table remain the same before taking into consideration any fee
waivers or reimbursements.
<PAGE>
Although your actual costs may be higher or lower, based on
these assumptions your costs would be:
- --------------------------------------------------------------------------------
CITISELECT FOLIO 200
..............................................................................
1 Year 3 Years 5 Years 10 Years
..............................................................................
Class A $596 $903 $1,232 $2,160
..............................................................................
Class B
..............................................................................
Assuming redemption at end of
period $628 $851 $1,049 $1,997
..............................................................................
Assuming no redemption $178 $551 $ 949 $1,997
- ------------------------------------------------------------------------------
CITISELECT FOLIO 300
..............................................................................
Class A $596 $903 $1,232 $2,160
..............................................................................
Class B
..............................................................................
Assuming redemption at end of
period $628 $851 $1,049 $1,997
..............................................................................
Assuming no redemption $178 $551 $ 949 $1,997
- ------------------------------------------------------------------------------
CITISELECT FOLIO 400
..............................................................................
Class A $645 $950 $1,278 $2,201
..............................................................................
Class B
..............................................................................
Assuming redemption at end of
period $703 $927 $1,178 $2,199
..............................................................................
Assuming no redemption $203 $627 $1,078 $2,199
- ------------------------------------------------------------------------------
CITISELECT FOLIO 500
..............................................................................
Class A $645 $950 $1,278 $2,201
..............................................................................
Class B
..............................................................................
Assuming redemption at end of
period $703 $927 $1,178 $2,199
..............................................................................
Assuming no redemption $203 $627 $1,078 $2,199
- --------------------------------------------------------------------------------
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<PAGE>
YOUR CITISELECT ACCOUNT
Your CitiSelect Account
CHOOSING A SHARE CLASS
Each Fund offers two share classes, Class A and Class B. Each
class has its own sales charge and expense structure. Please
read the information below carefully to help you decide which
share class is best for you.
CLASS A AT A GLANCE
o Front-end load -- there is an initial sales charge of 4.50% or
less (5.00% or less in the case of CitiSelect Folio 400 and
CitiSelect Folio 500)
o Lower sales charge rates for larger investments
o Annual distribution/service fee of up to 0.50%
o Lower annual expenses than Class B shares
CLASS B AT A GLANCE
o No initial sales charge
o The deferred sales charge declines from 4.50% (5.00% in the case
of CitiSelect Folio 400 and CitiSelect Folio 500) to 1% over five
years, and is eliminated if you hold your shares for six years or
more
o Annual distribution/service fee of up to 0.75% (1.00% in the case
of CitiSelect Folio 400 and CitiSelect Folio 500)
o Automatic conversion to Class A shares after 8 years
------------------------------------------------------------------
WHAT ARE DISTRIBUTION/SERVICE FEES?
Both Class A and Class B shares have annual DISTRIBUTION/
SERVICE FEES that are paid under a
12B-1 PLAN. These are fees, also called 12B-1 FEES, that are
deducted from Fund assets and are used to compensate those
financial professionals who sell fund shares and provide
ongoing services to shareholders and to pay other marketing
and advertising expenses. Because you pay these fees during
the whole period that you own the shares, over time you may
pay more than if you had paid other types of sales charges.
For this reason, you should consider the effects of 12b-1 fees
as well as sales loads when choosing a share class.
------------------------------------------------------------------
SALES CHARGES -- CLASS A SHARES
o Class A shares are sold at net asset value plus a front- end, or
initial, sales charge. The rate you pay goes down as the amount of
your investment in Class A shares goes up. The tables below show
the rate of sales charge that you pay, depending on the amount
that you purchase.
o The tables below also show the amount of broker/dealer
compensation that is paid out of the sales charge. This
compensation includes commissions and other fees that financial
professionals who sell shares of the Funds receive. The
distributor keeps up to approximately 10% of the sales charge
imposed on Class A shares. Financial professionals that sell Class
A shares will also receive the service fee payable on Class A
shares at an annual rate equal to 0.50% of the average daily net
assets represented by the Class A shares sold by them.
- --------------------------------------------------------------------------------
CITISELECT FOLIO 200 AND CITISELECT FOLIO 300
- ------------------------------------------------------------------------------
BROKER/
SALES CHARGE SALES CHARGE DEALER
AS A % OF AS A % OF COMMISSION
AMOUNT OF OFFERING YOUR AS A % OF
YOUR INVESTMENT PRICE INVESTMENT OFFERING PRICE
..............................................................................
Less than $25,000 4.50% 4.71% 4.05%
..............................................................................
$25,000 to less than $50,000 4.00% 4.17% 3.60%
..............................................................................
$50,000 to less than $100,000 3.50% 3.63% 3.15%
..............................................................................
$100,000 to less than $250,000 2.50% 2.56% 2.25%
..............................................................................
$250,000 to less than $500,000 1.50% 1.52% 1.35%
..............................................................................
$500,000 or more none* none* up to 1.00%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CITISELECT FOLIO 400 AND CITISELECT FOLIO 500
- ------------------------------------------------------------------------------
BROKER/
SALES CHARGE SALES CHARGE DEALER
AS A % OF AS A % OF COMMISSION
AMOUNT OF OFFERING YOUR AS A % OF
YOUR INVESTMENT PRICE INVESTMENT OFFERING PRICE
..............................................................................
Less than $25,000 5.00% 5.26% 4.50%
..............................................................................
$25,000 to less than $50,000 4.00% 4.17% 3.60%
..............................................................................
$50,000 to less than $100,000 3.50% 3.63% 3.15%
..............................................................................
$100,000 to less than $250,000 3.00% 3.09% 2.70%
..............................................................................
$250,000 to less than $500,000 2.00% 2.04% 1.80%
..............................................................................
$500,000 or more none* none* up to 1.00%
- --------------------------------------------------------------------------------
*A contingent deferred sales charge may apply in certain instances. See below.
o After the initial sales charge is deducted from your investment,
the balance of your investment is invested in the Fund.
o The sales charge may also be waived or reduced in certain
circumstances, as described in "Sales Charge Waivers or
Reductions" below. If you qualify to purchase Class A shares
without a sales load, you should purchase Class A shares rather
than Class B shares because Class A shares pay lower fees.
o If you invest at least $500,000 in a Fund, you do not pay any
initial sales charge. However, you may be charged a contingent
deferred sales charge (CDSC) of 1% of the purchase price, or the
sale price, whichever is less, if you sell within the first year.
Under certain circumstances, waivers may apply. Other policies
regarding the application of the CDSC are the same as for Class B
shares. Please read the discussion below on Class B shares for
more information.
PLEASE NOTE: If you owned Fund shares prior to January 4,
1999, you may exchange those shares into Class A shares of
other CitiFunds and other mutual funds managed by Citibank
without paying any sales charge, subject to verification.
Shares subject to the waiver include shares purchased prior to
January 4, 1999, and any shares representing capital
appreciation or reinvestment of dividends or capital gains
distributions on those shares.
SALES CHARGES -- CLASS B SHARES
o Class B shares are sold without a front-end, or initial, sales
charge, but you are charged a contingent deferred sales charge
(CDSC) when you sell shares within five years of purchase. The
rate of CDSC goes down the longer you hold your shares. The tables
below show the rates that you pay, as a percentage of your
original purchase price (or the sale price, whichever is less),
depending upon when you sell your shares.
- --------------------------------------------------------------------------------
CITISELECT FOLIO 200 AND CITISELECT FOLIO 300
- ---------------------------------------------------------------------
SALE DURING CDSC ON SHARES BEING SOLD
..............................................................................
1st year since purchase 4.50%
..............................................................................
2nd year since purchase 4.00%
..............................................................................
3rd year since purchase 3.00%
..............................................................................
4th year since purchase 2.00%
..............................................................................
5th year since purchase 1.00%
..............................................................................
6th year (or later) since purchase None
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CITISELECT FOLIO 400 AND CITISELECT FOLIO 500
- ---------------------------------------------------------------------
SALE DURING CDSC ON SHARES BEING SOLD
..............................................................................
1st year since purchase 5.00%
..............................................................................
2nd year since purchase 4.00%
..............................................................................
3rd year since purchase 3.00%
..............................................................................
4th year since purchase 2.00%
..............................................................................
5th year since purchase 1.00%
..............................................................................
6th year (or later) since purchase None
- --------------------------------------------------------------------------------
o Financial professionals selling Class B shares receive a
commission based upon the purchase price of the Class B shares
that they sell, except for sales exempt from the CDSC. The
commission is 4.00% of the purchase price of Folio 200 and Folio
300 Class B shares, and 4.50% of the purchase price of Folio 400
and Folio 500 Class B shares. Financial professionals also receive
a service fee at an annual rate equal to 0.25% of the average
daily net assets represented by the Class B shares that they have
sold.
o When you sell your shares, the CDSC will be based on either your
original purchase price, or the sale price, whichever is less.
o You do not pay a CDSC on shares acquired through reinvestment of
dividends and capital gain distributions or on shares representing
capital appreciation.
o To ensure that you pay the lowest CDSC possible, the Funds will
always use the Class B shares with the lowest CDSC to fill your
sell requests.
o You do not pay a CDSC at the time you exchange your Class B shares
for Class B shares of certain CitiFunds -- any payment will be
deferred until your Class B shares are redeemed.
o If you acquired your Class B shares through an exchange from
another Fund or from another fund managed or advised by Citibank,
the date of your initial investment will be used as the basis of
the CDSC calculations. If the rate of CDSC on the shares exchanged
was higher than the rate of CDSC on your Fund shares, you will be
charged the higher rate when you sell your Fund shares.
From time to time, the Fund's distributor or Citibank may
provide additional promotional bonuses, incentives or payments
to dealers that sell shares of the Funds. These may include
payments for travel expenses, including lodging, incurred in
connection with trips taken by invited registered
representatives and their guests to locations within and
outside the United States for meetings or seminars of a
business nature. In some instances, these bonuses, incentives
or payments may be offered only to dealers who have sold or
may sell significant amounts of shares. Certain dealers may
not sell all classes of shares.
The Funds' distributor may make payments for distribution and/
or shareholder servicing activities out of its past profits
and other available sources. The distributor may also make
payments for marketing, promotional or related expenses to
dealers. The amount of these payments is determined by the
distributor and may vary. Citibank may make similar payments
under similar arrangements.
SALES CHARGE WAIVERS OR REDUCTIONS
You may reduce or eliminate your sales charge on shares if you
qualify for certain waivers or elect to participate in certain
programs. These include:
Front-End Loads
o Sales charge elimination for certain eligible purchasers,
including certain tax-exempt organizations, certain employee
benefit plans, certain entities or persons with a qualifying
affiliation or relationship with Citibank, and, under certain
circumstances, investors using the proceeds of a redemption from
another mutual fund for their purchase of Class A shares. Further
information about eligible purchasers may be found in the Appendix
to this prospectus.
o Reduced sales charge plan for qualified groups.
o Right of Accumulation.
o Letter of Intent.
CDSC
o Redemptions made within one year of the death of the shareholder.
o Lump sum or other distributions from IRAs and certain other
retirement accounts.
o Redemptions made under a Fund's Systematic Withdrawal Plan.
You may learn more about the requirements for waiver or
reduction and how the programs work by requesting a copy of
the Funds' Statement of Additional Information, or by
consulting with your account representative.
AUTOMATIC CONVERSION OF CLASS B SHARES
Class B shares automatically convert to Class A shares
approximately eight years after purchase. If you acquired your
shares through an exchange, the date of your initial
investment will be used to determine your conversion date. You
will receive the same dollar amount of Class A shares as the
Class B shares converted. The price of Class A shares may be
higher than Class B shares at the time of conversion, because
of the lower expenses of Class A shares. Therefore, you may
receive fewer Class A shares than the number of Class B shares
converted.
HOW TO BUY SHARES
Shares of the CitiSelect Portfolios are offered continuously
and purchases may be made Monday through Friday, except on
certain holidays. Shares may be purchased from the Funds'
distributor or a broker-dealer or financial institution
(called a Service Agent) that has entered into a service
agreement with the distributor concerning the Funds. Please
specify whether you are purchasing Class A or Class B shares.
If you fail to specify, Class A shares will be purchased for
your account. The Funds and the distributor have the right to
reject any purchase order or cease offering Fund shares at any
time.
Shares are purchased at net asset value (NAV) the next time it
is calculated after your order is received and accepted by the
Funds' transfer agent. NAV is the value of a single share of a
Fund. If you are purchasing Class A shares, the applicable
sales charge will be added to the cost of your shares.
Your Service Agent will not transmit your purchase order for
Fund shares until it receives the purchase price in federal or
other immediately available funds. If you pay by check, the
Service Agent transmits the order when the check clears,
usually within two business days.
If you are a customer of a Service Agent, your Service Agent
will establish and maintain your account and be the
shareholder of record. If you wish to transfer your account,
you may only transfer it to another financial institution that
acts as a Service Agent, or you may set up an account directly
with the Fund's transfer agent.
HOW THE PRICE OF YOUR SHARES IS CALCULATED
Each Fund calculates its NAV every day the New York Stock
Exchange is open for trading. This calculation is made at the
close of regular trading on the New York Stock Exchange, normally
4:00 p.m. Eastern time. NAV is calculated separately for each
class of shares. NAV may be higher for Class A shares because
Class A shares bear lower expenses. On days when the financial
markets in which the Funds invest close early, NAV will be
calculated as of the close of those markets.
Each Fund's securities are valued primarily on the basis of
market quotations. When market quotations are not readily
available, the Funds may price securities at fair value. Fair
value is determined in accordance with procedures approved by
the Funds' Board of Trustees. When the Funds use the fair
value pricing method, a security may be priced higher or lower
than if the Funds had used a market quotation to price the
same security. For foreign securities the values are
translated from the local currency into U.S. dollars using
current exchange rates. If trading in the currency is
restricted, the Funds use a rate believed to reflect the
currency's fair value in U.S. dollars. Trading may take place
in foreign securities held by a Fund on days when the Fund is
not open for business. As a result, a Fund's NAV may change on
days on which it is not possible to purchase or sell shares of
the Fund.
HOW TO SELL SHARES
You may sell (redeem) your shares on any business day. The
price will be the NAV the next time it is calculated after
your redemption request in proper form has been received by
the Funds' transfer agent. If your shares are subject to a
CDSC, the applicable charge will be deducted from your sale
proceeds.
You may make redemption requests in writing through the Funds'
transfer agent or, if you are a customer of a Service Agent,
through your Service Agent. If your account application
permits, you may also make redemption requests by calling the
Funds' transfer agent or, if you are a customer of a Service
Agent, your Service Agent. Each Service Agent is responsible
for promptly submitting redemption requests to the Funds'
transfer agent. You are responsible for making sure that your
redemption request is in proper form.
Each Fund has a Systematic Withdrawal Plan which allows you to
automatically withdraw a specific dollar amount from your
account on a regular basis. You must have at least $10,000 in
your account to participate in this program. Under the Plan,
if your shares are subject to a CDSC, you may only withdraw up
to 10% of the value of your account in any year, but you will
not be subject to a CDSC on the shares withdrawn under the
Plan. For more information, please contact your Service Agent.
If you own both Class A and Class B shares, and want to sell
shares, you should specify which class of shares you wish to
sell. If you fail to specify, Class A shares will be redeemed
first.
When you sell your Class B shares, they will be redeemed so as
to minimize your CDSC. Shares on which the CDSC is not
payable, i.e.
o shares representing capital appreciation and
o shares representing the reinvestment of dividends and capital gain
distributions
will be sold first followed by
o shares held for the longest period of time.
You will receive your redemption proceeds in federal funds
normally on the business day after you sell your shares but
generally within seven days. Your redemption proceeds may be
delayed for up to ten days if your purchase was made by check.
Your redemption proceeds may also be delayed, or your right to
receive redemption proceeds suspended, if the New York Stock
Exchange is closed (other than on weekends or holidays) or
trading is restricted, or if an emergency exists. Each Fund
has the right to pay your redemption proceeds by giving you
securities instead of cash. In that case, you may incur costs
(such as brokerage commissions) converting the securities into
cash. You should be aware that you may have to pay taxes on
your redemption proceeds.
REINSTATING RECENTLY SOLD SHARES
For 90 days after you sell your Class A shares, the Funds
permit you to repurchase Class A shares in the same Fund, up
to the dollar amount of the shares redeemed, without paying
any sales charges. To take advantage of this reinstatement
privilege, you must notify the Fund in writing at the time you
wish to repurchase the shares.
EXCHANGES
You may exchange Fund shares for shares of the same class of
each other Fund and certain CitiFunds. You may also be able to
exchange your Class A shares for shares of certain CitiFunds
that offer only a single class of shares, unless your Class A
shares are subject to a CDSC. You may not exchange Class B
shares for shares of CitiFunds that offer only a single class
of shares. You may acquire Fund shares through an exchange
from another fund managed by Citibank.
You may place exchange orders through the transfer agent or,
if you are a customer of a Service Agent, through your Service
Agent. You may place exchange orders by telephone if your
account application permits. The transfer agent or your
Service Agent can provide you with more information, including
a prospectus for any fund that may be acquired through an
exchange.
The exchange will be based on the relative NAVs of both funds
when they are next determined after your order is accepted by
the Funds' transfer agent, subject to any applicable sales
charge. You cannot exchange shares until a Fund has received
payment in federal funds for your shares.
When you exchange your Class A shares, you generally will be
required to pay the difference, if any, between the sales
charge payable on the shares to be acquired in the exchange
and the sales charge paid in connection with your original
purchase of Class A shares. However, if your Fund shares were
purchased prior to January 4, 1999, you will not have to pay a
sales charge when you exchange those shares for Class A
shares, subject to confirmation through a check of appropriate
records and documentation.
When you exchange your Class B shares, you will not pay any
initial sales charge, and no CDSC is imposed when your Class B
shares are exchanged for Class B shares of certain CitiFunds
that are made available by your Service Agent. However, you
may be required to pay a CDSC when you sell those shares. The
length of time that you owned Fund shares will be included in
the holding period of your new Class B shares.
The exchange privilege may be changed or terminated at any
time. You should be aware that you may have to pay taxes on
your exchange.
DIVIDENDS
Each Fund pays substantially all of its net income (if any)
from dividends and interest to its shareholders of record as a
dividend on the following schedule:
For CITISELECT FOLIO 200 and CITISELECT FOLIO 300, quarterly
during the months of March, June, September and December.
For CITISELECT FOLIO 400 and CITISELECT FOLIO 500, annually
during the month 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 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.
Unless you choose to receive your dividends in cash, you will
receive them as full and fractional additional shares of the
applicable class. There is no sales charge on these shares.
TAX MATTERS
This discussion of taxes is for general information only. You
should consult your own tax adviser about your particular
situation, and the status of your account under state and
local laws.
TAXABILITY OF DISTRIBUTIONS. You will normally have to pay
federal income taxes on the distributions you receive from a
Fund, whether you take the distributions in cash or reinvest
them in additional shares. Distributions designated by a Fund
as capital gain dividends are taxable as long-term capital
gains. Other distributions are generally taxable as ordinary
income. Some distributions paid in January may be taxable to
you as if they had been paid the previous December. Each year
each Fund will mail you a report of your distributions for the
prior year and how they are treated for federal tax purposes.
Fund distributions will reduce the distributing Fund's net
asset value per share. As a result, if you buy shares just
before a Fund makes a distribution, you may pay the full price
for the shares and then effectively receive a portion of the
purchase price back as a taxable distribution.
BACKUP WITHHOLDING. The account application asks each new
investor to certify that the investor's Social Security or
taxpayer identification number is correct and that the
shareholder is not subject to 31% backup withholding for
failing to report income to the IRS. A Fund may be required to
withhold (and pay over to the IRS for your credit) 31% of
certain distributions and proceeds it pays you if you fail to
provide this information or otherwise violate IRS regulations.
FOREIGN SHAREHOLDERS. If you are not a citizen or resident of
the U.S., each Fund will withhold U.S. federal income tax
payments at the rate of 30% (or any lower applicable treaty
rate) on taxable dividends and other payments subject to
withholding taxes. Distributions received from a Fund by non-
U.S. persons also may be subject to tax under the laws of
their own jurisdictions.
TAXABILITY OF TRANSACTIONS. Any time you sell or exchange
shares, it is considered a taxable event for you. Depending on
the purchase price and the sale price of the shares you sell
or exchange, you may have a gain or a loss on the transaction.
You are responsible for any tax liabilities generated by your
transactions.
<PAGE>
MANAGEMENT OF THE FUNDS
Management of the Funds
MANAGER
The CitiSelect Portfolios draw on the strength and experience
of Citibank. Citibank is the investment manager of each Fund,
and subject to policies set by the Funds' Trustees, Citibank
makes investment decisions. Citibank has been managing money
since 1822. With its affiliates, it currently manages more
than $290 billion in assets worldwide.
Citibank, with headquarters at 153 East 53rd Street, New York,
New York, is a wholly-owned subsidiary of Citicorp, which is,
in turn, a wholly-owned subsidiary of Citigroup Inc. Citigroup
Inc. was formed as a result of the merger of Citicorp and
Travelers Group, Inc., which was completed on October 8, 1998.
"CitiSelect" is a registered trademark of Citicorp.
Citibank and its affiliates may have banking and investment
banking relationships with the issuers of securities that are
held in the Funds. However, in making investment decisions for
the Funds, Citibank does not obtain or use material inside
information acquired by any division, department or affiliate
of Citibank in the course of those relationships. Citibank and
its affiliates may have loans outstanding that are repaid with
proceeds of securities purchased by the Funds.
Richard Goldman, a Vice President of Citibank, has been the
overall portfolio manager of the Funds since January 1999 and
is responsible for determining asset allocations, supervising
and monitoring the performance of the Citibank personnel
described below who are responsible for the Funds' securities,
and supervising and monitoring the performance of the
subadvisers. Mr. Goldman's investment experience is discussed
below.
The following subadvisers currently manage the following kinds
of securities for the Funds:
SMALL CAP VALUE SECURITIES: Franklin Advisory Services, Inc.,
One Parker Plaza, 9th Floor, Fort Lee, New Jersey 07024.
Franklin Advisory Services 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 cap value securities since the Funds'
inception.
LARGE CAP VALUE SECURITIES: Mutual Management Corp. (MMC), 388
Greenwich Street, New York, New York 10013. MMC, an affiliate
of Citibank, is a registered investment adviser that took over
responsibility for the daily management of the Funds' large
cap value securities on January 22, 1999. Prior to this date,
Miller Anderson & Sherrerd, LLP, was responsible for the daily
management of large cap value securities. MMC is a wholly
owned subsidiary of Salomon Smith Barney Holdings Inc., which
in turn is a wholly owned subsidiary of Citigroup Inc. Frances
A. Root, an Investment Officer of MMC and a Senior Portfolio
Manager, has been responsible for the daily management of
large cap value securities since MMC assumed responsibility on
January 22, 1999. She joined Smith Barney Capital Management
in 1992. Formerly, she was with Shearson Lehman Advisors as a
Vice President and Portfolio Manager for seven years and prior
to that, with E.F. Hutton & Company, Inc.
INTERNATIONAL EQUITY SECURITIES: Hotchkis and Wiley, 725 South
Figueroa Street, Suite 4000, Los Angeles, California
90017-5400. Hotchkis and Wiley is a division 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 joined Hotchkis and Wiley
in 1994, where he is responsible for international investment
research in the U.K. and Europe, and where he serves on the
Investment Policy Committee. Prior to joining Hotchkis and
Wiley, Mr. Hartford was with The Investment Bank of Ireland
(now Bank of Ireland Asset Management), as a Senior Manager,
where he gained 10 years of experience in both international
and global equity management. Ms. Ketterer, a Managing
Director and Portfolio Manager, joined Hotchkis and Wiley in
1990, where she is responsible for international investment
research in the Asia-Pacific, Japan and Canadian regions, and
where she serves on the Investment Policy Committee. Prior to
joining Hotchkis and Wiley in 1990, Ms. Ketterer was an
associate with Bankers Trust and an analyst at Dean Witter.
FOREIGN GOVERNMENT SECURITIES: Salomon Brothers Asset
Management Limited (SBAML), Victoria Plaza, 111 Buckingham
Palace Road, London SWIS OSB, U.K. SBAML, an affiliate of
Citibank, is a U.S. registered investment adviser that took
over responsibility for the daily management of the Funds'
foreign government securities on March 1, 1999. Prior to that
date, Pacific Investment Management Company was responsible
for the daily management of the Funds' foreign government
securities. SBAML is a wholly owned indirect subsidiary of
Citigroup Inc. David Scott is the portfolio manager. Mr. Scott
joined SBAML in April 1990 as Director and Head of Global
Fixed Income of SBAML, and has been responsible for the
management of foreign government securities. Prior to that,
Mr. Scott worked for four years at JP Morgan Investment
Management where he had responsibility for global and non-
dollar portfolios; and prior to that, for Mercury Asset
Management.
The following individuals at Citibank are responsible for the
management of all other Fund investments:
LARGE CAP GROWTH SECURITIES: Grant D. Hobson and Richard
Goldman, Vice Presidents, have been responsible for the daily
management of large cap growth securities since the Funds'
inception. Mr. Hobson is a Senior Portfolio Manager who, since
September 1994 has been managing U.S. equity portfolios for
trust and pension accounts of Citibank Global Asset
Management. He currently manages, or co-manages, more than $4
billion of total assets at Citibank. Prior to joining Citibank
in 1993, Mr. Hobson was a securities analyst and sector
manager for pension accounts and mutual funds for Axe
Houghton, formerly a division of USF&G. Mr. Goldman is a
Senior Investment Officer and lead portfolio manager for the
Focused Growth Large Cap Funds and has been a member of the
Large Cap Growth Team since June 1994. He joined Citibank in
1985 as an assistant portfolio manager, working on
quantitative portfolio strategies. Within the investment unit,
he has had responsibilities in both product development and
portfolio management. From September 1988 through June 1994,
Mr. Goldman served as Director of Institutional Investor
Relations, where his responsibilities included managing
Citicorp's relationships with its investors and rating
agencies. He currently manages, or co-manages, approximately
$6 billion of total assets at Citibank.
SMALL CAP GROWTH SECURITIES: Marguerite Wagner, Vice President
and Senior Portfolio Manager, has been responsible for the
daily management of the Funds' small cap growth securities
since January 1999. Ms. Wagner joined Citibank in 1985. Since
1995, she has had portfolio management and research analyst
responsibility for an internal mid-cap common trust fund and
private equity managed accounts. From 1992 through the end of
1994, Ms. Wagner was a member of the small capitalization
equity management group of Citibank Global Asset Management.
Prior to 1992, she managed portfolios for the Private Banking
Group of Citibank.
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 19
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.
Citibank is responsible for recommending the hiring,
termination or replacement of any subadviser and for
supervising and monitoring the performance of any subadviser.
Certain of the Funds' underlying mutual funds have applied for
exemptive relief from the Securities and Exchange Commission
which would permit those funds to employ other or additional
subadvisers without shareholder approval. The requested
exemptive relief also would permit the terms of existing
subadvisory agreements to be changed and the employment of
existing subadvisers to be continued after events that would
otherwise cause an automatic termination of a subadvisory
agreement, in each case without shareholder approval if those
changes or continuation are approved by the underlying funds'
Board of Trustees. There is no assurance that the SEC will
grant the requested relief. This prospectus will be revised
and shareholders notified if a Subadviser is changed or added.
MANAGEMENT FEES
For the services Citibank and the subadvisers provided under
management agreements for the Funds and their underlying
mutual funds for their fiscal years ended October 31, 1998,
Citibank and the subadvisers received a total of 0.75% of each
Fund's average daily net assets.
<PAGE>
MORE ABOUT THE FUNDS
More About the Funds
The Funds' goals, principal investments and risks are
summarized in FUNDS AT A GLANCE. More information on
investments, investment strategies and risks appears below.
PRINCIPAL INVESTMENT STRATEGIES
The Funds' principal investment strategies are the strategies
that, in the opinion of Citibank, are most likely to achieve
each Fund's investment goal. Of course, there can be no
assurance that any Fund will achieve its goal. Please note
that each Fund may also use strategies and invest in
securities that are not described below but that are described
in the Statement of Additional Information. Of course, a
Fund's portfolio managers may decide, as a matter of
investment strategy, not to use the investments and investment
techniques described below and in the Statement of Additional
Information at any particular time. Each Fund's goal and
strategies may be changed without shareholder approval.
Each Fund is a diversified asset allocation mutual fund that
invests in a mix of equity, fixed income and money market
securities. Each Fund's asset mix is designed by Citibank to
offer a different level of potential return with a
corresponding amount of risk. For example, equity securities
typically have greater potential for growth of capital than
fixed income securities, and have the potential to outperform
fixed income securities over the long term. However, equity
securities generally are more volatile. Fixed income and money
market securities sometimes go up in value when equity
securities go down. As a result, a Fund investing a higher
percentage of its assets in equity securities may, over time,
have the potential to generate higher returns than a Fund
investing more in fixed income securities, but it may be more
volatile and a riskier investment. In making asset
allocations, Citibank studies the long term performance and
valuation relationships among these three types of securities
and the effects of market and economic variables on those
relationships. Each Fund's asset mix is determined by Citibank
to be an optimal combination of stocks, bonds and money market
instruments that maximizes potential returns for the level of
risk associated with the Fund's investment goal. In seeking to
achieve these individual goals, securities are sold when a
Fund needs cash to meet redemptions, or when the managers'
price objective for a security has been met, or when the
managers believe that better opportunities exist, or that a
security no longer fits within the managers' overall
strategies for achieving the Fund's goals. Of course, there
can be no assurance that the Funds will perform as intended.
- --------------------------------------------------------------------------------
ASSET CLASS RANGE*
FIXED MONEY
EQUITY INCOME MARKET
..............................................................................
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%
- --------------------------------------------------------------------------------
*If derivatives or other investment techniques are used in managing the assets
of an asset class, those derivatives or other investment techniques will be
counted as part of the assets in that asset class. Similarly, if cash is
received by the underlying funds in the equity or fixed income class, and the
cash is temporarily invested in short-term money market instruments, those
instruments will be included in the percentage limitations for that asset
class, rather than the money market asset class.
Citibank allocates each Fund's assets among equity, fixed
income and money market securities (each of these types of
securities is referred to as an asset class) generally within
the percentage ranges provided in the chart above. However,
cash flows into or out of a Fund, or changes in market
valuations, could produce different results. Citibank monitors
each Fund's asset mix daily and conducts quarterly reviews to
determine whether to rebalance the Fund's investments.
Rebalancing may be accomplished over a period of time, subject
to any regulatory restrictions.
Citibank may further allocate each Fund's equity securities
among large cap securities, small cap securities and
international securities, and each Fund's fixed income
securities among U.S. and foreign government and corporate
bonds. Of course, Citibank is not required to allocate each
Fund's assets among all of these types of equity and fixed
income securities at all times. These further allocations are
intended to maximize returns while managing overall
volatility. Each asset class and the types of securities in
that class are described below.
MANAGEMENT STYLE. In allocating assets while seeking to
maximize returns for a given risk level, Citibank employs a
multi-style, multi-manager strategy. Citibank believes that
there are periods when securities with particular
characteristics, or selected based on a particular investment
style, outperform other kinds of securities in the same asset
class. Citibank attempts to blend asset classes and
complementary investment styles through investment cycles.
To implement this strategy, Citibank has recommended that the
Funds employ subadvisers with expertise managing specific
types of securities or managing in a particular style. The
following subadvisers currently manage the following kinds of
securities:
- --------------------------------------------------------------------------------
small cap value securities Franklin Advisory Services, Inc.
..............................................................................
large cap value securities Mutual Management Corp.
..............................................................................
international equity securities Hotchkis and Wiley
..............................................................................
foreign government securities Salomon Brothers Asset Management Limited
- --------------------------------------------------------------------------------
Citibank manages all other kinds of securities, including
large cap growth, small cap growth, fixed income and money
market securities. Citibank monitors and supervises the
activities of the subadvisers and may terminate the services
of any subadviser at any time.
Each Fund invests in multiple underlying mutual funds, or
Portfolios. Each Portfolio invests directly in securities in a
particular type, such as large cap growth securities and
related investments, or foreign government securities and
related investments. See "Investment Structure" on page 53.
THE EQUITY CLASS
Each Fund generally diversifies its equity securities among
large cap issuers, small cap issuers and international
issuers. The mix of equity securities varies from Fund to
Fund. For example, CitiSelect Folio 400 currently emphasizes
securities of small cap issuers and international issuers to a
greater extent than CitiSelect Folios 200 and 300. CitiSelect
Folio 500 currently emphasizes securities of small cap issuers
and international issuers to a greater extent than CitiSelect
Folio 400. The types of equity securities emphasized may
change over time and in different market conditions, and there
is no requirement that each Fund invest in each type of equity
security.
LARGE CAP ISSUERS. Large cap issuers are those which have
market capitalizations, at the time the securities are
purchased, within the top 1,000 stocks of the equity market.
At December 31, 1998, issuers within the top 1,000 stocks had
market capitalizations of at least $1.9 billion. In selecting
large cap securities, the Funds emphasize securities issued by
established companies with stable operating histories.
SMALL CAP ISSUERS. Small cap issuers are those which have
market capitalizations, at the time the securities are
purchased, below the top 1,000 stocks of the equity market. At
December 31, 1998, the maximum capitalization of issuers in
this category was below $1.9 billion. These stocks may include
stocks in the Russell 2000 Index, which is an index of small
cap stocks. Small cap companies generally have negligible
dividend yields and extremely high levels of volatility. They
may offer more profit opportunity during certain economic
conditions than large and medium sized companies, but they
also involve special risks.
INTERNATIONAL ISSUERS. International issuers are those based
outside the United States. The Funds emphasize securities
included in the EAFE Index, which contains securities of
companies located in Europe, Australia and the Far East. The
Funds also may invest in emerging market equity securities.
There may be investment opportunities in overseas markets not
present in the U.S., and market performance in the U.S. and
abroad may not be the same or highly correlated. However,
overseas investments, particularly in emerging markets,
involve special risks.
See "Risks" for more information about the risks associated
with investing in equity securities.
-----------------------------------------------------------------
WHAT ARE EQUITY SECURITIES?
EQUITY SECURITIES generally represent an ownership interest
(or a right to acquire an ownership interest) in an issuer,
and 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 foreign issuers deposited in a U.S.
bank or a local branch of a foreign bank). While equity
securities historically have been more volatile than fixed
income securities, they historically have produced higher
levels of total return. Citibank believes that 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.
-----------------------------------------------------------------
THE FIXED INCOME CLASS
Each Fund generally diversifies its fixed income securities
among investment grade corporate debt obligations and
securities issued by the U.S. government and its agencies and
instrumentalities and by foreign governments. The mix of fixed
income securities varies from Fund to Fund. There is no
requirement that each Fund invest in each type of fixed income
security. Investment grade securities are those rated Baa or
better by Moody's, BBB or better by Standard & Poor's or 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 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 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. U.S. government
securities have minimal credit risk. 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. Even though
government securities have minimal credit risk, they still
fluctuate in value when interest rates change.
CORPORATE BONDS. Corporate bonds are used by U.S. and foreign
corporate issuers to borrow money from investors, and may have
varying maturities. Bonds also have varying degrees of quality
and varying degrees of sensitivity to changes in interest
rates. For example, the values of lower quality bonds
generally fluctuate more than higher quality bonds. Investment
in bonds of U.S. and foreign corporate issuers may provide
higher levels of current income than government securities.
See "Risks" for more information about the risks associated
with investing in fixed income securities.
-----------------------------------------------------------------
WHAT ARE FIXED INCOME SECURITIES?
FIXED INCOME SECURITIES generally represent a debt obligation
of an issuer, and include BONDS, SHORT-TERM OBLIGATIONS and
MORTGAGE-BACKED and ASSET-BACKED SECURITIES. Fixed income
securities, in general, offer a fixed stream of cash flow.
Most bond investments focus on generating income. The
potential for capital appreciation is a secondary objective.
The value of fixed income securities generally goes up when
interest rates go down, and down when rates go up. The value
of these securities also fluctuates based on other market and
credit factors.
-----------------------------------------------------------------
THE MONEY MARKET CLASS
Each Fund invests its assets allocated to the money market
class in cash and in U.S. dollar-denominated high quality
money market and short-term instruments. These investments
provide opportunities for income with low credit risk, but may
result in a lower yield (the income on your investment) than
investing in lower quality or longer-term instruments. At
least 25% of the assets in the money market class, and
possibly up to 100% of the assets in this class, are invested
in bank obligations.
-----------------------------------------------------------------
WHAT ARE MONEY MARKET INSTRUMENTS?
A MONEY MARKET INSTRUMENT is a short-term IOU issued by a bank
or other corporation, or the U.S. or a foreign government, or
a state or local government. Money market instruments may
include CERTIFICATES OF DEPOSIT, BANKERS' ACCEPTANCES,
VARIABLE or FLOATING RATE DEMAND NOTES (where the interest
rate is reset periodically and the holder may demand payment
from the issuer at any time), FIXED-TERM OBLIGATIONS,
COMMERCIAL PAPER (short term unsecured debt of corporations),
ASSET BACKED SECURITIES (which are backed by pools of accounts
receivable such as car installment loans or credit card
receivables) and REPURCHASE AGREEMENTS. In a repurchase
agreement, the seller sells a security and agrees to buy it
back at a later date (usually within seven days) and at a
higher price, which reflects an agreed upon interest rate.
-----------------------------------------------------------------
DERIVATIVES. The Funds may use derivatives in order to protect
(or "hedge") against changes in interest rates, currency
fluctuations or the prices of securities held or to be bought.
The Funds may also use a wide variety of derivatives for non-
hedging purposes, to enhance potential gains or generate
income. In addition, the Funds may use derivatives to manage
the maturity or duration of fixed income securities.
Derivatives that the Funds may use include futures (including
bond, interest rate and stock index futures), options on
securities and on futures (including options on interest rate
and stock index futures), interest rate swaps, equity swaps,
and other types of available swap agreements, including caps,
collars and floors. The Funds may also enter into foreign
currency exchange contracts, purchase foreign currency
futures, or purchase or write options on foreign currencies,
or enter into currency swaps and other similar transactions.
Derivatives may be used alone or in combination with other
derivatives. In some cases, the derivatives purchased by the
Funds are standardized contracts traded on commodities
exchanges or boards of trade. This means that the exchange or
board of trade guarantees counterparty performance. In other
cases, the derivatives may be illiquid, and the Funds may bear
more counterparty risk. Derivatives may not be available on
terms that make economic sense (for example, they may be too
costly). The Fund's ability to use derivatives may also be
limited by tax considerations.
The Funds' use of derivatives may involve leveraging. Under
leveraging, a relatively small investment may produce
substantial losses or gains for a Fund, well beyond the Fund's
initial investment.
-----------------------------------------------------------------
WHAT ARE SHORT SALES?
When a Fund's portfolio manager anticipates that the price of
a security will decline, the manager may enter into an
agreement to sell the security even though the Fund does not
own it. This technique is called SELLING SHORT. The Fund will
then borrow the same security from a broker or other
institution in order to complete the sale. The Fund must later
purchase the security in order to return the security
borrowed. If the portfolio manager has predicted accurately,
the price at which the Fund buys the security will be less
than the price at which the Fund earlier sold the security,
creating a profit for the Fund. However, if the price of the
security goes up during this period, the Fund will be forced
to buy the security for more than its sale price, causing a
loss to the Fund. Non-U.S. currencies may also be sold short.
-----------------------------------------------------------------
DEFENSIVE STRATEGIES. The Funds may, from time to time, take
temporary defensive positions that are inconsistent with the
Funds' principal investment strategies in attempting to
respond to adverse market, political or other conditions. When
doing so, the Funds may invest without limit in high quality
money market and other short-term instruments, and may not be
pursuing their investment goals.
INVESTMENT STRUCTURE. The Funds do not invest directly in
securities. Instead, each Fund invests in multiple Portfolios.
Currently the CitiSelect Portfolios invest in Large Cap Growth
Portfolio, Large Cap Value Portfolio, Small Cap Growth
Portfolio, Small Cap Value Portfolio, Intermediate Income
Portfolio, Short-Term Portfolio, International Portfolio and
Foreign Bond Portfolio. Each Portfolio is a mutual fund with
its own investment goals and policies. The Portfolios buy,
hold and sell securities in accordance with these goals and
policies. Of course, there can be no assurance that the Funds
or the Portfolios will achieve their goals. Each Portfolio
invests in securities in a particular asset class, in
particular types of securities or in securities of particular
maturities or duration.
Each Fund may withdraw its investment in any Portfolio at any
time, and will do so if the Fund's Trustees believe it to be
in the best interest of the Fund's shareholders. Each
Portfolio may change its investment goals and certain of its
investment policies and restrictions without approval by its
investors, but the Portfolio will notify the Fund and its
other investors at least 30 days before implementing any
change in its investment goals. A change in investment goals,
policies or restrictions may cause a Fund to withdraw its
investment in a Portfolio. If the Fund were to withdraw, the
Fund could either invest in another mutual fund or pooled
investment vehicle or invest directly in securities. Upon
withdrawal, the Fund could receive securities from a Portfolio
instead of cash, causing the Fund to incur brokerage, tax and
other charges or leaving it with securities which may or may
not be readily marketable or widely diversified.
Each Fund bears its share of each Portfolio's fees and
expenses. The total fees of each Fund and the underlying
Portfolios are reflected in the fee tables in "Funds at a
Glance".
Certain investment restrictions of each Portfolio cannot be
changed without approval by the investors in that Portfolio.
Of course, a Fund could be outvoted, or otherwise adversely
affected, by other investors in a Portfolio.
Each of the Funds is actively managed. Although the portfolio
managers attempt to minimize portfolio turnover, from time to
time a Fund's annual portfolio turnover rate may exceed 100%.
The sale of securities may produce capital gains, which, when
distributed, are taxable to investors. Active trading may also
increase the amount of commissions or mark-ups the Funds pay
to brokers or dealers when they buy and sell securities. The
"Financial Highlights" section of this prospectus shows the
portfolio turnover rate for the past fiscal year of each
underlying portfolio in which the Funds invest.
Citibank and the subadvisers may use brokers or dealers for
Fund transactions who also provide brokerage and research
services to the Funds or other accounts over which Citibank,
the subadvisers or their affiliates exercise investment
discretion. Each Fund may "pay up" for brokerage services,
meaning that it is authorized to pay a broker or dealer who
provides these brokerage and research services a commission
for executing a portfolio transaction which is higher than the
commission another broker or dealer would have charged.
However, the Funds will "pay up" only if Citibank or the
subadviser determines in good faith that the higher commission
is reasonable in relation to the brokerage and research
services provided, viewed in terms of either the particular
transaction or all of the accounts over which that adviser
exercises investment discretion.
RISKS
Investing in a mutual fund involves risk. Before investing,
you should consider the risks you will assume. Certain of
these risks are described below. More information about risks
appears in the Funds' Statement of Additional Information.
Remember that you may receive little or no return on your
investment in the Funds. You may lose money if you invest in
these Funds.
The risks of investing in each Fund vary depending on the
securities it holds and the investment strategies it uses. For
example, Funds investing more of their assets in fixed income
securities may be more susceptible to interest rate risk and
credit risk than Funds investing more of their assets in
equity securities. Conversely, Funds investing more of their
assets in equity securities may be more susceptible to greater
price volatility than Funds investing more of their assets in
fixed income securities. Please remember that an investment in
the Funds is not a deposit of Citibank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any
other government agency.
MARKET RISK. This is the risk that the prices of securities
will rise or fall due to changing economic, political or
market conditions, or due to a company's individual situation.
The value of the Funds' shares will change daily as the value
of their underlying securities change. This means that your
shares of a Fund may be worth more or less when you sell them
than when you bought them.
It is also possible that the Funds will not perform as
intended. For example, CitiSelect Folio 200 is expected to be
the least volatile of the Funds. However, under certain market
conditions this Fund could be the most volatile.
EQUITY SECURITIES. Equity securities are subject to market
risk that historically has resulted in greater price
volatility than exhibited by fixed income securities.
INTEREST RATE RISK. In general, the prices of debt securities
rise when interest rates fall, and fall when interest rates
rise. Longer term obligations are usually more sensitive to
interest rate changes. A change in interest rates could cause
the Funds' share prices to go down.
CREDIT RISK. The Funds invest in investment grade debt
securities. However, it is possible that some issuers will not
make payments on debt securities held by the Funds. Or, an
issuer may suffer adverse changes in its financial condition
that could lower the credit quality of a security, leading to
greater volatility in the price of the security and in shares
of a Fund. A change in the quality rating of a bond or other
security can also affect the security's liquidity and make it
more difficult for the Fund to sell. The lower quality debt
securities in which the Funds may invest are more susceptible
to these problems than higher quality obligations.
FOREIGN SECURITIES. Investments in foreign securities involve
risks relating to adverse political, social and economic
developments abroad, as well as risks resulting from the
differences between the regulations to which U.S. and foreign
issuers and markets are subject.
o These risks may include expropriation of assets, confiscatory
taxation, withholding taxes on dividends and interest paid on fund
investments, currency exchange controls and other limitations on
the use or transfer of Fund assets and political or social
instability.
o Foreign 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.
o Foreign markets may be less liquid and more volatile than U.S.
markets. Rapid increases in money supply may result in speculative
investing, contributing to volatility. Also, equity securities may
trade at price-earnings multiples that are higher than those of
comparable U.S. companies, and that may not be sustainable. As a
result, there may be rapid changes in the value of foreign
securities.
o Foreign markets may offer less protection to investors. Enforcing
legal rights may be difficult, costly and slow. There may be
special problems enforcing claims against foreign governments.
o Since foreign securities often trade 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.
An increase in the U.S. dollar relative to these other currencies
will adversely affect the value of the Fund. In addition, some
foreign currency values may be volatile and there is the
possibility of governmental controls on currency exchanges or
governmental intervention in currency markets. Controls or
intervention could limit or prevent a Fund from realizing value in
U.S. dollars from its investment in foreign securities.
o Each Fund may invest in issuers located in emerging, or
developing, markets.
o Emerging or developing countries are generally defined as
countries in the initial stages of their industrialization cycles
with low per capita income.
o All of the risks of investing in foreign securities are heightened
by investing in developing countries.
o The markets of developing countries have been more volatile than
the markets of developed countries with more mature economies.
SMALLER COMPANIES. The securities of smaller capitalization
companies may have more risks than those of larger, more
seasoned companies. They may be particularly susceptible to
market downturns because of limited financial or management
resources. Also, there may be less publicly available
information about small cap companies. As a result, their
prices may be volatile, causing the Funds' share prices to be
volatile.
PREPAYMENT RISK. The issuers of debt securities held by a Fund
may be able to prepay principal due on the securities,
particularly during periods of declining interest rates. A
Fund may not be able to reinvest that principal at attractive
rates, reducing income to the Fund, and the Fund may lose any
premium paid. In addition, rising interest rates may cause
prepayments to occur at slower than expected rates. This
effectively lengthens the maturities of the affected
securities, making them more sensitive to interest rate
changes and the Fund's share prices more volatile. Mortgage-
backed securities are particularly susceptible to prepayment
risk, and their prices may be very volatile.
BANK OBLIGATIONS. At least 25%, and possibly up to 100%, of
the Funds' investments in the money market class are in bank
obligations. Bank obligations are susceptible to adverse
events affecting the banking industry. Banks are sensitive to
changes in money market and general economic conditions, as
well as decisions by regulators that can affect their
profitability.
SPECIAL CHARACTERISTICS OF CONVERTIBLE SECURITIES. Convertible
securities, which are debt securities that may be converted
into stock, are subject to the market risk of stocks, and,
like other debt securities, are also subject to interest rate
risk and the credit risk of their issuers. Call provisions may
allow the issuer to repay the debt before it matures.
DERIVATIVES. The Funds' use of derivatives (such as futures
contracts and forward foreign currency contracts),
particularly when used for non-hedging purposes, may be risky.
This practice could result in losses that are not offset by
gains on other portfolio assets. Losses would cause the Funds'
share prices to go down. There is also the risk that the
counterparty may fail to honor its contract terms. This risk
becomes acute when the Fund invests in derivatives that are
not traded on commodities exchanges or boards of trade. Each
Fund's ability to use derivatives successfully depends on its
portfolio managers' ability to accurately predict movements in
stock prices, interest rates, currency exchange rates or other
economic factors. If the portfolio managers' predictions are
wrong, the Fund could suffer greater losses than if the Fund
had not used derivatives.
In some instances, a Fund's use of derivatives may have the
effect of leveraging the Fund. Leveraging adds increased risks
to a Fund, because the Fund's losses may be out of proportion
to the amount invested in the instrument -- a relatively small
investment may lead to much greater losses.
SHORT SALES. The Funds may engage in short sales. Losses from
short sales may be unlimited.
EURO CONVERSION. Each Fund may invest in securities of issuers
in European countries. Certain European countries have joined
the European Economic and Monetary Union (EMU). Each EMU
participant's currency began a conversion into a single
European currency, called the euro, on January 1, 1999, to be
completed by July 1, 2002. The consequences of the euro
conversion for foreign exchange rates, interest rates and the
value of European securities held by the Funds are presently
unclear. European financial markets, and therefore, the Funds
could be adversely affected if the euro conversion does not
continue as planned or if a participating country chooses to
withdraw from the EMU. The Funds could also be adversely
affected if the computing, accounting and trading systems used
by their service providers are not capable of processing
transactions related to the euro. These issues may negatively
affect the operations of the companies in which the Funds
invest as well.
YEAR 2000. The Funds could be adversely affected if the
computer systems used by the Funds or their service providers
are not programmed to accurately process information on or
after January 1, 2000. The Funds, and their service providers,
are making efforts to resolve any potential Year 2000
problems. While it is likely these efforts will be successful,
the failure to implement any necessary modifications could
have an adverse impact on the Funds. The Funds also could be
adversely affected if the issuers of securities held by the
Funds do not solve their Year 2000 problems, or if it costs
them large amounts of money to solve these problems.
<PAGE>
Financial Highlights
The financial highlights table is intended to help you understand the Funds'
financial performance for the fiscal periods indicated. Certain information
reflects financial results for a single Class A Fund share. The total returns
in the table represent the rate that an investor would have earned or lost on
an investment in a Fund (assuming investment of all dividends and
distributions). This information has been audited by PricewaterhouseCoopers
LLP, whose report, along with the Funds' financial statements, is included in
the annual report which is incorporated by reference into the Statement of
Additional Information and which is available upon request.
<TABLE>
<CAPTION>
CITISELECT FOLIO 200 CITISELECT FOLIO 300
...........................................................................................................................
Year Ten Months June 17, Year Ten Months June 17,
Ended Ended 1996+ to Ended Ended 1996+ to
October 31, October 31, December 31, October 31, October 31, December 31,
1998 1997 1996 1998 1997 1996
...........................................................................................................................
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
beginning of period $11.33 $10.50 $10.00 $11.71 $10.66 $10.00
...........................................................................................................................
Income From Operations:
Net investment income 0.240 0.138 0.128 0.187 0.101 0.088
Net realized and
unrealized gain
(loss) on investments 0.068++ 0.722 0.506 (0.036) 0.974 0.671
...........................................................................................................................
Total from operations 0.308 0.860 0.634 0.151 1.075 0.759
...........................................................................................................................
Less Distributions From:
Net investment income (0.172) (0.007) (0.112) (0.138) (0.002) (0.075)
Net realized gain on
investments (0.186) (0.023) (0.022) (0.243) (0.023) (0.024)
In excess of net income -- -- -- -- -- --
In excess of realized
gains on investments -- -- -- -- -- --
...........................................................................................................................
Total from
distributions (0.358) (0.030) (0.134) (0.381) (0.025) (0.099)
...........................................................................................................................
Net Asset Value, end of
period $11.28 $11.33 $10.50 $11.48 $11.71 $10.66
...........................................................................................................................
Total return 2.84% 8.21%** 6.38%** 1.38% 10.09%** 7.61%**
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CITISELECT FOLIO 200 CITISELECT FOLIO 300
...........................................................................................................................
Year Ten Months June 17, Year Ten Months June 17,
Ended Ended 1996+ to Ended Ended 1996+ to
October 31, October 31, December 31, October 31, October 31, December 31,
1998 1997 1996 1998 1997 1996
...........................................................................................................................
<S> <C> <C> <C> <C> <C> <C>
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of
period (in thousands) $206,313 $166,203 $102,775 $340,455 $325,193 $195,428
Ratio of expenses to
average net assets
(A) 1.50% 1.50%* 1.50%* 1.50% 1.50%* 1.50%*
Ratio of net investment
income to average net
assets 2.70% 2.88%* 2.84%* 2.09% 2.30%* 2.38%*
Portfolio turnover (B) +++ 177% 147% +++ 154% 132%
Note: If Agents of the Funds and the Agents of respective 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
per share $0.238 $0.126 $0.076 $0.187 $0.100 $0.060
RATIOS:
Expenses to average net
assets (A) 1.52% 1.75%* 2.66%* 1.50% 1.52%* 2.26%*
Net investment income
to average net assets 2.68% 2.63%* 1.68%* 2.09% 2.28%* 1.62%*
(A) Includes allocated expenses for the periods indicated from the respective portfolios.
(B) Portfolio turnover represents, for CitiSelect Folios 200 and 300, the rates of portfolio activity of Asset Allocation
Portfolios 200 and 300, respectively, the underlying portfolios through which the Funds invested until October 31, 1997.
* Annualized.
** Not annualized.
+ Commencement of Operations.
++ The amount shown for a share outstanding does not correspond with the aggregate net realized and unrealized gain (loss)
on investments for the period ended due to the timing of sales of Fund shares in relation to fluctuating market value of
the investments.
+++ The Funds invest all of their investable assets in Large Cap Growth Portfolio, Large Cap Value Portfolio, Small Cap
Growth Portfolio, Small Cap Value Portfolio, International Portfolio, Intermediate Income Portfolio, Foreign Bond
Portfolio and Short-Term Portfolio, whose portfolio turnover rates were 50%, 61%, 51%, 47%, 43%, 98%, 693% and 0%,
respectively at October 31, 1998.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CITISELECT FOLIO 400 CITISELECT FOLIO 500
...........................................................................................................................
Year Ten Months June 17, Year Ten Months September 3,
Ended Ended 1996+ to Ended Ended 1996+ to
October 31, October 31, December 31, October 31, October 31, December 31,
1998 1997 1996 1998 1997 1996
...........................................................................................................................
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
beginning of period $12.01 $10.82 $10.00 $12.08 $10.69 $10.00
...........................................................................................................................
Income From Operations:
Net investment income 0.090 0.037 0.042 0.053 0.044 0.019
Net realized and
unrealized gain
(loss) on investments (0.417) 1.183 0.841 (0.786) 1.346 0.701
...........................................................................................................................
Total from operations (0.327) 1.220 0.883 (0.733) 1.390 0.720
...........................................................................................................................
Less Distributions From:
Net investment income (0.079) (0.003) (0.029) (0.083) -- (0.019)
Net realized gain on
investments (0.244) (0.027) 0.034) (0.154) -- --
In excess of net income -- -- -- -- -- (0.001)
In excess of realized
gains on investments -- -- -- -- -- (0.010)
...........................................................................................................................
Total from
distributions (0.323) (0.030) (0.063) (0.237) -- (0.030)
...........................................................................................................................
Net Asset Value, end of
period $11.36 $12.01 $10.82 $11.11 $12.08 $10.69
...........................................................................................................................
Total return (2.73)% 11.28%** 8.84%** (6.14)% 13.00%** 7.20%**
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CITISELECT FOLIO 400 CITISELECT FOLIO 500
...........................................................................................................................
Year Ten Months June 17, Year Ten Months September 3,
Ended Ended 1996+ to Ended Ended 1996+ to
October 31, October 31, December 31, October 31, October 31, December 31,
1998 1997 1996 1998 1997 1996
...........................................................................................................................
<S> <C> <C> <C> <C> <C> <C>
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of
period (in thousands) $410,350 $455,747 $253,556 $163,540 $202,823 $85,072
Ratio of expenses to
average net assets
(A) 1.47% 1.65%* 1.75%* 1.48% 1.72%* 1.75%*
Ratio of net investment
income to average net
assets 1.26% 1.39%* 1.39%* 0.72% 0.88%* 1.09%*
Portfolio turnover (B) +++ 151% 130% +++ 92% 27%
Note: If Agents of the Funds and the Agents of respective 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
per share $0.090 $0.037 $0.028 $0.053 $0.040 $0.001
RATIOS:
Expenses to average net
assets (A) 1.47% 1.65%* 2.20%* 1.48% 1.80%* 2.80%*
Net investment income
to average net assets 1.26% 1.39%* 0.93%* 0.72% 0.80%* 0.04%*
(A) Includes allocated expenses for the periods indicated from the respective portfolios.
(B) Portfolio turnover represents, for CitiSelect Folios 400 and 500, the rates of portfolio activity of Asset Allocation
Portfolios 400 and 500, respectively, the underlying portfolios through which the Funds invested until October 31, 1997.
* Annualized.
** Not annualized.
+ Commencement of Operations.
+++ The Funds invest all of their investable assets in Large Cap Growth Portfolio, Large Cap Value Portfolio, Small Cap
Growth Portfolio, Small Cap Value Portfolio, International Portfolio, Intermediate Income Portfolio, Foreign Bond
Portfolio and Short-Term Portfolio, whose portfolio turnover rates were 50%, 61%, 51%, 47%, 43%, 98%, 693% and 0%,
respectively at October 31, 1998.
</TABLE>
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
APPENDIX
Appendix
CLASS A SHARES -- ELIGIBLE PURCHASERS
Class A shares may be purchased without a sales charge by the
following eligible purchasers:
[] tax exempt organizations under Section 501(c)(3-13) of the
Internal Revenue Code
[] trust accounts for which Citibank, N.A or any subsidiary or
affiliate of Citibank acts as trustee and exercises
discretionary investment management authority
[] accounts for which Citibank or any subsidiary or affiliate of
Citibank performs investment advisory services or charges fees
for acting as custodian
[] directors or trustees (and their immediate families), and
retired directors or trustees (and their immediate families),
of any investment company for which Citibank or any subsidiary
or affiliate of Citibank serves as the investment adviser or as
a service agent
[] employees of Citibank and its affiliates, CFBDS, Inc. and its
affiliates or any Service Agent and its affiliates (including
immediate families of any of the foregoing), and retired
employees of Citibank and its affiliates or CFBDS and its
affiliates (including immediate families of any of the
foregoing)
[] investors participating in a fee-based or promotional
arrangement sponsored or advised by Citibank or its affiliates
[] investors participating in a rewards program that offers Fund
shares as an investment option based on an investor's balances
in selected Citigroup Inc. products and services
[] employees of members of the National Association of Securities
Dealers, Inc., provided that such sales are made upon the
assurance of the purchaser that the purchase is made for
investment purposes and that the securities will not be resold
except through redemption or repurchase
[] separate accounts used to fund certain unregistered variable
annuity contracts
[] direct rollovers by plan participants from a 401(k) plan
offered to Citigroup employees
[] shareholder accounts established through a reorganization or
similar form of business combination approved by a Fund's Board
of Trustees or by the Board of Trustees of any CitiFund the
terms of which entitle those shareholders to purchase shares of
a Fund or any CitiFund at net asset value without a sales
charge
[] employee benefit plans qualified under Section 401(k) of the
Internal Revenue Code with accounts outstanding on January 4,
1999
[] employee benefit plans qualified under Section 401 of the
Internal Revenue Code, including salary reduction plans
qualified under Section 401(k) of the Code, subject to minimum
requirements as may be established by CFBDS with respect to the
amount of purchase; currently, the amount invested by the
qualified plan in a Fund or in any combination of the Funds and
CitiFunds must total a minimum of $1 million
[] accounts associated with Copeland Retirement Programs
[] investors purchasing $500,000 or more of Class A shares;
however, a contingent deferred sales charge will be imposed on
the investments in the event of certain share redemptions
within 12 months following the share purchase, at the rate of
1% of the lesser of the value of the shares redeemed (not
including reinvested dividends and capital gains distributions)
or the total cost of the shares; the contingent deferred sales
charge on Class A shares will be waived under the same
circumstances as the contingent deferred sales charge on Class
B shares will be waived; in determining whether a contingent
deferred sales charge on Class A shares is payable, and if so,
the amount of the charge:
o it is assumed that shares not subject to the contingent
deferred sales charge are the first redeemed followed by
other shares held for the longest period of time
o all investments made during a calendar month will age one
month on the last day of the month and each subsequent month
o any applicable contingent deferred sales charge will be
deferred upon an exchange of Class A shares for Class A
shares of another Fund or any CitiFund and deducted from the
redemption proceeds when the exchanged shares are
subsequently redeemed (assuming the contingent deferred sales
charge is then payable)
o the holding period of Class A shares so acquired through an
exchange will be aggregated with the period during which the
original Class A shares were held
[] subject to appropriate documentation, investors where the
amount invested represents redemption proceeds from a mutual
fund (other than a Fund or a CitiFund), if:
o the redeemed shares were subject to an initial sales charge
or a deferred sales charge (whether or not actually imposed),
and
o the redemption has occurred no more than 60 days prior to the
purchase of Class A shares of the Fund
[] an investor who has a business relationship with an investment
consultant or other registered representative who joined a
broker-dealer which has a sales agreement with CFBDS from
another investment firm within six months prior to the date of
purchase by the investor, if:
o the investor redeems shares of another mutual fund sold
through the investment firm that previously employed that
investment consultant or other registered representative, and
either paid an initial sales charge or was at some time
subject to, but did not actually pay, a deferred sales charge
or redemption fee with respect to the redemption proceeds
o the redemption is made within 60 days prior to the investment
in a Fund, and
o the net asset value of the shares of the Fund sold to that
investor without a sales charge does not exceed the proceeds
of the redemption
The Statement of Additional Information (SAI) provides more
details about the Funds and their policies. The SAI is
incorporated by reference into this prospectus and is legally
part of it.
Additional information about each Fund's investments is
available in the Funds' Annual and Semi-Annual Reports to
Shareholders. In the Funds' Annual Report, you will find a
discussion of the market conditions and investment strategies
that significantly affected each Fund's performance.
The Annual and Semi-Annual Reports for the Funds list their
portfolio holdings and describe their performance.
To obtain free copies of the SAI and the Annual and Semi-
Annual Reports or to make other inquiries, please call toll-
free 1-800-625-4554.
The SAI is also available from the Securities and Exchange
Commission. You can find it on the SEC Internet site at http:/
/www.sec.gov. Information about the Funds (including the SAI)
can also be reviewed and copied at the SEC's Public Reference
Room in Washington, DC. You can get information on the
operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. You can receive copies of this information by
sending your request and a duplicating fee to the SEC's Public
Reference Section, Washington, DC 20549-6009.
SEC File Number:811-4006 CSP399
<PAGE>
Rule 497(C) File Nos. 2-90518 and 811-4006
Statement of Additional Information
March 1, 1999
CITISELECT(R) FOLIO 200
CITISELECT(R) FOLIO 300
CITISELECT(R) FOLIO 400
CITISELECT(R) FOLIO 500
CitiFunds Trust I (formerly known as "Landmark Funds I") (the "Trust") is
an open-end management investment company which was organized as a business
trust under the laws of the Commonwealth of Massachusetts on April 13, 1984. The
Trust offers shares of CitiSelect(R) Folio 200, CitiSelect(R) Folio 300,
CitiSelect(R) Folio 400 and CitiSelect(R) Folio 500 (collectively, the "Funds"),
to which this Statement of Additional Information relates, as well as shares of
one other series. The address and telephone number of the Trust are 21 Milk
Street, Boston, Massachusetts 02109, (617) 423-1679.
FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY,
CITIBANK, N.A. OR ANY OF ITS AFFILIATES, ARE NOT INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY OTHER AGENCY, AND ARE SUBJECT TO INVESTMENT RISKS,
INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
TABLE OF CONTENTS PAGE
1. The Trust ......................................................... 2
2. Investment Objectives and Policies ................................ 2
3. Description of Permitted Investments and Investment Practices ..... 3
4. Investment Restrictions ........................................... 22
5. Performance Information and Advertising ........................... 23
6. Determination of Net Asset Value; Valuation of Securities ......... 24
7. Additional Information on the Purchase and Sale of Fund Shares
and Shareholder Programs .......................................... 25
8. Management ........................................................ 32
9. Portfolio Transactions ............................................ 40
10. Description of Shares, Voting Rights and Liabilities .............. 41
11. Tax Matters ....................................................... 42
12. Certain Bank Regulatory Matters ................................... 44
13. Financial Statements .............................................. 45
This Statement of Additional Information sets forth information which may be of
interest to investors but which is not necessarily included in the Funds'
Prospectus, dated March 1, 1999, by which shares of the Funds are offered. This
Statement of Additional Information should be read in conjunction with the
Prospectus. This Statement of Additional Information incorporates by reference
the financial statements described on page 45 hereof. These financial statements
can be found in the Funds' Annual Report to Shareholders. An investor may obtain
copies of the Funds' Prospectus and Annual Report without charge by calling
1-800-625-4554.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS AUTHORIZED
FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY AN
EFFECTIVE PROSPECTUS.
<PAGE>
1. THE TRUST
CitiFunds Trust I (the "Trust") is an open-end management investment
company organized as a business trust under the laws of the Commonwealth of
Massachusetts on April 13, 1984. The Trust was called Landmark Funds I until its
name was changed effective March 2, 1998. This Statement of Additional
Information relates to four funds offered by the Trust -- CitiSelect Folio 200,
CitiSelect Folio 300, CitiSelect Folio 400 and CitiSelect Folio 500
(collectively, the "Funds").
The Trust seeks the investment objective of each Fund by investing all of
its investable assets in multiple underlying investment companies or series
thereof. Currently, these investment companies are Large Cap Value Portfolio,
Small Cap Value Portfolio, Intermediate Income Portfolio, Short-Term Portfolio,
International Portfolio, Foreign Bond Portfolio, Large Cap Growth Portfolio and
Small Cap Growth Portfolio (collectively, the "Portfolios"). The Portfolios
(other than Large Cap Growth Portfolio and Small Cap Growth Portfolio, which are
series of The Premium Portfolios) are series of Asset Allocation Portfolios
(collectively, with The Premium Portfolios, the "Portfolio Trusts"). The
Portfolio Trusts are open-end, diversified management investment companies
organized as New York trusts. Under the Investment Company Act of 1940, as
amended (the "1940 Act"), a diversified management investment company 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 investment company and
not more than 10% of the voting securities of the issuer.
Citibank, N.A. ("Citibank" or the "Manager") is investment adviser and
also provides certain administrative services to each of the Funds. Certain
subadvisers have been engaged to manage certain kinds of assets of the Funds.
Citibank or the applicable subadviser manages the investments of the Funds from
day to day in accordance with each Fund's investment objective and policies. The
selection of investments for the Funds and the way they are managed depend on
the conditions and trends in the economy and the financial marketplaces.
The Board of Trustees of the Trust provides broad supervision over the
affairs of the Funds. Shares of the Funds are continuously sold by CFBDS, Inc.,
the Funds' distributor ("CFBDS" or the "Distributor").
2. INVESTMENT OBJECTIVES AND POLICIES
Each Fund is an asset allocation 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 by Citibank to offer a different
level of potential return within a corresponding amount of risk. The investment
objective (or goal) 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.
The Prospectus contains a discussion of the principal investment
strategies of each Fund and the principal risks of investing in each Fund. The
following supplements the information contained in the Prospectus concerning the
investment policies and techniques of each Fund.
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 investors who can
withstand greater market swings to seek potential long-term rewards. CitiSelect
Folio 400 is designed for investors seeking long-term rewards, but with less
volatility.
The Trust may withdraw the investment of any Fund from one or more of its
underlying Portfolios at any time if the Board of Trustees of the Trust
determines that it is in the best interests of the Fund to do so. Upon any such
withdrawal, the Fund's assets would continue to be invested in accordance with
the investment policies described herein with respect to that Fund.
Except as otherwise expressly noted, the policies described above and
those described below are not fundamental and may be changed without shareholder
approval.
3. DESCRIPTION OF PERMITTED INVESTMENTS AND INVESTMENT PRACTICES
The Funds may, but need not, invest in any or all of the investments and
utilize any or all of the investment techniques described in the Prospectus and
herein. The selection of investments and the utilization of investment
techniques depend on, among other things, the Manager's and, as applicable, the
subadvisers' investment strategies for the Funds, conditions and trends in the
economy and financial markets and investments being available on terms that, in
the Manager's or a subadviser's opinion, make economic sense.
BANK OBLIGATIONS
Each of the Funds may invest in bank obligations, i.e., certificates of
deposit, time deposits (including Eurodollar time deposits) and bankers'
acceptances and other short-term debt obligations issued by domestic banks,
foreign subsidiaries or foreign branches of domestic banks, domestic and foreign
branches of foreign banks, domestic savings and loan associations and other
banking institutions. A bankers' acceptance is a bill of exchange or time draft
drawn on and accepted by a commercial bank. It is used by corporations to
finance the shipment and storage of goods and to furnish dollar exchange.
Maturities are generally six months or less. A certificate of deposit is a
negotiable interest-bearing instrument with a specific maturity. Certificates of
deposit are issued by banks and savings and loan institutions in exchange for
the deposit of funds and normally can be traded in the secondary market prior to
maturity. A time deposit is a non-negotiable receipt issued by a bank in
exchange for the deposit of funds. Like a certificate of deposit, it earns a
specified rate of interest over a definite period of time; however, it cannot be
traded in the secondary market. Time deposits with a withdrawal penalty are
considered to be illiquid securities.
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.
OTHER INVESTMENT COMPANIES
Each Fund invests in shares of underlying investment companies or
Portfolios in accordance with Section 12(d)(1)(G) of the 1940 Act. Each
Portfolio may invest its assets in closed-end investment companies as permitted
by applicable law.
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.
MORTGAGE-BACKED SECURITIES
Each of the Funds may invest in mortgage-backed securities, which are
securities representing interests in pools of mortgage loans. Interests in pools
of mortgage-related securities differ from other forms of debt securities which
normally provide for periodic payment of interest in fixed amounts with
principal payments at maturity or specified call dates. Instead, these
securities provide a monthly payment which consists of both interest and
principal payments. In effect, these payments are a "pass-through" of the
monthly payments made by the individual borrowers on their mortgage loans, net
of any fees paid to the issuer or guarantor of such securities. Additional
payments are caused by prepayments of principal resulting from the sale,
refinancing or foreclosure of the underlying property, net of fees or costs
which may be incurred. The market value and interest yield of these instruments
can vary due to market interest rate fluctuations and early prepayments of
underlying mortgages.
The principal governmental issuers or guarantors of mortgage-backed
securities are the Government National Mortgage Association ("GNMA"), Federal
National Mortgage Association ("FNMA"), and Federal Home Loan Mortgage
Corporation ("FHLMC"). Obligations of GNMA are backed by the full faith and
credit of the United States Government while obligations of FNMA and FHLMC are
supported by the respective agency only. Although GNMA certificates may offer
yields higher than those available from other types of U.S. Government
securities, GNMA certificates may be less effective than other types of
securities as a means of "locking in" attractive long-term rates because of the
prepayment feature. For instance, when interest rates decline, the value of a
GNMA certificate likely will not rise as much as comparable debt securities due
to the prepayment feature. In addition, these prepayments can cause the price of
a GNMA certificate originally purchased at a premium to decline in price to its
par value, which may result in a loss.
Each Fund may also invest in collateralized mortgage obligations or
"CMOs," a type of mortgage-backed security. CMOs are securities collateralized
by mortgages, mortgage pass-through certificates, mortgage pay-through bonds
(bonds representing an interest in a pool of mortgages where the cash flow
generated from the mortgage collateral pool is dedicated to bond repayment), and
mortgage-backed bonds (general obligations of the issuers payable out of the
issuers' general funds and additionally secured by a first lien on a pool of
single family detached properties). Many CMOs are issued with a number of
classes or series which have different maturities and are retired in sequence.
Investors purchasing such CMOs in the shortest maturities receive or are
credited with their pro rata portion of the scheduled payments of interest and
principal on the underlying mortgages plus all unscheduled prepayments of
principal up to a predetermined portion of the total CMO obligation. Until that
portion of such CMO obligations is repaid, investors in the longer maturities
receive interest only. Accordingly, the CMOs in the longer maturity series are
less likely than other mortgage pass-through certificates to be prepaid prior to
their stated maturity. Although some of the mortgages underlying CMOs may be
supported by various types of insurance, and some CMOs may be backed by GNMA
certificates or other mortgage pass-through certificates issued or guaranteed by
U.S. Government agencies or instrumentalities, the CMOs themselves are not
generally guaranteed.
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. 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. This
particular risk, referred to as "maturity extension 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, rising interest rates would not only likely
decrease the value of a Fund's fixed income securities, but would also increase
the inherent volatility of the Fund by effectively converting short-term debt
instruments into long-term debt instruments. As a result, prices of
mortgage-backed securities may decrease more than prices of other debt
obligations when interest rates go up.
MORTGAGE "DOLLAR ROLL" TRANSACTIONS
The Funds may enter into mortgage "dollar roll" transactions pursuant to
which they sell mortgage-backed securities for delivery in the future and
simultaneously contract to repurchase substantially similar securities on a
specified future date. During the roll period, a Fund forgoes principal and
interest paid on the mortgage-backed securities. The Fund is compensated for the
lost principal and interest by the difference between the current sales price
and the lower price for the future purchase (often referred to as the "drop") as
well as by the interest earned on the cash proceeds of the initial sale. The
Fund may also be compensated by receipt of a commitment fee. However, a Fund
takes the risk that the market price of the mortgage-backed security will drop
below the future purchase price. When a Fund uses a mortgage dollar roll, it is
also subject to the risk that the other party to the agreement will not be able
to perform. A "covered roll" is a specific type of dollar roll for which a Fund
establishes a segregated account with liquid securities equal in value to the
securities subject to repurchase by the Fund. The Funds will invest only in
covered rolls.
CORPORATE ASSET-BACKED SECURITIES
Each of the Funds 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 and 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. Credit card receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts owed on the credit cards, thereby reducing the
balance due. Most issuers of automobile receivables permit the servicers to
retain possession of the underlying obligations. If the servicer were to sell
these obligations to another party, there is a risk that the purchaser would
acquire an interest superior to that of the holders of the related automobile
receivables. In addition, because of the large number of vehicles involved in a
typical issuance and technical requirements under state laws, the trustee for
the holders of the automobile receivables may not have a proper security
interest in all of the obligations backing such receivables. Therefore, there is
the possibility that recoveries on repossessed collateral may not, in some
cases, be available to support payments on these securities. The underlying
assets (e.g., loans) are also subject to prepayments which shorten the
securities' weighted average life and may lower their return.
Corporate asset-backed securities are often backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors on underlying assets to make payments, the
securities may contain elements of credit support which fall into two
categories: (i) liquidity protection and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the receipt of payments
on the underlying pool occurs in a timely fashion. Protection against losses
resulting from ultimate default ensures payment through insurance policies or
letters of credit obtained by the issuer or sponsor from third parties. The
degree of credit support provided for each issue is generally based on
historical information respecting the level of credit risk associated with the
underlying assets. Delinquency or loss in excess of that anticipated or failure
of the credit support could adversely affect the return on an investment in such
a security.
RULE 144A SECURITIES
Consistent with applicable investment restrictions, each of the Funds may
purchase securities that are not registered ("restricted securities") under the
Securities Act of 1933 (the "Securities Act"), but can be offered and sold to
"qualified institutional buyers" under Rule 144A under the Securities Act.
However, none of the Funds invests more than 15% of its net assets (taken at
market value) in illiquid investments, which include securities for which there
is no readily available market, securities subject to contractual restrictions
on resale and restricted securities, unless, in the case of restricted
securities, the Board of Trustees of the Trust determines, based on the trading
markets for the specific restricted security, that it is liquid. The Trustees
have adopted guidelines and, subject to oversight by the Trustees, have
delegated to the Manager and to each Subadviser the daily function of
determining and monitoring liquidity of restricted securities.
PRIVATE PLACEMENTS AND ILLIQUID INVESTMENTS
Each Fund may invest up to 15% 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.
SECURITIES OF NON-U.S. ISSUERS
Each of the Funds may invest in securities of non-U.S. issuers. Investing
in securities of foreign issuers may involve significant risks not present in
domestic investments. For example, the value of such securities fluctuates based
on the relative strength on the U.S. dollar. In addition, there is generally
less publicly available information about foreign issuers, particularly those
not subject to the disclosure and reporting requirements of the U.S. securities
laws. Non-U.S. issuers are generally not bound by uniform accounting, auditing
and financial reporting requirements comparable to those applicable to domestic
issuers. Investments in securities of non-U.S. issuers also involve the risk of
possible adverse changes in investment or exchange control regulations,
expropriation or confiscatory taxation, limitation on the removal of funds or
other assets of the Fund, political or financial instability or diplomatic and
other developments which would affect such investments. Further, economies of
other countries or areas of the world may differ favorably or unfavorably from
the economy of the U.S.
It is anticipated that in most cases the best available market for
securities of non-U.S. issuers would be on exchanges or in over-the-counter
markets located outside the U.S. Non-U.S. stock markets, while growing in volume
and sophistication, are generally not as developed as those in the U.S., and
securities of some non-U.S. issuers (particularly those located in developing
countries) may be less liquid and more volatile than securities of comparable
U.S. companies. Non-U.S. security trading practices, including those involving
securities settlement where the Fund's assets may be released prior to receipt
of payments, may expose the Fund to increased risk in the event of a failed
trade or the insolvency of a non-U.S. broker-dealer. In addition, foreign
brokerage commissions are generally higher than commissions on securities traded
in the U.S. and may be non-negotiable. In general, there is less overall
governmental supervision and regulation of non-U.S. securities exchanges,
brokers and listed companies than in the U.S.
Investments in closed-end investment companies which primarily hold
securities of non-U.S. issuers may entail the risk that the market value of such
investments may be substantially less than their net asset value and that there
would be duplication of investment management and other fees and expenses.
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
the Funds to make non-U.S. investments. These securities are not usually
denominated in the same currency as the securities into which they may be
converted. Generally, ADRs, in registered form, are designed for use in U.S.
securities markets and 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.
ADRs, EDRs, and GDRs may be issued pursuant to sponsored or unsponsored
programs. In sponsored programs, an issuer has made arrangements to have its
securities traded in the form of depositary receipts. In unsponsored programs,
the issuer may not be directly involved in the creation of the program. Although
regulatory requirements with respect to sponsored and unsponsored programs are
generally similar, in some cases it may be easier to obtain financial
information from an issuer that has participated in the creation of a sponsored
program. Accordingly, there may be less information available regarding issuers
of securities underlying unsponsored programs and there may not be a correlation
between such information and the market value of the depositary receipts.
The Funds may invest in securities of non-U.S. issuers that impose
restrictions on transfer within the United States or to United States persons.
Although securities subject to such transfer restrictions may be marketable
abroad, they may be less liquid than securities of non-U.S. issuers of the same
class that are not subject to such restrictions.
REPURCHASE AGREEMENTS
Each of the Funds may invest in repurchase agreements collateralized by
securities in which that Fund may otherwise invest. Repurchase agreements are
agreements by which a Fund purchases a security and simultaneously commits to
resell that security to the seller (which is usually a member bank of the U.S.
Federal Reserve System or a member firm of the New York Stock Exchange (or a
subsidiary thereof)) at an agreed upon date within a number of days (usually not
more than seven) from the date of purchase. The resale price reflects the
purchase price plus an agreed upon market rate of interest which is unrelated to
the coupon rate or maturity of the purchased security. A repurchase agreement
involves the obligation of the seller to pay the agreed upon price, which
obligation is in effect secured by the value of the underlying security, usually
U.S. Government or Government agency issues. Under the 1940 Act repurchase
agreements may be considered to be loans by the buyer. A Fund's risk is limited
to the ability of the seller to pay the agreed-upon amount on the delivery date.
If the seller defaults, the underlying security constitutes collateral for the
seller's obligation to pay although that Fund may incur certain costs in
liquidating this collateral and in certain cases may not be permitted to
liquidate this collateral. All repurchase agreements entered into by the Funds
are fully collateralized, with such collateral being marked to market daily. In
the event of the bankruptcy of the other party to a 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 purchased has
decreased, the Fund could experience a loss.
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 segregated. 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. In the event of the bankruptcy of the
other party to a reverse repurchase agreement, a Fund could experience delays in
recovering the securities sold. To the extent that, in the meantime, the value
of the securities sold has increased, the Fund could experience a loss.
LENDING OF SECURITIES
Consistent with applicable regulatory requirements and in order to
generate income, each of the Funds may lend its securities to broker-dealers and
other institutional borrowers. Loans of securities would be secured continuously
by collateral in cash, cash equivalents, or U.S. Treasury obligations maintained
on a current basis at an amount at least equal to the market value of the
securities loaned. The cash collateral would be invested in high quality
short-term instruments. Either party has the right to terminate a loan at any
time on customary industry settlement notice (which will not usually exceed
three business days). During the existence of a loan, a Fund would continue to
receive the equivalent of the interest or dividends paid by the issuer on the
securities loaned and with respect to cash collateral, would also receive
compensation based on investment of cash collateral (subject to a rebate payable
to the borrower) or a fee from the borrower in the event the collateral consists
of securities. Where the borrower provides a Fund with collateral consisting of
U.S. Treasury obligations, the borrower is also obligated to pay the Fund a fee
for use of the borrowed securities. The Fund, would not, however, have the right
to vote any securities having voting rights during the existence of the loan,
but would call the loan in anticipation of an important vote to be taken among
holders of the securities or of the giving or withholding of their consent on a
material matter affecting the investment. As with other extensions of credit,
there are risks of delay in recovery or even loss of rights in the collateral
should the borrower fail financially. However, the loans would be made only to
entities deemed by the Manager or a Subadviser to be of good standing, and when,
in the judgment of the Manager or a Subadviser, the consideration which can be
earned currently from loans of this type justifies the attendant risk. In
addition, a Fund could suffer loss if the borrower terminates the loan and the
Fund is forced to liquidate investments in order to return the cash collateral
to the buyer. If the Manager or a subadviser determines to make loans, it is not
intended that the value of the securities loaned would exceed 30% of the market
value of the respective Fund's total assets.
WHEN-ISSUED SECURITIES
Each of the Funds 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. It is expected that,
under normal circumstances, the applicable Fund would take delivery of such
securities. In general, the Fund does not pay for the securities until received
and does not start earning interest until the contractual settlement date. When
a Fund commits to purchase a security on a "when-issued" or on a "forward
delivery" basis, it sets up procedures consistent with Securities and Exchange
Commission policies. Since those policies currently require that an amount of a
Fund's assets equal to the amount of the purchase be held aside or segregated to
be used to pay for the commitment, the Funds expect always to have cash or
liquid securities sufficient to cover any commitments or to limit any potential
risk. However, even though the Funds intend to adhere to the provisions of
Securities and Exchange Commission policies, purchases of securities on such
bases may involve more risk than other types of purchases. For example, a Fund
may have to sell assets which have been set aside in order to meet redemptions.
Also, if the Manager or a Subadviser determines it is advisable as a matter of
investment strategy to sell the "when-issued" or "forward delivery" securities,
the Fund would be required to meet its obligations from the then available cash
flow or the sale of securities, or, although it would not normally expect to do
so, from the sale of the "when-issued" or "forward delivery" securities
themselves (which may have a value greater or less than the Fund's payment
obligation). 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.
SHORT SALES
The Funds may seek to hedge investments or realize additional gains
through short sales. Short sales are transactions in which a Fund sells a
security it does not own in anticipation of a decline in the market value of
that security. To complete such a transaction, a Fund must borrow the security
to make delivery to the buyer. A Fund then is obligated to replace the security
borrowed by purchasing it at the market price at or prior to the time of
replacement. The price at such time may be more or less than the price at which
the security was sold by a Fund. Until the security is replaced, a Fund is
required to repay the lender any dividends or interest that accrue during the
period of the loan. To borrow the security, a Fund also may be required to pay a
premium, which would increase the cost of the security sold. A portion of the
net proceeds of the short sale may be retained by the broker (or by the Fund's
custodian in a special custody account), to the extent necessary to meet margin
requirements, until the short position is closed out. A Fund will also incur
transaction costs in effecting short sales.
A Fund will incur a loss as a result of the short sale if the price of
the security increases between the date of the short sale and the date on which
a Fund replaces the borrowed security. A Fund will realize a gain if the
security declines in price between those dates. The amount of any gain will be
decreased, and the amount of any loss increased, by the amount of the premiums,
dividends, interest or expenses a Fund may be required to pay in connection with
a short sale. An increase in the value of a security sold short by a Fund over
the price at which it was sold short will result in a loss to the Fund, and
there can be no assurance that a Fund will be able to close out the position at
any particular time or at an acceptable price. Thus a Fund's losses on short
sales are potentially unlimited.
The Funds may also engage in short sales of non-U.S. currencies. See
"Foreign Currency Exchange Transactions" below.
FOREIGN CURRENCY EXCHANGE TRANSACTIONS
The Funds may engage in foreign currency exchange transactions as an
attempt to protect against uncertainty in the level of future foreign currency
exchange rates or as an attempt to enhance performance.
The Funds may enter into foreign currency exchange transactions to
convert United States currency to foreign currency and foreign currency to
United States currency, as well as convert foreign currency to other foreign
currencies. A Fund either enters into these transactions on a spot (i.e., cash)
basis at the spot rate prevailing in the foreign currency exchange market, or
uses forward contracts to purchase or sell foreign currencies.
The Funds may convert currency on a spot basis from time to time, and
investors should be aware of the costs of currency conversion. Although currency
exchange dealers do not charge a fee for conversion, they do realize a profit
based on the difference (the "spread") between the prices at which they are
buying and selling various currencies. Thus, a dealer may offer to sell a
currency at one rate, while offering a lesser rate of exchange should the Fund
desire to resell that currency to the dealer.
A forward contract involves an obligation to purchase or sell a specific
currency at a future date, which may be any fixed number of days from the date
of the contract, agreed upon by the parties, at a price set at the time of the
contract. These contracts are traded in the interbank market conducted directly
between currency traders (usually large commercial banks) and their customers. A
forward contract generally has no deposit requirement, and no fees or
commissions are charged at any stage for trades. A Fund may enter into forward
contracts for hedging and non-hedging purposes, including transactions entered
into for the purposes of profiting from anticipated changes in foreign currency
exchange rates.
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. A forward contract entered into by a Fund may
involve the purchase or sale, for a fixed amount of U.S. currency, of another
currency. Each of the Funds may also enter into forward contracts for the
purchase or sale, for a fixed amount of a non-U.S. currency, of another non-U.S.
currency.
When a Fund enters into a contract for the purchase or sale of a security
denominated in a non-U.S. currency, it may desire to "lock in" the U.S. dollar
price of the security. By entering into a forward contract for the purchase or
sale, for a fixed amount of U.S. dollars, of the amount of non-U.S. currency
involved in the underlying security transaction, the Fund may be able to protect
against a possible loss resulting from an adverse change in the relationship
between the U.S. dollar and the non-U.S. currency during the period between the
date the security is purchased or sold and the date on which payment is made or
received.
When the Manager or a Subadviser believes that the currency of a
particular country may suffer a substantial decline against the U.S. dollar, a
Fund may enter into a forward contract to sell the non-U.S. currency, for a
fixed amount of U.S. dollars. If a Fund owns securities in that currency, the
Manager or Subadviser may enter into a contract to sell the non-U.S. currency in
an amount approximating the value of some or all of the Fund's securities
denominated in such non-U.S. currency. The precise matching of the forward
contract amounts and the value of the securities involved is not generally
possible since the future value of such securities in non-U.S. currencies
changes as a consequence of market movements in the value of those securities
between the date the forward contract is entered into and the date it matures.
At the maturity of a forward contract, a Fund will either deliver the
non-U.S. currency or terminate its contractual obligation to deliver the
non-U.S. currency by purchasing an "offsetting" contract with the same currency
trader obligating it to purchase, on the same maturity date, the same amount of
the non-U.S. currency. If a Fund engages in an offsetting transaction, the Fund
will incur a gain or a loss (as described below) to the extent that there has
been movement in forward contract prices. If a Fund engages in an offsetting
transaction, it may subsequently enter into a new forward contract to sell the
non-U.S. currency. Should forward prices decline during the period between the
date a Fund enters into a forward contract for the sale of the non-U.S. currency
and the date it enters into an offsetting contract for the purchase of such
currency, the Fund will realize a gain to the extent the selling price of the
currency exceeds the purchase price of the currency. Should forward prices
increase, the Fund will suffer a loss to the extent that the purchase price of
the currency exceeds the selling price of the currency.
Where a Fund enters into a forward contract with respect to securities it
holds denominated in the non-U.S. currency, it is impossible to forecast with
precision the market value of Fund securities at the expiration of the contract.
Accordingly, it may be necessary for a Fund to purchase additional non-U.S.
currency on the spot market if the market value of the security is less than the
amount of non-U.S. currency the Fund is obligated to deliver and if a decision
is made to sell the security and make delivery of such currency. Conversely, it
may be necessary to sell on the spot market some of the non-U.S. currency
received upon the sale of the security if its market value exceeds the amount of
such currency the Fund is obligated to deliver.
When a Fund enters into a forward contract for non-hedging purposes,
there is a greater potential for profit but also a greater potential for loss.
For example, a Fund may purchase a given foreign currency through a forward
contract if the value of such currency is expected to rise relative to the U.S.
dollar or another foreign currency. Conversely, a Fund may sell the currency
through a forward contract if the value of the currency is expected to decline
against the dollar or another foreign currency. The Fund will profit if the
anticipated movements in foreign currency exchange rates occur, which will
increase gross income. Where exchange rates do not move in the direction or the
extent anticipated, however, the Fund may sustain losses which will reduce its
gross income. Such transactions should be considered speculative and could
involve significant risk of loss.
Each of the Funds may also engage in short sales of non-U.S. currencies
in which a Fund would sell a currency that it did not own in anticipation of a
fall in the value of that currency relative to U.S. dollars or another foreign
currency. A Fund may do this even if it does not hold any securities or other
assets denominated in the non-U.S. currency being sold short. In order for the
Fund to deliver the currency sold short, it would be required to purchase the
currency. If the expected decline occurs, the Fund would gain the difference
between the price at which it sold the currency, and the price it paid for the
currency. However, if the price of the currency increases, the Fund would suffer
a loss to the extent that the purchase price of the currency exceeds the price
of the currency it sold short. A Fund's losses on such short sales are
potentially unlimited.
Each Fund has established procedures consistent with policies of the
Securities and Exchange Commission concerning forward contracts and short sales.
Those policies currently require that an amount of a Fund's assets equal to the
amount of the purchase be held aside or segregated to be used to pay for the
commitment or that the Fund otherwise covers its position in accordance with
applicable regulations and policies.
Each of the Funds may purchase put options on a currency in an attempt to
protect against currency rate fluctuations or to seek to enhance gains. When a
Fund purchases a put option on a currency, the Fund will have the right to sell
the currency for a fixed amount in U.S. dollars, or other currency. Conversely,
where a rise in the value of one currency is projected against another, the Fund
may purchase call options on the currency, giving it the right to purchase the
currency for a fixed amount of U.S. dollars or another currency. Each Fund may
purchase put or call options on currencies, even if the Fund does not currently
hold or intend to purchase securities denominated in such currencies.
The benefit to the Fund from purchases of currency options will be
reduced by the amount of the premium and related transaction costs. In addition,
where currency exchange rates do not move in the direction or to the extent
anticipated, the Fund could sustain losses on transactions in foreign currency
options.
The Funds may write options on currencies for hedging purposes or
otherwise in an attempt to achieve their investment objectives. For example,
where a Fund anticipates a decline in the U.S. dollar value of a foreign
security due to adverse fluctuations in exchange rates it could, instead of
purchasing a put option, write a call option on the relevant currency. If the
expected decline occurs, the option will most likely not be exercised, and the
diminution in value of the security held by the Fund may be offset by the amount
of the premium received. If the expected decline does not occur, the Fund may be
required to sell foreign currencies at disadvantageous exchange rates, thereby
incurring losses. A Fund could also write call options on a currency, even if it
does not own any securities denominated in that currency, in an attempt to
enhance gains. In that case, if the expected decline does not occur, the Fund
would be required to purchase the currency and sell it at a loss, which may not
be offset by the premium received. As with a short sale of a security or a
currency, the losses in this case could be unlimited.
Similarly, instead of purchasing a call option to hedge against an
anticipated increase in the cost of a foreign security to be acquired because of
an increase in the U.S. dollar value of the currency in which the underlying
security is primarily traded, a Fund could write a put option on the relevant
currency which, if rates move in the manner projected, will expire unexercised
and allow the Fund to hedge such increased cost up to the amount of the premium.
However, the writing of a currency option will constitute only a partial hedge
up to the amount of the premium, and only if rates move in the expected
direction. If this does not occur, the option may be exercised and the Fund
would be required to purchase or sell the underlying currency at a loss which
may not be offset by the amount of the premium. Through the writing of options
on currencies, a Fund also may be required to forgo all or a portion of the
benefits which might otherwise have been obtained from favorable movements in
exchange rates. A Fund could also write put options on a currency, even if it
does not own, or intend to purchase, any securities denominated in that
currency. In that case, if the expected increase does not occur, the Fund would
be required to purchase the currency at a price that is greater than the current
exchange rate for the currency, and the losses in this case could exceed the
amount of premium received for writing the options, and could be unlimited.
Options on foreign currencies are traded on U.S. or foreign exchanges or
in the over-the-counter market. Each of the Funds may enter into transactions in
options on foreign currencies that are traded in the over-the-counter market.
These transactions are not afforded the protections provided to traders on
organized exchanges or those regulated by the CFTC. In particular,
over-the-counter options are not cleared and guaranteed by a clearing
corporation, thereby increasing the risk of counterparty default. In addition,
there may not be a liquid market on these options, which may prevent a Fund from
liquidating open positions at a profit prior to exercise or expiration, or to
limit losses in the event of adverse market conditions.
The purchase and sale of foreign currency options are subject to the
risks of the availability of a liquid secondary market and counterparty risk, as
described above, as well as the risks regarding adverse market movements,
margining of options written, the nature of the foreign currency market,
possible interventions by governmental authorities and the effects of other
political and economic events. In addition, the value of a Fund's positions in
foreign currency options could be adversely affected by (1) other complex
foreign political and economic factors, (2) lesser availability of data on which
to make trading decisions than in the United States, (3) delays in the Fund's
ability to act upon economic events occurring in foreign markets during
non-business hours in the United States or at the applicable Subadviser's place
of business, and (4) imposition of different exercise and settlement terms and
procedures and margin requirements than in the United States.
In addition, because foreign currency transactions occurring in the
interbank market generally involve substantially larger amounts than those that
may be involved in the use of foreign currency options, the Funds may be
disadvantaged by having to deal in an odd lot market (generally consisting of
transactions of less than $1 million) for the underlying foreign currencies at
prices that are less favorable than for round lots.
There is no systematic reporting of last-sale information for foreign
currencies and there is no regulatory requirement that quotations available
through dealers or other market sources be firm or revised on a timely basis.
Available quotation information is generally representative of very large
transactions in the interbank market and thus may not reflect relatively smaller
transactions (less than $1 million) where rates may be less favorable. The
interbank market in foreign currencies is a global, around-the-clock market. To
the extent that the U.S. options markets, or other markets used by the Manager
or a Subadviser are closed while the markets for the underlying currencies
remain open, significant price and rate movements may take place in the
underlying markets that may not be reflected in the U.S. or other markets used
by the Funds.
Put and call options on non-U.S. currencies written by a Fund will be
covered by segregation of cash and liquid securities in an amount sufficient to
discharge the Fund's obligations with respect to the option, by acquisition of
the non-U.S. currency or of a right to acquire such currency (in the case of a
call option) or the acquisition of a right to dispose of the currency (in the
case of a put option), or in such other manner as may be in accordance with the
requirements of any exchange on which, or the counterparty with which, the
option is traded and applicable laws and regulations.
The Funds may engage in proxy hedges and cross hedges. For example, in a
proxy hedge, a Fund, having purchased a security, would 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
might 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. Fox
example, the Fund would sell the currency expected to decrease and purchase a
currency which is expected to increase against the currency sold in an attempt
to protect against declines in value of the Fund's holdings denominated in the
currency sold.
Investing in ADRs and other depositary receipts presents many of the same
risks regarding currency exchange rates as investing directly in securities
traded in currencies other than the U.S. dollar. Because the securities
underlying ADRs are traded primarily in non-U.S. currencies, changes in currency
exchange rates will affect the value of these receipts. For example, a decline
in the U.S. dollar value of another currency in which securities are primarily
traded will reduce the U.S. dollar value of such securities, even if their value
in the other non-U.S. currency remains constant, and thus will reduce the value
of the receipts covering such securities. A Fund may employ any of the above
described foreign currency hedging techniques to protect the value of its assets
invested in depositary receipts.
Each of the Funds may also purchase and sell foreign currency futures
contracts as more fully discussed under "Futures Contracts" below, and engage in
currency swaps and other similar transactions as more fully discussed under
"Swaps and Related Transactions" below.
Of course, a Fund is not required to enter into the transactions
described above and does not do so unless deemed appropriate by the Manager or a
Subadviser. It should be realized that under certain circumstances, the Funds
may not be able to hedge against a decline in the value of a currency, even if
the Manager or a Subadviser deems it appropriate to try to do so, because doing
so would be too costly. It should also be realized that transactions entered
into to protect the value of a Fund's securities against a decline in the value
of a currency (even when successful) do not eliminate fluctuations in the
underlying prices of the securities. Additionally, although hedging transactions
may tend to minimize the risk of loss due to a decline in the value of the
hedged currency, they also tend to limit any potential gain which might result
should the value of such currency increase.
Investors should also be aware of the increased risk to a Fund and its
shareholders when it enters into foreign currency exchange transactions for
non-hedging purposes. Non-hedging transactions in such instruments involve
greater risks and may result in losses which are not offset by increases in the
value of a Fund's other assets. Although a Fund is required to segregate assets
or otherwise cover certain types of transactions, this does not protect the Fund
against risk of loss. Furthermore, the Funds' use of foreign currency exchange
transactions may involve leveraging. Leveraging adds increased risks to a Fund,
because the Fund's losses may be out of proportion to the amount invested in the
instrument--a relatively small investment may lead to much greater losses.
OPTIONS
Each of the Funds may write call and put options and purchase call and
put options on securities for hedging and nonhedging purposes. Call and put
options written by a Fund will be covered in the manner set forth below, or the
Fund will segregate cash or liquid securities equal to the value of the
securities underlying the option.
A call option written by a Fund is "covered" if the Fund owns the
security underlying the call or has an absolute and immediate right to acquire
that security without additional cash consideration (or for additional cash
consideration held in a segregated account) upon conversion or exchange of other
securities held in its portfolio. A call option is also covered if a Fund holds
a call on the same security and in the same principal amount as the call written
where the exercise price of the call held (a) is equal to or less than the
exercise price of the call written or (b) is greater than the exercise price of
the call written if the difference is maintained by a Fund in cash or liquid
securities in a segregated account. A put option written by a Fund is "covered"
if the Fund maintains cash or liquid securities with a value equal to the
exercise price in a segregated account or else holds a put on the same security
and in the same principal amount as the put written where the exercise price of
the put held is equal to or greater than the exercise price of the put written
or where the exercise price of the put held is less than the exercise price of
the put written if the difference is maintained by the Fund in cash or liquid
securities in a segregated account. Put and call options written by a Fund may
also be covered in such other manner as may be in accordance with the
requirements of the exchange on which, or the counterparty with which, the
option is traded, and applicable laws and regulations. Even if the Fund's
obligation is covered, it is subject to the risk of the full change in value of
the underlying security from the time the option is written until exercise.
Covering an option does not protect the Fund from risk of loss.
When a Fund writes a call option, the Fund, in return for a fee, or
"premium", agrees to sell a security at the exercise price, if the holder
exercises the right to purchase prior to the expiration date of the call option.
If the Fund holds the security in question, the Fund gives up some or all of the
opportunity to profit from the increase in the market price of the security
during the life of the option. The Fund retains the risk of loss should the
price of the security decline. If the option expires unexercised, the Fund
realizes a gain equal to the premium, which may be offset by a decline in price
of the underlying security. If the option is exercised, the Fund realizes a gain
or loss equal to the difference between the fund's cost for the underlying
security and the proceeds of sale (exercise price minus commissions) plus the
amount of the premium.
A Fund may terminate a call option it has written before it expires by
entering into a closing purchase transaction. A Fund may enter into closing
purchase transactions in order to free itself to sell the underlying security or
to write another call on the security, realize a profit on a previously written
call option, or protect a security from being called in an unexpected market
rise. Any profits from closing a purchase transaction may be offset by a decline
in the value of the underlying security. Conversely, because increases in the
market price of a call option will generally reflect increases in the market
price of the underlying security, if the Fund holds the underlying security any
loss resulting from a closing purchase transaction is likely to be offset in
whole or in part by unrealized appreciation of the underlying security. If the
Fund does not hold the underlying security, the Fund's loss could be unlimited.
A Fund may write put options in an attempt to enhance its current return.
Such option transactions may also be used as a limited form of hedging against
an increase in the price of securities that a Fund plans to purchase. A put
option written by the Fund gives the holder the right to sell, and, in return
for a premium, obligates the Fund to buy, a security at the exercise price at
any time before the expiration date.
In addition to the receipt of premiums and the potential gains from
terminating such options in closing purchase transactions, a Fund may also
receive a return on the cash and debt securities maintained to cover the
exercise price of the option. By writing a put option, the Fund assumes the risk
that it may be required to purchase the underlying security for an exercise
price higher than its then current market value, resulting in a loss to the
Fund, unless the security later appreciates in value. A Fund may terminate a put
option it has written before it expires by a closing purchase transaction. Any
loss from this transactions may be partially or entirely offset by the premium
received on the terminated option.
Each of the Funds may purchase options for hedging purposes or to
increase the Fund's return. When put options are purchased as a hedge against a
decline in the value of portfolio securities, the put options may be purchased
at or about the same time that the Fund purchases the underlying security or at
a later time. If such decline occurs, the put options will permit a Fund to sell
the securities at the exercise price, or to close out the options at a profit.
By using put options in this way, the Fund will reduce any profit it might
otherwise have realized in the underlying security by the amount of the premium
paid for the put option and by transaction costs. Similarly, when put options
are used for non-hedging purposes, the Fund may make a profit when the price of
the underlying security or instrument falls below the strike price. If the price
of the underlying security or instrument does not fall sufficiently, the options
may expire unexercised and the Fund would lose the premiums it paid for the
option. If the price of the underlying security or instrument falls sufficiently
and the option is exercised, the amount of any resulting profit will be offset
by the amount of premium paid.
Each of the Funds may purchase call options to hedge against an increase
in the price of securities that the Fund anticipates purchasing in the future.
If such increase occurs, the call option will permit the Fund to purchase the
securities at the exercise price, or to close out the options at a profit. The
premium paid for the call option plus any transaction costs will reduce the
benefit, if any, realized by the Fund upon exercise of the option, and, unless
the price of the underlying security rises sufficiently, the option may expire
worthless to the Fund and the premium would be lost.
Call options may also be purchased in order to increase a Fund's return
at a time when the call is expected to increase in value due to anticipated
appreciation of the underlying security. Prior to its expiration, a call option
may be sold by a Fund in closing sale transactions, which are sales by the Fund,
prior to the exercise of options that it has purchased, of options of the same
series. Profit or loss from the sale will depend upon whether the amount
received is more or less than the premium paid for the option plus the related
transaction costs. The purchase of call options on securities that a Fund owns,
when a Fund is substantially fully invested, is a form of leverage, up to the
amount of the premium and related transaction costs, and involves risks of loss
and of increased volatility.
Each of the Funds may write (sell) call and put options and purchase call
and put options on securities indices. The delivery requirements of options on
securities indices differ from options on securities. Unlike a securities
option, which contemplates the right to take or make delivery of securities at a
specified price, an option on a securities index gives the holder the right to
receive a cash "exercise settlement amount" equal to (1) the amount, if any, by
which the fixed exercise price of the option exceeds (in the case of a put) or
is less than (in the case of a call) the closing value of the underlying index
on the date of exercise, multiplied by (2) a fixed "index multiplier." Receipt
of this cash amount will depend upon the closing level of the securities index
upon which the option is based being greater than, in the case of a call, or
less than, in the case of a put, the exercise price of the option. The writer of
the option is obligated, in return for the premium received, to make delivery of
this amount. The writer may offset its position in securities index options
prior to expiration by entering into a closing transaction on an exchange or it
may allow the option to expire unexercised.
Each of the Funds may cover call options on securities indices by owning
securities whose price changes, in the opinion of the Manager or a Subadviser,
are expected to be similar to those of the underlying index, or by having an
absolute and immediate right to acquire such securities without additional cash
consideration (or for additional cash consideration held in a segregated
account) upon conversion or exchange of other securities in its portfolio. Where
a Fund covers a call option on a securities index through ownership of
securities, such securities may not match the composition of the index and, in
that event, the Fund will not be fully covered and could be subject to risk of
loss in the event of adverse changes in the value of the index. A Fund may also
cover call options on securities indices by holding a call on the same index and
in the same principal amount as the call written where the exercise price of the
call held (a) is equal to or less than the exercise price of the call written or
(b) is greater than the exercise price of the call written if the difference is
maintained by the Fund in cash or liquid securities in a segregated account. A
Fund may cover put options on securities indices by maintaining cash or liquid
securities with a value equal to the exercise price in a segregated account or
by holding a put on the same securities index and in the same principal amount
as the put written where the exercise price of the put held is equal to or
greater than the exercise price of the put written or where the exercise price
of the put held is less than the exercise price of the put written if the
difference is maintained by the Fund in cash or liquid securities in a
segregated account. Put and call options on securities indices may also be
covered in such other manner as may be in accordance with the rules of the
exchange on which, or the counterparty with which, the option is traded, and
applicable laws and regulations. Investors should be aware that although a Fund
will only write call or put options on securities indices that are covered,
covering an option does not protect the Fund from risk of loss.
A Fund will receive a premium from writing a put or call option, which
increases the Fund's gross income in the event the option expires unexercised or
is closed out at a profit. If the value of an index on which a Fund has written
a call option falls or remains the same, the Fund will realize a profit in the
form of the premium received (less transaction costs) that could offset all or a
portion of any decline in the value of the securities it owns. If the value of
the index rises, however, the Fund will realize a loss in its call option
position, which will reduce the benefit of any unrealized appreciation in the
Fund's stock investments. By writing a put option, a Fund assumes the risk of a
decline in the index. To the extent that the price changes of securities owned
by a Fund correlate with changes in the value of the index, writing covered put
options on indices will increase the Fund's losses in the event of a market
decline, although such losses will be offset in part by the premium received for
writing the option.
Each of the Funds may purchase put options on securities indices when the
Manager or Subadviser believes that there may be a decline in the prices of the
securities covered by the index. The Fund will realize a gain if the put option
appreciates in excess of the premium paid for the option. If the option does not
increase in value, the Fund's loss will be limited to the premium paid for the
option plus related transaction costs.
A Fund may purchase call options on securities indices to take advantage
of an anticipated broad market advance, or an advance in an industry or market
segment. A Fund will bear the risk of losing all or a portion of the premium
paid if the value of the index does not rise. The purchase of call options on
securities indices when a Fund is substantially fully invested is a form of
leverage, up to the amount of the premium and related transaction costs, and
involves risks of loss and of increased volatility.
Securities index options are subject to position and exercise limits and
other regulations imposed by the exchange on which they are traded. The ability
of a Fund to engage in closing purchase transactions with respect to securities
index options depends on the existence of a liquid secondary market. However, no
such secondary market may exist, or the market may cease to exist at some future
date, for some options. No assurance can be given that a closing purchase
transaction can be effected when the Manager or a Subadviser desires that a Fund
engage in such a transaction.
Because the value of an index option depends upon movements in the level
of the index rather than the price of a particular security, whether a Fund
realizes a gain or loss from purchasing or writing of options on an index
depends upon movements in the level of prices in the market generally or, in the
case of certain indices, in an industry or market segment, rather than movements
in the price of a particular security. As a result, successful use by a Fund of
options on securities indices is subject to the Manager's or a Subadviser's
ability to predict correctly movements in the direction of the market generally
or of a particular industry. This ability contemplates different skills and
techniques from those used in predicting changes in the price of individual
securities. When a Fund purchases or writes securities index options as a
hedging technique, the Fund's success will depend upon the extent to which price
movements in the portion of a securities portfolio being hedged correlate with
price movements of the securities index selected.
A Fund's purchase or sale of securities index options in an attempt to
enhance performance involves speculation and may be very risky and cause losses,
which, in the case of call options written, are potentially unlimited.
The Funds may purchase over-the-counter ("OTC") or dealer options or sell
covered OTC options. Unlike exchange-listed options where an intermediary or
clearing corporation assures that all transactions are properly executed, the
responsibility for performing all transactions with respect to OTC options rests
solely with the writer and the holder of those options. A listed call option
writer, for example, is obligated to deliver the underlying stock to the
clearing organization if the option is exercised, and the clearing organization
is then obligated to pay the writer the exercise price of the option. If a Fund
were to purchase a dealer option, however, it would rely on the dealer from whom
it purchased the option to perform if the option were exercised. If the dealer
fails to honor the exercise of the option by the Fund, the Fund would lose the
premium it paid for the option and the expected benefit of the transaction.
Listed options may have a liquid market while dealer options have none.
Consequently, a Fund will generally be able to realize the value of a dealer
option it has purchased only by exercising it or reselling it to the dealer who
issued it. Similarly, when a Fund writes a dealer option, it generally will be
able to close out the option prior to the expiration only by entering into a
closing purchase transaction with the dealer to which the Fund originally sold
the option. Although the Funds will seek to enter into dealer options only with
dealers who will agree to and that are expected to be capable of entering into
closing transactions with the Funds, there can be no assurance that a Fund will
be able to liquidate a dealer option at a favorable price at any time prior to
expiration. The inability to enter into a closing transaction may result in
material losses to a Fund. Until a Fund, as an OTC call option writer, is able
to effect a closing purchase transaction, it will not be able to liquidate
securities (or other assets) used to cover the written option until the option
expires or is exercised. This requirement may impair a Fund's ability to sell
portfolio securities or, with respect to currency options, currencies at a time
when such sale might be advantageous. In the event of insolvency of the other
party, the Fund may be unable to liquidate a dealer option.
To the extent permitted under rules and interpretations of the CFTC, each
of the Funds may also purchase or write put and call options on securities index
futures contracts that are traded on a U.S. exchange or board of trade or a
foreign exchange, as a hedge against changes in market conditions and interest
rates, for duration management, or in an attempt to enhance performance, and may
enter into closing transactions with respect to those options to terminate
existing positions.
Each of the Funds may purchase and write options on foreign currencies as
more fully described in "Foreign Currency Exchange Transactions" above.
The Funds' use of options may involve leveraging. Leveraging adds
increased risks to a Fund, because the Fund's losses may be out of proportion to
the amount invested in the instrument--a relatively small investment may lead to
much greater losses.
FUTURES CONTRACTS
Each of the Funds may enter into futures contracts, including bond
futures contracts, interest rate futures contracts, stock index futures
contracts and/or foreign currency futures contracts. Such investment strategies
may be used for hedging purposes and for nonhedging purposes, subject to
applicable law.
A futures contract is an agreement between two parties for the purchase
or sale for future delivery of securities or for the payment or acceptance of a
cash settlement based upon changes in the value of the securities or of an index
of securities. A "sale" of a futures contract means the acquisition of a
contractual obligation to deliver the securities called for by the contract at a
specified price, or to make or accept the cash settlement called for by the
contract, on a specified date. A "purchase" of a futures contract means the
acquisition of a contractual obligation to acquire the securities called for by
the contract at a specified price, or to make or accept the cash settlement
called for by the contract, on a specified date. Futures contracts in the United
States have been designed by exchanges which have been designated "contract
markets" by the Commodity Futures Trading Commission ("CFTC") and must be
executed through a futures commission merchant, or brokerage firm, which is a
member of the relevant contract market. Futures contracts trade on these
markets, and the exchanges, through their clearing organizations, guarantee that
the contracts will be performed as between the clearing members of the exchange.
Futures contracts may also be traded on markets outside the U.S.
Futures contracts based on debt securities provide for the delivery and
acceptance of securities, although such deliveries and acceptances are very
seldom made. Generally, a futures contract is terminated by entering into an
offsetting transaction. Brokerage fees will be incurred when a Fund purchases or
sells a futures contract. At the same time such a purchase or sale is made, the
Fund must provide cash or securities as a deposit ("initial deposit") known as
"margin." The initial deposit required will vary, but may be as low as 1% or
less of a contract's face value. Daily thereafter, the futures contract is
valued through a process known as "marking to market," and the Fund may receive
or be required to pay additional "variation margin" as the futures contract
becomes more or less valuable. At the time of delivery of securities pursuant to
such a contract, adjustments are made to recognize differences in value arising
from the delivery of securities with a different interest rate than the specific
security that provides the standard for the contract. In some (but not many)
cases, securities called for by a futures contract may not have been issued when
the contract was entered into. Interest rate futures, which are typically based
on shorter-term interest rates, such as overnight to six-month time periods,
settle in cash only rather than by delivery of the underlying instrument.
A Fund may purchase or sell interest rate futures contracts or bond
futures contracts to attempt to protect the Fund from fluctuations in interest
rates, to manage the effective maturity or duration of the Fund's portfolio in
an effort to reduce potential losses, or in an effort to enhance potential gain,
without actually buying or selling debt securities. For example, if the Fund
owned long-term bonds and interest rates were expected to increase, the Fund
might enter into interest rate futures contracts for the sale of debt
securities. Such a sale would have much the same effect as if the Fund sold
bonds that it owned, or as if the Fund sold longer-term bonds and purchased
shorter-term bonds. If interest rates did increase, the value of the Fund's debt
securities would decline, but the value of the futures contracts would increase,
thereby keeping the net asset value of the Fund from declining as much as it
otherwise would have. Similar results could be accomplished by selling bonds, or
by selling bonds with longer maturities and investing in bonds with shorter
maturities. However, by using futures contracts, the Fund avoids having to sell
its securities.
Bond futures may be used for nonhedging purposes. For example, even if
the Fund were not trying to protect the value of any bonds held by it, if the
Manager or a Subadviser anticipates that interest rates are about to rise,
depressing future prices of bonds, the Manager or Subadviser may sell bond
futures short, closing out the position later at a lower price, if the future
prices had fallen, as expected. If the prices had not fallen, the Fund would
experience a loss and such loss may be unlimited.
Similarly, when it is expected that interest rates may decline, a Fund
might enter into futures contracts for the purchase of debt securities. Such a
purchase would be intended to have much the same effect as if the Fund purchased
bonds, or as if the Fund sold shorter-term bonds and purchased longer-term
bonds. If interest rates did decline, the value of the futures contracts would
increase.
Although futures on individual equity securities are not available in
United States markets, futures contracts on individual equity securities may be
available in foreign markets, and may be purchased or sold by the Funds.
Each of the Funds may buy and sell stock index futures contracts to
attempt to increase investment return, to gain stock market exposure while
holding cash available for investments and redemptions, or to protect against a
decline in the stock market.
A stock index futures contract is a contract to buy or sell units of a
stock index at a specified future date at the price agree upon when the contract
is made. A unit is the current value of the stock index.
The following example illustrates generally the manner in which index
futures contracts operate. The Standard & Poor's 100 Stock Index (the "S&P 100
Index") is composed of 100 selected common stocks, most of which are listed on
the New York Stock Exchange. The S&P 100 Index assigns relative weightings to
the common stocks included in the Index, and the Index fluctuates with changes
in the market values of those common stocks. In the case of the S&P 100 Index,
contracts are to buy or sell 100 units. Thus, if the value of the S&P 100 Index
were $180, one contract would be worth $18,000 (100 units x $180). The stock
index futures contract specifies that no delivery of the actual stocks making up
the index will take place. Instead, settlement in cash must occur upon the
termination of the contract, with the settlement being the difference between
the contract price and the actual level of the stock index at the expiration of
the contract. For example, if a Fund enters into a futures contract to buy 100
units of the S&P 100 Index at a specified future date at a contract price of
$180 and the S&P 100 Index is at $184 on that future date, the Fund will gain
$400 (100 units x gain of $4) reduced by transaction costs. If the Fund enters
into a futures contract to sell 100 units of the stock index at a specified
future date at a contract price of $180 and the S&P 100 Index is at $182 on that
future date, the Fund will lose $200 (100 units x loss of $2) increased by
transaction costs.
Positions in index futures may be closed out only on an exchange or board
of trade which provides a secondary market for such futures.
Each of the Funds may purchase and sell foreign currency futures
contracts to attempt to protect its current or intended investments from
fluctuations in currency exchange rates or, for non-hedging purposes, in an
attempt to benefit from such fluctuations. Such fluctuations could reduce the
dollar value of portfolio securities denominated in foreign currencies, or
increase the cost of foreign-denominated securities to be acquired, even if the
value of such securities in the currencies in which they are denominated remains
constant. A Fund may sell futures contracts on a foreign currency, for example,
where it holds securities denominated in such currency and it anticipates a
decline in the value of such currency relative to the dollar. In the event such
decline occurs, the resulting adverse effect on the value of foreign-denominated
securities may be offset, in whole or in part, by gains on the futures
contracts. A Fund may also sell futures contracts in a foreign currency even if
it does not hold securities denominated in such currency, if it anticipates a
decline in the value of such currency.
Conversely, the Fund could protect against a rise in the dollar cost
of foreign-denominated securities to be acquired by purchasing futures contracts
on the relevant currency, which could offset, in whole or in part, the increased
cost of such securities resulting from a rise in the dollar value of the
underlying currencies. Where the Fund purchases futures contracts under such
circumstances, however, and the prices of securities to be acquired instead
decline, the Fund will sustain losses on its futures position which could reduce
or eliminate the benefits of the reduced cost of portfolio securities to be
acquired. The Fund could also purchase futures contracts on a currency if it
expected the currency to rise in value, even if the Fund did not anticipate
purchasing securities denominated in that currency.
Although the use of futures for hedging should tend to minimize the risk
of loss due to a decline in the value of the hedged position (e.g., if a Fund
sells a futures contract to protect against losses in the debt securities held
by the Fund), at the same time the futures contract limits any potential gain
which might result from an increase in value of a hedged position.
In addition, the ability effectively to hedge all or a portion of a
Fund's investments through transactions in futures contracts depends on the
degree to which movements in the value of the securities underlying such
contracts correlate with movements in the value of the Fund's securities. If the
security underlying a futures contract is different than the security being
hedged, they may not move to the same extent or in the same direction. In that
event, the Fund's hedging strategy might not be successful and the Fund could
sustain losses on these hedging transactions which would not be offset by gains
on the Fund's other investments or, alternatively, the gains on the hedging
transaction might not be sufficient to offset losses on the Fund's other
investments. It is also possible that there may be a negative correlation
between the security underlying a futures contract and the securities being
hedged, which could result in losses both on the hedging transaction and the
securities. In these and other instances, the Fund's overall return could be
less than if the hedging transactions had not been undertaken. Similarly, even
where a Fund enters into futures transactions other than for hedging purposes,
the effectiveness of its strategy may be affected by lack of correlation between
changes in the value of the futures contracts and changes in value of the
underlying securities, currencies or indices.
The ordinary spreads between prices in the cash and futures markets, due
to differences in the nature of those markets, are subject to distortions.
First, all participants in the futures market are subject to initial deposit and
variation margin requirements. Rather than meeting additional variation margin
requirements, investors may close out futures contracts through offsetting
transactions which could distort the normal relationship between the cash and
futures markets. Second, there is the potential that the liquidity of the
futures market may be lacking. Prior to expiration, a futures contract may be
terminated only by entering into a closing purchase or sale transaction, which
requires a secondary market on the contract market on which the futures contract
was originally entered into. There can be no assurance that a liquid secondary
market will exist for any particular futures contract at any specific time. In
that event, it may not be possible to close out a position held by the Fund,
which could require the Fund to purchase or sell the instrument underlying the
futures contract or to meet ongoing variation margin requirements. The inability
to close out futures positions also could have an adverse impact on the ability
effectively to use futures transactions for hedging or other purposes.
The liquidity of a secondary market in a futures contract may be
adversely affected by "daily price fluctuation limits" established by the
exchanges, which limit the amount of fluctuation in the price of a futures
contract during a single trading day and prohibit trading beyond such limits
once they have been reached. Each contract market on which futures contracts are
traded has established a number of limitations governing the maximum number of
positions which may be held by a trader, whether acting alone or in concert with
others. The trading of futures contracts also is subject to the risk of trading
halts, suspensions, exchange or clearing house equipment failures, government
intervention, insolvency of a brokerage firm or clearing house or other
disruptions of normal trading activity, which could at times make it difficult
or impossible to liquidate existing positions or to recover excess variation
margin payments.
Investments in futures contracts also entail the risk that if the
Manager's or a Subadviser's investment judgment about the general direction of
interest rates, equity markets, or other economic factors is incorrect, the
Fund's overall performance may be poorer than if any such contract had not been
entered into. For example, if a Fund entered into a futures contract in the
belief that interest rates would increase, and interest rates decrease instead,
the Fund will have offsetting losses in its futures positions. Similarly, if a
Fund purchases futures contracts expecting a decrease in interest rates and
interest rates instead increased, the Fund will have losses in its futures
positions which will increase the amount of the losses on the securities in its
portfolio which will also decline in value because of the increase in interest
rates. In addition, in such situations, if the Fund has insufficient cash, the
Fund may have to sell bonds from its investments to meet daily variation margin
requirements, possibly at a time when it may be disadvantageous to do so.
CFTC regulations require compliance with certain limitations in order to
assure that a Fund is not deemed to be a "commodity pool" under such
regulations. Generally speaking, CFTC regulations prohibit a Fund from
purchasing or selling futures contracts (other than for bona fide hedging
transactions) if, immediately thereafter, the sum of the amount of initial
margin required to establish that Fund's non-hedging futures positions and the
premiums required to establish positions in options on futures, would exceed 5%
of that Fund's net assets. These limitations apply only to instruments regulated
by the CFTC, and may not apply to all of the Funds' transactions in futures
contracts.
Each Fund will comply with this CFTC requirement if applicable. In
addition, an amount of cash or liquid securities will be maintained by each Fund
in a segregated account so that the amount so segregated, plus the applicable
margin held on deposit, will be approximately equal to the amount necessary to
satisfy the Fund's obligations under the futures contract, or a Fund will
otherwise "cover" its positions in accordance with applicable policies and
regulations.
The use of futures contracts may expose 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.
OPTIONS ON FUTURES CONTRACTS
Each of the Funds may purchase and write options to buy or sell futures
contracts in which the Fund may invest. Such investment strategies may be used
for hedging purposes and for non-hedging purposes, subject to applicable law.
An option on a futures contract provides the holder with the right to
enter into a "long" position in the underlying futures contract, in the case of
a call option, or a "short" position in the underlying futures contract, in the
case of a put option, at a fixed exercise price up to a stated expiration date
or, in the case of certain options, on such date. Upon exercise of the option by
the holder, the contract market clearinghouse establishes a corresponding short
position for the writer of the option, in the case of a call option, or a
corresponding long position in the case of a put option. In the event that an
option is exercised, the parties will be subject to all the risks associated
with the trading of futures contracts, such as payment of initial and variation
margin deposits. In addition, the writer of an option on a futures contract,
unlike the holder, is subject to initial and variation margin requirements on
the option position.
A position in an option on a futures contract may be terminated by the
purchaser or seller prior to expiration by effecting a closing purchase or sale
transaction, subject to the availability of a liquid secondary market, which is
the purchase or sale of an option of the same series (i.e., the same exercise
price and expiration date) as the option previously purchased or sold. The
difference between the premiums paid and received represents the trader's
profits or loss on the transaction.
Options on futures contracts that are written or purchased by a Fund on
U.S. exchanges are traded on the same contract market as the underlying futures
contract, and, like futures contracts, are subject to regulation by the CFTC and
the performance guarantee of the exchange clearinghouse. In addition, options on
futures contracts may be traded on foreign exchanges.
Each of the Funds may cover the writing of call options on futures
contracts (a) through purchases of the underlying futures contract, (b) through
ownership of the instrument, or instruments included in the index underlying the
futures contract, or (c) through the holding of a call on the same futures
contract and in the same principal amount as the call written where the exercise
price of the call held (i) is equal to or less than the exercise price of the
call written or (ii) is greater than the exercise price of the call written if
the difference is maintained by the Fund in cash or securities in a segregated
account. A Fund may cover the writing of put options on futures contracts (a)
through sales of the underlying futures contract, (b) through segregation of
cash or liquid securities in an amount equal to the value of the security or
index underlying the futures contract, (c) through the holding of a put on the
same futures contract and in the same principal amount as the put written where
the exercise price of the put held is equal to or greater than the exercise
price of the put written or where the exercise price of the put held is less
than the exercise price of the put written if the difference is maintained by a
Fund in cash or liquid securities in a segregated account. Put and call options
on futures contracts may also be covered in such other manner as may be in
accordance with the rules of the exchange on which the option is traded and
applicable laws and regulations. Upon the exercise of a call option on a futures
contract written by a Fund, the Fund will be required to sell the underlying
futures contract which, if the Fund has covered its obligation through the
purchase of such contract, will serve to liquidate its futures position.
Similarly, where a put option on a futures contract written by a Fund is
exercised, the Fund will be required to purchase the underlying futures contract
which, if the Fund has covered its obligation through the sale of such contract,
will close out its futures position.
The writing of a call option on a futures contract may be used as a
partial hedge against declining prices of the securities deliverable on exercise
of the futures contract. A Fund will receive an option premium when it writes
the call, and, if the price of the futures contract at expiration of the option
is below the option exercise price, the Fund will retain the full amount of this
option premium, which provides a partial hedge against any decline that may have
occurred in the Fund's security holdings. Similarly, the writing of a put option
on a futures contract may be used as a partial hedge against increasing prices
of the securities deliverable upon exercise of the futures contract. If a Fund
writes an option on a futures contract and that option is exercised, the Fund
may incur a loss, which loss will be reduced by the amount of the option premium
received, less related transaction costs. A Fund's ability to hedge effectively
through transactions in options on futures contracts depends on, among other
factors, the degree of correlation between changes in the value of securities
held by the Fund and changes in the value of its futures positions. This
correlation cannot be expected to be exact, and the Fund bears a risk that the
value of the futures contract being hedged will not move in the same amount, or
even in the same direction, as the hedging instrument. Thus it may be possible
for a Fund to incur a loss on both the hedging instrument and the futures
contract being hedged.
Each of the Funds may purchase options on futures contracts for hedging
purposes instead of purchasing or selling the underlying futures contracts. For
example, where a decrease in the value of portfolio securities is anticipated as
a result of a projected market-wide decline or changes in interest or exchange
rates, a Fund could, in lieu of selling futures contracts, purchase put options
thereon. In the event that such decrease occurs, it may be offset, in whole or
part, by a profit on the option. Conversely, where it is projected that the
value of securities to be acquired by a Fund will increase prior to acquisition,
due to a market advance or changes in interest or exchange rates, the Fund could
purchase call options on futures contracts, rather than purchasing the
underlying futures contracts.
Each of the Funds may also purchase options on futures contracts for
non-hedging purposes, in order to take advantage of projected market advances or
declines or changes in interest rates or exchange rates. For example, a Fund can
buy a call option on a bond futures contract when the Manager or Subadviser
believes that the underlying futures contract will rise. If prices do rise, the
Fund could exercise the option and acquire the underlying futures contract at
the strike price or the Fund could offset the long call position with a sale and
realize a profit. Or, a Fund can sell a call option if the Manager or Subadviser
believes that futures prices will decline. If prices decline, the call will
likely not be exercised and the Fund would profit. However, if the underlying
futures contract should rise, the buyer of the option would likely exercise the
call against the Fund and acquire the underlying futures position at the strike
price; the Fund's loss in this case could be unlimited.
The Funds' use of options on futures contracts may involve leveraging.
Leveraging adds increased risks to a Fund, because the Fund's losses may be out
of proportion to the amount invested in the instrument--a relatively small
investment may lead to much greater losses.
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 ratings
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.
SWAPS AND RELATED TRANSACTIONS
Each Fund may enter into interest rate swaps, currency swaps, equity
swaps and 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. Interest rate swaps involve the exchange by
the Fund with another party of their respective commitments to pay or receive
interest. An equity swap is an agreement to exchange cash flows on a principal
amount based on changes in the values of the reference index. A currency swap is
an agreement to exchange cash flows on a principal amount based on changes in
the values of the currency exchange rates. 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 a cap and selling a
floor.
A Fund will maintain liquid assets with its custodian or otherwise cover
its current obligations under swap transactions in accordance with current
regulations and policies applicable to the Fund.
The most significant factor in the performance of swaps, caps, floors and
collars is the change in the specific interest rate, equity, currency or other
factor that determines the amount of payments to be made under the arrangement.
If the Manager or a Subadviser is incorrect in its forecasts of such factors,
the investment performance of the Fund would be less than what it would have
been if these investment techniques had not been used. If a swap agreement calls
for payments by the Fund, the Fund must be prepared to make such payments when
due. No Fund will enter into any swap unless the Manager or Subadviser deems the
counterparty to be creditworthy. If the counterparty's creditworthiness
declined, the value of the swap agreement would be likely to decline,
potentially resulting in losses. If the counterparty defaults, the Fund's risk
of loss consists of the net amount of payments that the Fund is contractually
entitled to receive. Each Fund anticipates that it will be able to eliminate or
reduce its exposure under these arrangements by assignment or other disposition
or by entering into an offsetting agreement with the same or another
counterparty.
Swap agreements are subject to each Fund's overall limit that not more
than 15% of its net assets may be invested in illiquid securities.
Engaging in swap and related transactions may involve leveraging.
Leveraging adds increased risks to a Fund, because the Fund's losses may be out
of proportion to the amount invested in the instrument--a relatively small
investment may lead to much greater losses.
ADDITIONAL DISCLOSURE REGARDING DERIVATIVES
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 CFTC 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.
The use of certain derivatives, such as futures, forward contracts, and
written options may involve leverage for the Funds because they create an
obligation, or indebtedness, to someone other than the Funds' shareholders and
enable a Fund to participate in gains and losses on an amount that exceeds its
initial investment. If a Fund writes a stock put option, for example, it makes
no initial investment, but instead receives a premium in an amount equal to a
fraction of the price of the underlying stock. In return, the Fund is obligated
to purchase the underlying stock at a fixed price, thereby being subject to
losses on the full stock price.
Likewise, if a Fund purchases a futures contract, it makes an initial
margin payment that is typically a small percentage of the contract's price.
However, because of the purchase, the Fund will participate in gains or losses
on the full contract price.
Other types of derivatives provide the economic equivalent of leverage
because they display heightened price sensitivity to market fluctuations, such
as changes in stock prices or interest rates. These derivatives magnify a Fund's
gain or loss from an investment in much the same way that incurring indebtedness
does. For example, if a Fund purchases a stock call option, the Fund pays a
premium in an amount equal to a fraction of the stock price, and in return, the
Fund participates in gains on the full stock price. If there were no gains, the
Fund generally would lose the entire initial premium.
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.
The use of derivatives may increase the amount of taxable income of a
Fund and may affect the amount, timing and character of a Fund's income for tax
purposes, as more fully discussed herein in the section entitled "Tax Matters."
DEFENSIVE STRATEGIES
The Funds may, from time to time, take temporary defensive positions that
are inconsistent with the Funds' principal investment strategies in attempting
to respond to adverse market, political or other conditions. When doing so, the
Funds may invest without limit in high quality money market and other short-term
instruments, and may not be pursuing their investment goals.
4. INVESTMENT RESTRICTIONS
The Trust, on behalf of the Funds, and the Portfolio Trusts, on behalf of
the Portfolios, have each adopted the following policies which may not be
changed with respect to any of the foregoing Funds or Portfolios without
approval by holders of a majority of the outstanding voting securities of that
Fund or Portfolio, which as used in this Statement of Additional Information
means the vote of the lesser of (i) 67% or more of the outstanding voting
securities of the Fund or Portfolio present at a meeting at which the holders of
more than 50% of the outstanding voting securities of the Fund or Portfolio are
present or represented by proxy, or (ii) more than 50% of the outstanding voting
securities of the Fund or Portfolio. The term "voting securities" as used in
this paragraph has the same meaning as in the 1940 Act.
None of the Funds or Portfolios may:
(1) Borrow money, except that as a temporary measure for
extraordinary or emergency purposes it may borrow in an amount not to
exceed 1/3 of the current value of its net assets, including the
amount borrowed, or purchase any securities at any time at which
borrowings exceed 5% of the total assets of the Fund or Portfolio,
taken at market value. It is intended that the Fund or Portfolio
would borrow money only from banks and only to accommodate requests
for the repurchase of shares of the Fund or beneficial interests in
the Portfolio while effecting an orderly liquidation of portfolio
securities.
(2) Make loans to other persons except (a) through the lending
of its portfolio securities and provided that any such loans not
exceed 30% of the Fund's or Portfolio's total assets (taken at market
value), (b) through the use of repurchase agreements, fixed time
deposits or the purchase of short-term obligations or (c) by
purchasing all or a portion of an issue of debt securities of types
commonly distributed privately to financial institutions. The
purchase of short-term commercial paper or a portion of an issue of
debt securities which is part of an issue to the public shall not be
considered the making of a loan.
(3) Purchase securities of any issuer if such purchase at the
time thereof would cause with respect to 75% of the total assets of
the Fund or Portfolio more than 10% of the voting securities of such
issuer to be held by the Fund or Portfolio; provided that, for
purposes of this restriction, the issuer of an option or futures
contract shall not be deemed to be the issuer of the security or
securities underlying such contract; and provided further that the
Fund or Portfolio may invest all or any portion of its assets in one
or more investment companies, to the extent not prohibited by the
1940 Act, the rules and regulations thereunder, and exemptive orders
granted under such Act.
(4) Purchase securities of any issuer if such purchase at the
time thereof would cause as to 75% of the Fund's or Portfolio's total
assets more than 5% of the Fund's or Portfolio's assets (taken at
market value) to be invested in the securities of such issuer (other
than securities or obligations issued or guaranteed by the United
States, any state or political subdivision thereof, or any political
subdivision of any such state, or any agency or instrumentality of
the United States or of any state or of any political subdivision of
any state); provided that, for purposes of this restriction, the
issuer of an option or futures contract shall not be deemed to be the
issuer of the security or securities underlying such contract; and
provided further that the Fund or Portfolio may invest all or any
portion of its assets in one or more investment companies, to the
extent not prohibited by the 1940 Act, the rules and regulations
thereunder, and exemptive orders granted under such Act.
(5) Concentrate its investments in any particular industry,
but if it is deemed appropriate for the achievement of the Fund's or
Portfolio's investment objective, (a) up to 25% of its assets, at
market value at the time of each investment, may be invested in any
one industry, except that positions in futures contracts shall not be
subject to this restriction and (b) with respect to the Short Term
Portfolio only, up to 100% of its assets, at market value at the time
of each investment, may be invested in bank obligations.
(6) Underwrite securities issued by other persons, except that
all or any portion of the assets of the Fund or Portfolio may be
invested in one or more investment companies, to the extent not
prohibited by the 1940 Act, the rules and regulations thereunder, and
exemptive orders granted under such Act, and except in so far as the
Fund or Portfolio may technically be deemed an underwriter under the
Securities Act in selling a security.
(7) Purchase or sell real estate (including limited
partnership interests but excluding securities secured by real estate
or interests therein), interests in oil, gas or mineral leases,
commodities or commodity contracts in the ordinary course of business
(the foregoing shall not be deemed to preclude the Fund or Portfolio
from purchasing or selling futures contracts or options thereon, and
each of the Fund and the Portfolio reserves the freedom of action to
hold and to sell real estate acquired as a result of the ownership of
securities by the Fund or the Portfolio).
(8) Issue any senior security (as that term is defined in the
1940 Act) if such issuance is specifically prohibited by the 1940 Act
or the rules and regulations promulgated thereunder.
For purposes of restriction (1) above, covered mortgage dollar rolls and
arrangements with respect to securities lending are not treated as borrowing.
If a percentage or rating restriction on investment or utilization of
assets set forth above or referred to in this Registration Statement is adhered
to at the time an investment is made or assets are so utilized, a later change
in percentage resulting from changes in the value of the securities or a later
change in the rating of the securities held for the Fund will not be considered
a violation of policy.
5. PERFORMANCE INFORMATION AND ADVERTISING
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 worth 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, 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 rate of return is generated over a one-year period.
A total rate of return quotation for a Fund is calculated for any period
by (a) dividing (i) the sum of the net asset value per share on the last day of
the period and the net asset value per share on the last day of the period of
shares purchasable with dividends and capital gains distributions declared
during such period with respect to a share held at the beginning of such period
and with respect to shares purchased with such dividends and capital gains
distributions, by (ii) the public offering price per share on the first day of
such period, and (b) subtracting 1 from the result. Any annualized total rate of
return quotation is calculated by (x) adding 1 to the period total rate of
return quotation calculated above, (y) raising such sum to a power which is
equal to 365 divided by the number of days in such period, and (z) subtracting 1
from the result.
Set forth below is total rate of return information for the Class A
shares of each Fund for the periods indicated, assuming that dividends and
capital gains distributions, if any, were reinvested. All outstanding shares
were designated Class A shares on January 4, 1999. The return information
relates to periods prior to January 4, 1999, when there were no sales charges on
the purchase or sale of the Funds' shares. The Class A performance for past
periods has therefore been adjusted to reflect the maximum sales charge
currently in effect. The Class B shares are newly offered and have no investment
history. Performance results include any applicable fee waivers or expense
subsidies in place during the time period, which may cause the results to be
more favorable than they would otherwise have been.
CITISELECT FOLIO 200
REDEEMABLE VALUE
AVERAGE OF A HYPOTHETICAL
ANNUAL $1,000 INVESTMENT
TOTAL RATE OF AT THE END OF
PERIOD RETURN THE PERIOD
------ ------ ----------
June 17, 1996
(commencement of operations)
to October 31, 1998 5.31%* $1,130.72
One year ended October 31, 1998 (1.79)% $ 981.74
CITISELECT FOLIO 300
REDEEMABLE VALUE
AVERAGE OF A HYPOTHETICAL
ANNUAL $1,000 INVESTMENT
TOTAL RATE OF AT THE END OF
PERIOD RETURN THE PERIOD
------ ------ ----------
June 17, 1996
(commencement of operations)
to October 31, 1998 5.95%* $1,146.96
One year ended October 31, 1998 (3.18)% $ 963.11
CITISELECT FOLIO 400
REDEEMABLE VALUE
AVERAGE OF A HYPOTHETICAL
ANNUAL $1,000 INVESTMENT
TOTAL RATE OF AT THE END OF
PERIOD RETURN THE PERIOD
------ ------ ----------
June 17, 1996
(commencement of operations)
to October 31, 1998 4.86%* $1,119.10
One year ended October 31, 1998 (7.59)% $ 924.35
CITISELECT FOLIO 500
REDEEMABLE VALUE
AVERAGE OF A HYPOTHETICAL
ANNUAL $1,000 INVESTMENT
TOTAL RATE OF AT THE END OF
PERIOD RETURN THE PERIOD
------ ------ ----------
September 3, 1996
(commencement of operations)
to October 31, 1998 3.64%* $1,080.15
One year ended October 31, 1998 (10.83)% $ 892.05
* Not Annualized.
From time to time, advertising and marketing material of any of the Funds
may include charts showing the historical performance of hypothetical portfolios
comprised of classes of assets similar to those in which the Funds invest. The
classes of assets will be represented by the historical performance of specific
unmanaged indices. The information contained in such charts should not be viewed
as a projection of results of any of the Funds or as the historical performance
of any of the Funds. In addition, the past performance illustrated by such
charts should not be viewed as a guarantee of future results.
For advertising and sales purposes, the Funds will generally use the
performance of Class A shares. All outstanding Fund shares were designated Class
A shares on January 4, 1999. Performance prior to that date will be adjusted to
include the sales charges currently in effect. Class A shares are sold at net
asset value plus a current maximum sales charge of 4.50% (5.00% for CitiSelect
Folio 400 and CitiSelect Folio 500). Performance will typically include this
maximum sales charge for the purposes of calculating performance figures. If the
performance of Class B shares is used for advertising and sales purposes,
performance after class inception on January 4, 1999 will be actual performance,
while performance prior to that date will be Class A performance, adjusted to
reflect the differences in sales charges (but not the differences in fees and
expenses) between the classes. For these purposes, it will be assumed that the
maximum contingent deferred sales charge applicable to the Class B shares is
deducted at the times, in the amount, and under the terms stated in the
Prospectus. Class B share performance generally would have been lower than Class
A performance, had the Class B shares been offered for the entire period,
because the expenses attributable to Class B shares are higher than the expenses
attributable to the Class A shares. Fund performance may also be presented in
advertising and sales literature without the inclusion of sales charges.
6. DETERMINATION OF NET ASSET VALUE; VALUATION OF SECURITIES
The net asset value per share of each Fund is determined for each class
on each day during which the New York Stock Exchange is open for trading
("Business Day"). As of the date of this Statement of Additional Information,
the Exchange is open for trading every weekday except for the following holidays
(or the days on which they are observed): New Year's Day, Martin Luther King Jr.
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. This determination of net asset value is
made once each day as of the close of regular trading on the Exchange by adding
the market value of all securities and other assets attributable to the class
(including its interest in its underlying Portfolios), then subtracting the
liabilities attributable to that class, and then dividing the result by the
number of outstanding shares of the class. The net asset value per share is
effective for orders received and accepted by the Transfer Agent prior to its
calculation.
For purposes of calculating net asset value per share, all assets and
liabilities initially expressed in non-U.S. currencies will be converted into
U.S. dollars at the prevailing market rates or if there are no market rates, at
fair value, at the time of valuation. Equity securities are valued at the last
sale price on the exchange on which they are primarily traded or on the NASDAQ
system for unlisted national market issues, or at the last quoted bid price for
securities in which there were no sales during the day or for unlisted
securities not reported on the NASDAQ system. Securities listed on a foreign
exchange are valued at the last quoted sale price available before the time when
net assets are valued. Bonds and other fixed income securities (other than
short-term obligations) are valued on the basis of valuations furnished by a
pricing service, use of which has been approved by the Board of Trustees of the
Trust. In making such valuations, the pricing service utilizes both
dealer-supplied valuations and electronic data processing techniques which take
into account appropriate factors such as institutional-size trading in similar
groups of securities, yield, quality, coupon rate, maturity, type of issue,
trading characteristics and other market data, without exclusive reliance upon
quoted prices or exchange or over-the-counter prices, since such valuations are
believed to reflect more accurately the fair value of such securities. In
certain instances, securities are valued on the basis of valuations received
from a single dealer, which is usually an established market maker in the
security. In these instances, additional dealer valuations are obtained monthly.
Short-term obligations (maturing in 60 days or less) are valued at amortized
cost, which constitutes fair value as determined by the Board of Trustees of the
Trust. Futures contracts are normally valued at the settlement price on the
exchange on which they are traded. Securities for which there are no such
valuations are valued at fair value as determined in good faith by or at the
direction of the Board of Trustees of the Trust.
Trading in securities on most foreign exchanges and over-the-counter
markets is normally completed before the close of regular trading on the
Exchange. Trading may also take place on days on which the Exchange is closed
and on which it is not possible to purchase or redeem shares of the Funds. If
events materially affecting the value of foreign securities occur between the
time when the exchange on which they are traded closes and the time when a
Fund's net asset value is calculated, such securities may be valued at fair
value in accordance with procedures established by and under the general
supervision of the Board of Trustees of the Trust.
Interest income on long-term obligations held for a Fund is determined on
the basis of interest accrued plus amortization of "original issue discount"
(generally, the difference between issue price and stated redemption price at
maturity) and premiums (generally, the excess of purchase price over stated
redemption price at maturity). Interest income on short-term obligations is
determined on the basis of interest accrued plus amortization of premiums.
7. ADDITIONAL INFORMATION ON THE PURCHASE AND SALE OF FUND SHARES
AND SHAREHOLDER PROGRAMS
As described in the Prospectus, the Funds provide you with alternative
ways of purchasing shares based upon your individual investment needs.
Each class of shares of a Fund represents an interest in the same
portfolio of investments. Each class is identical in all respects except that
each class bears its own class expenses, including distribution and service
fees, and each class has exclusive voting rights with respect to any
distribution or service plan applicable to its shares. As a result of the
differences in the expenses borne by each class of shares, net income per share,
dividends per share and net asset value per share will vary for each class of
shares. There are no conversion, preemptive or other subscription rights, except
that Class B shares automatically convert to Class A shares in eight years as
more fully described below.
Shareholders of each class will share expenses proportionately for
services that are received equally by all shareholders. A particular class of
shares will bear only those expenses that are directly attributable to that
class, where the type or amount of services received by a class varies from one
class to another. The expenses that may be borne by specific classes of shares
may include (i) transfer agency fees attributable to a specific class of shares,
(ii) printing and postage expenses related to preparing and distributing
materials such as shareholder reports, prospectuses and proxy statements to
current shareholders of a specific class of shares, (iii) Securities and
Exchange Commission ("SEC") and state securities registration fees incurred by a
specific class, (iv) the expense of administrative personnel and services
required to support the shareholders of a specific class of shares, (v)
litigation or other legal expenses relating to a specific class of shares, (vi)
accounting expenses relating to a specific class of shares and (vii) any
additional incremental expenses subsequently identified and determined to be
properly allocated to one or more classes of shares.
CLASS A SHARES
You may purchase Class A shares at a public offering price equal to the
applicable net asset value per share plus an up-front sales charge imposed at
the time of purchase as set forth in the Prospectus. You may qualify for a
reduced sales charge depending upon the amount of your purchase, or the sales
charge may be waived in its entirety, as described below under "Sales Charge
Waivers." If you qualify to purchase Class A shares without a sales load, you
should purchase Class A shares rather than Class B shares because Class A shares
pay lower fees. Class A shares are also subject to an annual
distribution/service fee of up to .50%. See "Distributor." Set forth below is an
example of the method of computing the offering price of the Class A shares of
the Fund. The example assumes a purchase on October 31, 1998 of Class A shares
from a Fund aggregating less than $25,000 subject to the schedule of sales
charges set forth below.
- --------------------------------------------------------------------------------
CITISELECT FOLIO 200 CITISELECT FOLIO 300
Net Asset Value per share $11.28 $11.48
Per Share Sales Charge - 4.50%
of public offering price (4.71%
of net asset value per share) $0.53 $0.54
Per Share Offering Price to
the Public $11.81 $12.02
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CITISELECT FOLIO 400 CITISELECT FOLIO 500
Net Asset Value per share $11.36 $11.11
Per Share Sales Charge - 5.00%
of public offering price (5.26%
of net asset value per share) $0.60 $0.58
Per Share Offering Price to
the Public $11.96 $11.69
- --------------------------------------------------------------------------------
A Fund receives the entire net asset value of all Class A shares that are sold.
The Distributor retains the full applicable sales charge from which it pays the
uniform reallowances shown in the table below.
The front-end sales charge for Class A shares expressed as a percentage
of offering price and net asset value, and the dealer reallowance expressed as a
percentage of the offering price is set forth in the tables below. The Funds
have established certain shareholder programs that may permit you to take
advantage of the lower rates available for larger purchases, as described under
"Shareholder Programs" below.
- --------------------------------------------------------------------------------
CITISELECT FOLIO 200 AND CITISELECT FOLIO 300
BROKER/DEALER
SALES CHARGE SALES CHARGE COMMISSION
AS A % OF AS A % OF AS A % OF
AMOUNT OF OFFERING YOUR OFFERING
YOUR INVESTMENT PRICE INVESTMENT PRICE
Less than $25,000 4.50% 4.71% 4.05%
$25,000 to less than $50,000 4.00% 4.17% 3.60%
$50,000 to less than $100,000 3.50% 3.63% 3.15%
$100,000 to less than $250,000 2.50% 2.56% 2.25%
$250,000 to less than $500,000 1.50% 1.52% 1.35%
$500,000 or more none* none* up to 1.00%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CITISELECT FOLIO 400 AND CITISELECT FOLIO 500
SALES CHARGE SALES CHARGE COMMISSION
AS A % OF AS A % OF AS A % OF
AMOUNT OF OFFERING YOUR OFFERING
YOUR INVESTMENT PRICE INVESTMENT PRICE
Less than $25,000 5.00% 5.26% 4.50%
$25,000 to less than $50,000 4.00% 4.17% 3.60%
$50,000 to less than $100,000 3.50% 3.63% 3.15%
$100,000 to less than $250,000 3.00% 3.09% 2.70%
$250,000 to less than $500,000 2.00% 2.04% 1.80%
$500,000 or more none* none* up to 1.00%
- --------------------------------------------------------------------------------
* A contingent deferred sales charge may apply in certain instances. See "Sales
Charge Waivers".
CLASS B SHARES
Class B shares are sold without a front-end, or initial, sales charge,
but you are charged a "contingent deferred sales charge" (CDSC) when you sell
shares within five years of purchase. The rate of CDSC goes down the longer you
hold your shares. The tables below show the rates that you pay, as a percentage
of the purchase price (or the sale price, whichever is less), depending upon
when you sell your shares.
- --------------------------------------------------------------------------------
CITISELECT FOLIO 200 AND CITISELECT FOLIO 300
SALE DURING CDSC ON SHARES BEING SOLD
1st year since purchase 4.50%
2nd year since purchase 4.00%
3rd year since purchase 3.00%
4th year since purchase 2.00%
5th year since purchase 1.00%
6th year (or later) since purchase None
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CITISELECT FOLIO 400 AND CITISELECT FOLIO 500
SALE DURING CDSC ON SHARES BEING SOLD
1st year since purchase 5.00%
2nd year since purchase 4.00%
3rd year since purchase 3.00%
4th year since purchase 2.00%
5th year since purchase 1.00%
6th year (or later) since purchase None
- --------------------------------------------------------------------------------
Class B shares pay distribution/service fees of up to 0.75% (up to 1.00%
for CitiSelect Folio 400 and CitiSelect Folio 500) of the average daily net
assets represented by the Class B shares. Financial professionals selling Class
B shares receive a commission based upon the purchase price of the Class B
shares that they sell, except sales exempt from the CDSC. The commission is
4.00% of the purchase price of Folio 200 and Folio 300 Class B shares, and 4.50%
of the purchase price of Folio 400 and Folio 500 Class B shares. Financial
professionals also receive a service fee at an annual rate equal to 0.25% of the
average daily net assets represented by the Class B shares that they have sold.
When you sell your shares, the CDSC will be based on either your purchase
price, or the sale price, whichever is less. You do not pay a CDSC on shares
acquired through reinvestment of dividends and capital gain distributions and
shares representing capital appreciation. Each Fund will assume that a
redemption of Class B shares is made:
|_| first, of Class B shares representing capital appreciation
|_| next, of shares representing the reinvestment of dividends and
capital gains distributions
|_| finally, of other shares held by the investor for the longest period
of time.
Under certain circumstances, as set forth below in "Sales Charge Waivers," the
CDSC will be waived.
The holding period of Class B shares of a Fund acquired through an
exchange with another CitiFund will be calculated from the date that the Class B
shares were initially acquired in the other CitiFund, and Class B shares being
redeemed will be considered to represent, as applicable, capital appreciation or
dividend and capital gains distribution reinvestments in the other fund. When
determining the amount of the CDSC, each Fund will use the CDSC schedule of any
fund from which you have exchanged shares that would result in you paying the
highest CDSC.
SALES CHARGE WAIVERS
In certain circumstances, the initial sales charge imposed on purchases of
Class A shares, and the CDSC imposed upon sales of Class A or Class B shares,
are waived. Waivers are generally instituted in order to promote good will with
persons or entities with which Citibank or the Distributor or their affiliates
have business relationships, or because the sales effort, if any, involved in
making such sales is negligible, or, in the case of certain CDSC waivers,
because the circumstances surrounding the sale of Fund shares were not
foreseeable or voluntary. These sales charge waivers may be modified or
discontinued at any time.
CLASS A--FRONT-END SALES CHARGE
o Reinvestment. The sales charge does not apply to Class A shares
acquired through the reinvestment of dividends and capital gains
distributions.
o Eligible Purchasers. Class A shares may be purchased without a
sales charge by:
|_| tax exempt organizations under Section 501(c)(3-13) of the
Internal Revenue Code
|_| trust accounts for which Citibank, N.A or any subsidiary or
affiliate of Citibank acts as trustee and exercises
discretionary investment management authority
|_| accounts for which Citibank or any subsidiary or affiliate of
Citibank performs investment advisory services or charges
fees for acting as custodian
|_| directors or trustees (and their immediate families), and
retired directors and trustees (and their immediate
families), of any investment company for which Citibank or
any subsidiary or affiliate of Citibank serves as the
investment adviser or as a service agent
|_| employees of Citibank and its affiliates, CFBDS, Inc. and its
affiliates or any Service Agent and its affiliates (including
immediate families of any of the foregoing), and retired
employees of Citibank and its affiliates or CFBDS, Inc. and
its affiliates (including immediate families of the
foregoing)
|_| investors participating in a fee-based or promotional
arrangement sponsored or advised by Citibank or its
affiliates
|_| investors participating in a rewards program that offers Fund
shares as an investment option based on an investor's
balances in selected Citigroup Inc. products and services
|_| employees of members of the National Association of
Securities Dealers, Inc., provided that such sales are made
upon the assurance of the purchaser that the purchase is made
for investment purposes and that the securities will not be
resold except through redemption or repurchase
|_| separate accounts used to fund certain unregistered variable
annuity contracts
|_| direct rollovers by plan participants from a 401(k) plan
offered to Citigroup employees
|_| shareholder accounts established through a reorganization or
similar form of business combination approved by a Fund's
Board of Trustees or by the Board of Trustees of any other
CitiFund or mutual fund managed or advised by Citibank (all
of such funds being referred to herein as CitiFunds) the
terms of which entitle those shareholders to purchase shares
of a Fund or any other CitiFund at net asset value without a
sales charge
|_| employee benefit plans qualified under Section 401(k) of the
Internal Revenue Code with accounts outstanding on January 4,
1999
|_| employee benefit plans qualified under Section 401 of the
Internal Revenue Code, including salary reduction plans
qualified under Section 401(k) of the Code, subject to
minimum requirements as may be established by CFBDS with
respect to the amount of purchase; currently, the amount
invested by the qualified plan in a Fund or in any
combination of CitiFunds must total a minimum of $1 million
|_| accounts associated with Copeland Retirement Programs
|_| investors purchasing $500,000 or more of Class A shares;
however, a contingent deferred sales charge will be imposed
on the investments in the event of certain share redemptions
within 12 months following the share purchase, at the rate of
1% of the lesser of the value of the shares redeemed (not
including reinvested dividends and capital gains
distributions) or the total cost of the shares; the
contingent deferred sales charge on Class A shares will be
waived under the same circumstances as the contingent
deferred sales charge on Class B shares will be waived; in
determining whether a contingent deferred sales charge on
Class A shares is payable, and if so, the amount of the
charge:
\/ it is assumed that shares not subject to the contingent
deferred sales charge are the first redeemed followed by
other shares held for the longest period of time
\/ all investments made during a calendar month will age one
month on the last day of the month and each subsequent
month
\/ any applicable contingent deferred sales charge will be
deferred upon an exchange of Class A shares for Class A
shares of another CitiFund and deducted from the
redemption proceeds when the exchanged shares are
subsequently redeemed (assuming the contingent deferred
sales charge is then payable)
\/ the holding period of Class A shares so acquired through
an exchange will be aggregated with the period during
which the original Class A shares were held
|_| subject to appropriate documentation, investors where the
amount invested represents redemption proceeds from a mutual
fund (other than a CitiFund), if:
\/ the redeemed shares were subject to an initial sales
charge or a deferred sales charge (whether or not
actually imposed), and
\/ the redemption has occurred no more than 60 days prior to
the purchase of Class A shares of the Fund
|_| an investor who has a business relationship with an
investment consultant or other registered representative who
joined a broker-dealer which has a sales agreement with CFBDS
from another investment firm within six months prior to the
date of purchase by the investor, if:
\/ the investor redeems shares of another mutual fund sold
through the investment firm that previously employed that
investment consultant or other registered representative,
and either paid an initial sales charge or was at some
time subject to, but did not actually pay, a deferred
sales charge or redemption fee with respect to the
redemption proceeds
\/ the redemption is made within 60 days prior to the
investment in a Fund, and
\/ the net asset value of the shares of the Fund sold to
that investor without a sales charge does not exceed the
proceeds of the redemption
CONTINGENT DEFERRED SALES CHARGE:
o Reinvestment. There is no CDSC on shares representing capital
appreciation or on shares acquired through reinvestment of
dividends or capital gains distributions.
o Waivers. The CDSC will be waived in connection with:
|_| a total or partial redemption made within one year of the
death of the shareholder; this waiver is available where the
deceased shareholder is either the sole shareholder or owns
the shares with his or her spouse as a joint tenant with
right of survivorship, and applies only to redemption of
shares held at the time of death
|_| a lump sum or other distribution in the case of an Individual
Retirement Account (IRA), a self-employed individual
retirement plan (Keogh Plan) or a custodian account under
Section 403(b) of the Internal Revenue Code, in each case
following attainment of age 59 1/2
|_| a total or partial redemption resulting from any distribution
following retirement in the case of a tax-qualified
retirement plan
|_| a redemption resulting from a tax-free return of an excess
contribution to an IRA
|_| redemptions made under a Fund's Systematic Withdrawal Plan
AUTOMATIC CONVERSION OF CLASS B SHARES
A shareholder's Class B shares will automatically convert to Class A
shares in the same Fund approximately eight years after the date of issuance. At
the same time, a portion of all Class B shares representing dividends and other
distributions paid in additional Class B shares will be converted in accordance
with procedures from time to time approved by the Funds' Trustees. The
conversion will be effected at the relative net asset values per share of the
two classes on the first business day of the month in which the eighth
anniversary of the issuance of the Class B shares occurs. If a shareholder
effects one or more exchanges among Class B shares of the CitiFunds during the
eight-year period, the holding periods for the shares so exchanged will be
counted toward the eight-year period. Because the per share net asset value of
the Class A shares may be higher than that of the Class B shares at the time of
conversion, a shareholder may receive fewer Class A shares than the number of
Class B shares converted, although the dollar value will be the same.
SHAREHOLDER PROGRAMS
The Funds make the following programs available to shareholders to enable
them to reduce or eliminate the front-end sales charges on Class A shares or to
exchange Fund shares for shares of other CitiFunds without, in many cases, the
payment of a sales charge. These programs may be changed or discontinued at any
time. For more information, please contact your Service Agent.
REDUCED SALES CHARGE PLAN
A qualified group may purchase shares as a single purchaser under the
reduced sales charge plan. The purchases by the group are lumped together
and the sales charge is based on the lump sum. A qualified group must:
|_| have been in existence for more than six months
|_| have a purpose other than acquiring Fund shares at a discount
|_| satisfy uniform criteria that enable CFBDS to realize economies of
scale in its costs of distributing shares
|_| have more than ten members
|_| be available to arrange for group meetings between representatives of
the Funds and the members
|_| agree to include sales and other materials related to the Funds in
its publications and mailings to members at reduced or no cost to the
distributor
|_| seek to arrange for payroll deduction or other bulk transmission of
investments to the Funds
<PAGE>
LETTER OF INTENT
If an investor anticipates purchasing $25,000 or more of Class A
shares of a Fund alone or in combination with Class B shares of the Fund or
any of the classes of other CitiFunds or of any other mutual fund managed or
advised by Citibank (all of such funds being referred to herein as
CitiFunds) within a 13-month period, the investor may obtain the shares at
the same reduced sales charge as though the total quantity were invested in
one lump sum by completing a letter of intent on the terms described below.
Subject to acceptance by CFBDS, Inc., the Funds' distributor, and the
conditions mentioned below, each purchase will be made at a public offering
price applicable to a single transaction of the dollar amount specified in
the letter of intent.
|_| The shareholder or, if the shareholder is a customer of a Service
Agent, his or her Service Agent must inform CFBDS that the letter of
intent is in effect each time shares are purchased.
|_| The shareholder makes no commitment to purchase additional shares,
but if his or her purchases within 13 months plus the value of shares
credited toward completion of the letter of intent do not total the
sum specified, an increased sales charge will apply as described
below.
|_| A purchase not originally made pursuant to a letter of intent may be
included under a subsequent letter of intent executed within 90 days
of the purchase if CFBDS is informed in writing of this intent within
the 90-day period.
|_| The value of shares of a Fund presently held, at cost or maximum
offering price (whichever is higher), on the date of the first
purchase under the letter of intent, may be included as a credit
toward the completion of the letter, but the reduced sales charge
applicable to the amount covered by the letter is applied only to new
purchases.
|_| Instructions for issuance of shares in the name of a person other
than the person signing the letter of intent must be accompanied by a
written statement from the Transfer Agent or a Service Agent stating
that the shares were paid for by the person signing the letter.
|_| Neither income dividends nor capital gains distributions taken in
additional shares will apply toward the completion of the letter of
intent.
|_| The value of any shares redeemed or otherwise disposed of by the
purchaser prior to termination or completion of the letter of intent
are deducted from the total purchases made under the letter of
intent.
If the investment specified in the letter of intent is not completed
(either prior to or by the end of the 13-month period), the Transfer Agent
will redeem, within 20 days of the expiration of the letter of intent, an
appropriate number of the shares in order to realize the difference between
the reduced sales charge that would apply if the investment under the letter
of intent had been completed and the sales charge that would normally apply
to the number of shares actually purchased. By completing and signing the
letter of intent, the shareholder irrevocably grants a power of attorney to
the Transfer Agent to redeem any or all shares purchased under the letter of
intent, with full power of substitution.
RIGHT OF ACCUMULATION
A shareholder qualifies for cumulative quantity discounts on the
purchase of Class A shares when his or her new investment, together with the
current offering price value of all holdings of that shareholder in the
CitiFunds, reaches a discount level. For example, if a Fund shareholder owns
shares valued at $50,000 and purchases an additional $50,000 of Class A
shares of the Fund, the sales charge for the additional $50,000 purchase
would be at the rate of 2.50% for CitiSelect Folio 200 and CitiSelect Folio
300 and 3.00% for CitiSelect Folio 400 and CitiSelect Folio 500 (in each
case, the rate applicable to single transactions from $100,000 to less than
$250,000). A shareholder must provide the Transfer Agent with information to
verify that the quantity sales charge discount is applicable at the time the
investment is made.
SYSTEMATIC WITHDRAWAL PLAN
Each Fund's Systematic Withdrawal Plan permits you to have a
specified dollar amount (minimum of $100 per withdrawal) automatically
withdrawn from your account on a regular basis if you have at least $10,000
in your Fund account at the time of enrollment. You are limited to one
withdrawal per month under the Plan.
If you redeem Class A or Class B shares under the Plan that are
subject to a CDSC, you are not subject to any CDSC applicable to the shares
redeemed, but the maximum amount that you can redeem under the Plan in any
year is limited to 10% of the average daily balance in your account.
You may receive your withdrawals by check, or have the monies
transferred directly into your bank account. Or you may direct that payments
be made directly to a third party.
To participate in the Plan, you must complete the appropriate forms
provided by your Service Agent.
REINSTATEMENT PRIVILEGE
Shareholders who have redeemed Class A shares may reinstate their
Fund account without a sales charge up to the dollar amount redeemed (with a
credit for any contingent deferred sales charge paid) by purchasing Class A
shares of the same Fund within 90 days after the redemption. To take
advantage of this reinstatement privilege, shareholders must notify their
Service Agents in writing at the time the privilege is exercised.
EXCHANGE PRIVILEGE
Shares of each Fund may be exchanged for shares of the same class of
certain other CitiFunds that are made available by your Service Agent, or
may be acquired through an exchange of shares of the same class of those
funds. Class A shares also may be exchanged for shares of certain CitiFunds
money market funds that offer only a single class of shares, unless the
Class A shares are subject to a contingent deferred sales charge. Class B
shares may not be exchanged for shares of CitiFunds money market funds other
than Cash Reserves.
No initial sales charge is imposed on shares being acquired through
an exchange unless Class A shares are being acquired and the sales charge
for Class A of the fund being exchanged into is greater than the current
sales charge of the Fund (in which case an initial sales charge will be
imposed at a rate equal to the difference). Investors whose shares are
outstanding on January 4, 1999 will be able to exchange those Class A
shares, and any shares acquired through capital appreciation and the
reinvestment of dividends and capital gains distributions on those shares,
into Class A shares of the other funds without paying any sales charge.
No CDSC is imposed on Class B shares at the time they are exchanged
for Class B shares of certain other CitiFunds that are made available by
your Service Agent. However, you may be required to pay a CDSC when you sell
those shares. When determining the amount of the CDSC, each Fund will use
the CDSC schedule of any fund from which you have exchanged shares that
would result in you paying the highest CDSC.
You must notify your Service Agent at the time of exchange if you
believe that you qualify for share prices which do not include the sales
charge or which reflect a reduced sales charge, because the Fund shares you
are exchanging were: (a) purchased with a sales charge, (b) acquired through
a previous exchange from shares purchased with a sales charge, (c)
outstanding as of January 4, 1999, or (d) acquired through capital
appreciation or the reinvestment of dividends and capital gains
distributions on those shares. Any such qualification may be subject to
confirmation, through a check of appropriate records and documentation, of
your existing share balances and any sales charges paid on prior share
purchases.
This exchange privilege may be modified or terminated at any time,
and is available only in those jurisdictions where such exchanges legally
may be made. Before making any exchange, shareholders should contact their
Service Agents to obtain more information and prospectuses of the funds to
be acquired through the exchange. 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.
ADDITIONAL PURCHASE AND SALE INFORMATION
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. Your Service Agent is the shareholder of
record for the shares of a Fund that you own.
Investors may be able to establish new accounts in the Funds 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.
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, Social Security number, and
account number. If these or other reasonable procedures are not followed, the
Funds, 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.
Subject to compliance with applicable regulations, the Trust has reserved
the right to pay the redemption or repurchase price of shares of the Funds,
either totally or partially, by a distribution in kind of readily marketable
securities (instead of cash). The securities so distributed would be valued at
the same amount as that assigned to them in calculating the net asset value for
the shares being sold. If a holder of shares received a distribution in kind,
such holder could incur brokerage or other charges in converting the securities
to cash.
The Trust may suspend the right of redemption or postpone the date of
payment for shares of a Fund more than seven days during any period when (a)
trading in the markets a Fund normally utilizes is restricted, or an emergency,
as defined by the rules and regulations of the Securities and Exchange
Commission (the "SEC"), exists making disposal of a Fund's investments or
determination of its net asset value not reasonably practicable; (b) the New
York Stock Exchange is closed (other than customary weekend and holiday
closings); or (c) the SEC has by order permitted such suspension.
8. MANAGEMENT
Each Fund is supervised by the Board of Trustees of the Trust. 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.
The Trustees and officers of the Trust and the Portfolio Trusts and their
principal occupations during the past five years are set forth below. Their
titles may have varied during that period. Asterisks indicate that those
Trustees and officers are "interested persons" (as defined in the 1940 Act) of
the Trust or the Portfolio Trusts. Unless otherwise indicated below, the address
of each Trustee and officer is 21 Milk Street, Boston, Massachusetts. The
address of the Portfolio Trusts is Elizabethan Square, George Town, Grand
Cayman, British West Indies.
TRUSTEES OF THE TRUST
PHILIP W. COOLIDGE* (aged 47) -- President of the Trust and the Portfolio
Trusts; Chief Executive Officer and President, Signature Financial Group, Inc.
and CFBDS.
RILEY C. GILLEY (aged 72) -- Vice President and General Counsel, Corporate
Property Investors (November 1988 to December 1991); Partner, Breed, Abbott &
Morgan (Attorneys) (retired, December 1987). His address is 4041 Gulf Shore
Boulevard North, Naples, Florida.
DIANA R. HARRINGTON (aged 58) -- Professor, Babson College (since September
1993); Visiting Professor, Kellogg Graduate School of Management, Northwestern
University (September 1992 to September 1993); Professor, Darden Graduate School
of Business, University of Virginia (September 1978 to September 1993); Trustee,
the Highland Family of Funds (March 1997 to March 1998).
Her address is 120 Goulding Street, Holliston, Massachusetts.
SUSAN B. KERLEY (aged 47) -- President, Global Research Associates, Inc.
(Investment Research) (since August 1990); Manager, Rockefeller & Co. (March
1988 to July 1990); Trustee, Mainstay Institutional Funds (since December 1990).
Her address is P.O. Box 9572, New Haven, Connecticut.
HEATH B. MCLENDON* (aged 65) - Chairman, President, and Chief Executive Officer
of Mutual Management Corp. (since March 1996); Managing Director of Salomon
Smith Barney (since August 1993); and Chairman, President and Chief Executive
Officer of fifty-eight investment companies sponsored by Salomon Smith Barney.
His address is 388 Greenwich Street, New York, New York.
C. OSCAR MORONG, JR. (aged 63) - Chairman of the Board of the Trust and the
Portfolio Trusts; Managing Director, Morong Capital Management (since February
1993); Senior Vice President and Investment Manager, CREF Investments, Teachers
Insurance & Annuity Association (retired January 1993); Director, Indonesia
Fund; Director, MAS Funds. His address is 1385 Outlook Drive West, Mountainside,
New Jersey.
E. KIRBY WARREN (aged 64) -- Professor of Management, Graduate School of
Business, Columbia University (since 1987); Samuel Bronfman Professor of
Democratic Business Enterprise (1978 to 1987). His address is Columbia
University, Graduate School of Business, 725 Uris Hall, New York, New York.
WILLIAM S. WOODS, JR. (aged 78) -- Vice President-Investments, Sun Company, Inc.
(retired, April 1984). His address is 35 Colwick Road, Cherry Hill, New Jersey.
TRUSTEES OF THE PORTFOLIO TRUSTS
ELLIOTT J. BERV (aged 55) -- Chairman and Director, Catalyst, Inc. (Management
Consultants) (since June 1992); President, Chief Operating Officer and Director,
Deven International, Inc. (International Consultants) (June 1991 to June 1992);
President and Director, Elliott J. Berv & Associates (Management Consultants)
(since May 1984). His address is 24 Atlantic Drive, Scarborough, Maine.
PHILIP W. COOLIDGE* (aged 47) -- President of the Trust and the Portfolio
Trusts; Chief Executive Officer and President, Signature Financial Group, Inc.
and CFBDS.
MARK T. FINN (aged 55) -- President and Director, Delta Financial, Inc. (since
June 1983); Chairman of the Board and Chief Executive Officer, FX 500 Ltd.
(Commodity Trading Advisory Firm) (since April 1990); General Partner and
Shareholder, Greenwich Ventures LLC (Investment Partnership) (since January
1996); President and Secretary, Phoenix Trading Co. (Commodity Trading Advisory
Firm) (since March 1997); Director, Vantage Consulting Group, Inc. (since
October 1988). His address is 3500 Pacific Avenue, P.O. Box 539, Virginia Beach,
Virginia.
C. OSCAR MORONG, JR. (aged 63) - Chairman of the Board of the Trust and the
Portfolio Trusts; Managing Director, Morong Capital Management (since February
1993); Senior Vice President and Investment Manager, CREF Investments, Teachers
Insurance & Annuity Association (retired January 1993); Director, Indonesia
Fund; Director, MAS Funds. His address is 1385 Outlook Drive West, Mountainside,
New Jersey.
WALTER E. ROBB, III (aged 72) -- President, Benchmark Consulting Group, Inc.
(since 1991); Principal, Robb Associates (Corporate Financial Advisors) (since
1978); President, Benchmark Advisors, Inc. (Corporate Financial Advisors) (since
1989); Trustee of certain registered investment companies in the MFS Family of
Funds. His address is 35 Farm Road, Sherborn, Massachusetts.
E. KIRBY WARREN (aged 64) -- Professor of Management, Graduate School of
Business, Columbia University (since 1987); Samuel Bronfman Professor of
Democratic Business Enterprise (1978 to 1987). His address is Columbia
University, Graduate School of Business, 725 Uris Hall, New York, New York.
OFFICERS OF THE TRUST AND THE PORTFOLIO TRUST
PHILIP W. COOLIDGE* (aged 47) -- President of the Trust and the Portfolio
Trusts; Chief Executive Officer and President, Signature Financial Group, Inc.
and CFBDS.
CHRISTINE A. DRAPEAU* (aged 28) -- Assistant Secretary and Assistant Treasurer
of the Trust and the Portfolio Trusts; Vice President, Signature Financial
Group, Inc. (since January 1996); Paralegal and Compliance Officer, various
financial companies (July 1992 to January 1996).
TAMIE EBANKS-CUNNINGHAM* (aged 26) -- Assistant Secretary of the Trust and the
Portfolio Trusts; Office Manager, Signature Financial Group, (Grand Cayman)
Limited (Since April 1995); Administrator, Cayman Islands Primary School (prior
to April 1995). Her address is P.O. Box 2494, Elizabethan Square, George Town,
Grand Cayman, Cayman Islands, B.W.I.
JOHN R. ELDER* (aged 50) -- Treasurer of the Trust and the Portfolio Trusts;
Vice President, Signature Financial Group, Inc. (since April 1995); Assistant
Treasurer, CFBDS (since April 1995); Treasurer, the Phoenix Family of Mutual
Funds (Phoenix Home Life Mutual Insurance Company) (1983 to March 1995).
LINDA T. GIBSON* (aged 33) -- Secretary of the Trust and the Portfolio Trusts;
Senior Vice President, Signature Financial Group, Inc.; Secretary, CFBDS.
JAMES E. HOOLAHAN* (aged 52) -- Vice President, Assistant Secretary and
Assistant Treasurer of the Trust and the Portfolio Trusts; Senior Vice
President, Signature Financial Group, Inc.
SUSAN JAKUBOSKI* (aged 34) -- Vice President, Assistant Secretary and Assistant
Treasurer of the Trust and the Portfolio Trusts; Vice President, Signature
Financial Group (Cayman) Ltd. (since August 1994); Fund Compliance
Administrator, Concord Financial Group (November 1990 to August 1994).
MOLLY S. MUGLER* (aged 47) -- Assistant Secretary and Assistant Treasurer of the
Trust and the Portfolio Trusts; Vice President, Signature Financial Group, Inc.;
Assistant Secretary, CFBDS.
CLAIR TOMALIN* (aged 30) -- Assistant Secretary of the Trust and the Portfolio
Trusts; Office Manager, Signature Financial Group (Europe) Limited. Her address
is 117 Charterhouse Street, London ECIM 6AA.
SHARON M. WHITSON* (aged 50) -- Assistant Secretary and Assistant Treasurer of
the Trust and the Portfolio Trusts; Assistant Vice President, Signature
Financial Group, Inc.
JULIE J. WYETZNER* (aged 39) -- Vice President, Assistant Secretary and
Assistant Treasurer of the Trust and the Portfolio Trusts; Vice President,
Signature Financial Group, Inc.
The Trustees and officers of the Trust and the Portfolio Trusts also hold
comparable positions with certain other funds for which CFBDS, Signature
Financial Group, Inc. or their affiliates serve as the distributor or
administrator.
The Trustees of the Trust received the following remuneration from the
Trust during its fiscal year ended October 31, 1998:
<TABLE>
<CAPTION>
TOTAL COMPENSATION
PENSION OR RETIREMENT ESTIMATED ANNUAL FROM TRUST AND
AGGREGATE COMPENSATION BENEFITS ACCRUED AS PART BENEFITS UPON FUND COMPLEX
TRUSTEE FROM REGISTRANT OF FUND EXPENSES RETIREMENT PAID TO TRUSTEES (1)
------- --------------- ---------------- ---------- --------------------
<S> <C> <C> <C> <C>
Philip W. Coolidge............. $0 None None $0
Riley C. Gilley................ $5,206 None None $41,500
Diana R. Harrington............ $8,196 None None $59,000
Susan B. Kerley................ $8,096 None None $55,000
Heath B. McLendon (2).......... $0 None None $0
C. Oscar Morong, Jr............ $11,640 None None $71,000
E. Kirby Warren................ $7,404 None None $49,000
William S. Woods, Jr........... $7,434 None None $54,000
(1) Information relates to the fiscal year ended October 31, 1998. Messrs. Coolidge, Gilley, McLendon, Morong, Warren and
Woods and Mses. Harrington and Kerley are trustees of 49, 33, 20, 40, 40, 26, 28 and 28 funds, respectively, of the
family of open-end registered investment companies advised or managed by Citibank.
(2) Mr. McLendon was appointed as Trustee in February, 1999.
</TABLE>
As of February 22, 1999, all Trustees and officers as a group owned less
than 1% of each Fund's outstanding shares. As of the same date, more than 95% of
the outstanding shares of each Fund were held of record by Citibank, N.A. or its
affiliates as Service Agents of the Fund for the accounts of their respective
clients.
The Declaration of Trust of each of the Trust and the Portfolio Trusts
provides that the Trust or the Portfolio Trust, as the case may be, will
indemnify its Trustees and officers against liabilities and expenses incurred in
connection with litigation in which they may be involved because of their
offices with the Trust or the Portfolio Trust, as the case may be, unless, as to
liability to the Trust, the Portfolio Trust or their respective investors, it is
finally adjudicated that they engaged in willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in their offices, or
unless with respect to any other matter it is finally adjudicated that they did
not act in good faith in the reasonable belief that their actions were in the
best interests of the Trust or the Portfolio Trust, as the case may be. In the
case of settlement, such indemnification will not be provided unless it has been
determined by a court or other body approving the settlement or other
disposition, or by a reasonable determination, based upon a review of readily
available facts, by vote of a majority of disinterested Trustees of the Trust or
the Portfolio Trust, or in a written opinion of independent counsel, that such
officers or Trustees have not engaged in willful misfeasance, bad faith, gross
negligence or reckless disregard of their duties.
MANAGER
Citibank manages the assets of each Portfolio and provides certain
administrative services to the Funds and the Portfolios pursuant to separate
management agreements (the "Management Agreements"). Subject to such policies as
the Board of Trustees of the Portfolio Trusts may determine, Citibank manages
the securities of each Portfolio and makes investment decisions for each
Portfolio. Citibank furnishes at its own expense all services, facilities and
personnel necessary in connection with managing each Portfolio's investments and
effecting securities transactions for each Portfolio. Each Management Agreement
with the Portfolio Trusts provides that Citibank may delegate the daily
management of the securities of each Portfolio to one or more Subadvisers. Each
Management Agreement with the Portfolio Trusts will continue in effect
indefinitely as long as such continuance is specifically approved at least
annually by the Board of Trustees of the applicable Portfolio Trust or by a vote
of a majority of the outstanding voting securities of the applicable Portfolio,
and, in either case, by a majority of the Trustees of the applicable Portfolio
Trust who are not parties to the Management Agreement or interested persons of
any such party, at a meeting called for the purpose of voting on the Management
Agreement. Unless otherwise terminated, each Management Agreement with the Trust
will continue in effect indefinitely as long as such continuance is specifically
approved at least annually by the Board of Trustees of the Trust or by a vote of
a majority of the outstanding voting securities of the applicable Fund, and, in
either case, by a majority of the Trustees of the Trust who are not parties to
the Management Agreement or interested persons of any such party, at a meeting
called for the purpose of voting on the Management Agreement.
Citibank provides the Funds and the Portfolios with general office
facilities and supervises the overall administration of the Funds and the
Portfolios, including, among other responsibilities, the negotiation of
contracts and fees with, and the monitoring of performance and billings of, the
Funds' or the Portfolios' independent contractors and agents; the preparation
and filing of all documents required for compliance by the Funds or the
Portfolios with applicable laws and regulations; and arranging for the
maintenance of books and records of the Funds or the Portfolios. Trustees,
officers, and investors in the Trust and the Portfolio Trusts are or may be or
may become interested in Citibank, as directors, officers, employees, or
otherwise and directors, officers and employees of Citibank are or may become
similarly interested in the Trust and the Portfolio Trusts.
Each Management Agreement provides that Citibank may render services to
others. Each Management Agreement is terminable without penalty on not more than
60 days' nor less than 30 days' written notice by the applicable Portfolio Trust
or the Trust, as the case may be, when authorized either by a vote of a majority
of the outstanding voting securities of the applicable Portfolio or Fund or by a
vote of a majority of the Board of Trustees of the applicable Portfolio Trust or
the Trust, or by Citibank on not more than 60 days' nor less than 30 days'
written notice, and will automatically terminate in the event of its assignment.
Each Management Agreement with the Portfolio Trusts provides that neither
Citibank nor its personnel shall be liable for any error of judgment or mistake
of law or for any loss arising out of any investment or for any act or omission
in the execution of security transactions for the applicable Portfolio, except
for willful misfeasance, bad faith or gross negligence or reckless disregard of
its or their obligations and duties under the Management Agreement with the
Portfolio Trust. Each Management Agreement with the Trust provides that neither
Citibank nor its personnel shall be liable for any error of judgment or mistake
of law or for any omission in the administration or management of the Trust or
the performance of its duties under the Management Agreement, except for willful
misfeasance, bad faith or gross negligence or reckless disregard of its or their
obligations and duties under the Management Agreement with the Trust.
The Funds pay an aggregate management fee, which is accrued daily and
paid monthly, of 0.75% of each Fund's average daily net assets on an annualized
basis for the Fund's then-current fiscal year. This fee is higher than the
management fee paid by most mutual funds. Citibank may reimburse any Fund or
Portfolio or waive all or a portion of its management fees.
For the period from June 17, 1996 (September 3, 1996 for CitiSelect Folio
500), commencement of operations, to December 31, 1996, all fees payable to
Citibank under prior management agreements with the Trust with respect to
CitiSelect Folio 200, CitiSelect Folio 300 and CitiSelect Folio 500 were
voluntarily waived. For the period from June 17, 1996, commencement of
operations, to December 31, 1996, the fees paid to Citibank, after waivers and
reimbursements, under a prior management agreement with the Trust with respect
to CitiSelect Folio 400 were $78,821. For the period from January 1, 1997 to
October 31, 1997, the fees paid to Citibank, after waivers and reimbursements,
under prior management agreements with the Trust were as follows: CitiSelect
Folio 200 $35,899, CitiSelect Folio 300 $170,079, CitiSelect Folio 400 $299,950
and CitiSelect Folio 500 $120,606. For the period from November 1, 1997 to
October 31, 1998, the fees paid to Citibank, after waivers and reimbursements,
under the Management Agreements with the Trust were as follows: CitiSelect Folio
200 $440,035, CitiSelect Folio 300 $579,750, CitiSelect Folio 400 $439,941 and
CitiSelect Folio 500 $140,476. Prior to November 1, 1997, CitiSelect Folio 200,
CitiSelect Folio 300, CitiSelect Folio 400 and CitiSelect Folio 500 invested
their assets in, respectively, Asset Allocation Portfolio 200, Asset Allocation
Portfolio 300, Asset Allocation Portfolio 400, and Asset Allocation Portfolio
500. For the period from June 17, 1996 (September 3, 1996 for Asset Allocation
Portfolio 500), commencement of operations, to December 31, 1996, all fees
payable to Citibank under prior management agreements with Asset Allocation
Portfolios with respect to Asset Allocation Portfolio 200, Asset Allocation
Portfolio 300 and Asset Allocation Portfolio 500 were voluntarily waived. For
the period from June 17, 1996, commencement of operations, to December 31, 1996,
the fees paid to Citibank, after waivers and reimbursements, under a prior
management agreement with Asset Allocation Portfolios with respect to Asset
Allocation Portfolio 400 were $133,692. For the period from January 1, 1997 to
October 31, 1997, the fees paid to Citibank, after waivers and reimbursements,
under prior management agreements with Asset Allocation Portfolios were as
follows: Asset Allocation Portfolio 200 $528,753, Asset Allocation Portfolio 300
$1,478,303, Asset Allocation Portfolio 400 $1,993,100 and Asset Allocation
Portfolio 500 $698,291.
Pursuant to a sub-administrative services agreement with Citibank, CFBDS
performs such sub-administrative duties for the Trust and the Portfolio Trusts
as from time to time are agreed upon by Citibank and CFBDS. For performing such
sub-administrative services, CFBDS receives compensation as from time to time is
agreed upon by Citibank, not in excess of the amount paid to Citibank for its
services under the Management Agreements with the Trust and the Portfolio
Trusts. All such compensation is paid by Citibank.
The Funds have entered into separate Submanagement Agreements with the
Subadvisers listed below for the kinds of assets of each Fund noted opposite the
Subadvisers' names.
Small cap value securities Franklin Advisory Services, Inc.
Large cap value securities Mutual Management Corp.
International equity securities Hotchkis and Wiley
Foreign government securities Salomon Brothers Asset Management Limited
It is the responsibility of the Subadviser to make the day-to-day
investment decisions for their allocated assets of the Funds, and to place the
purchase and sales orders for securities transactions concerning those assets,
subject in all cases to the general supervision of Citibank. Each Subadviser
furnishes at its own expense all services, facilities and personnel necessary in
connection with managing the assets of the Funds allocated to it and effecting
securities transactions concerning those assets.
The Submanagement Agreements with Franklin Advisory Services, Inc. and
Hotchkis and Wiley will continue in effect as to each applicable Portfolio
indefinitely as long as such continuance is specifically approved at least
annually by the Board of Trustees of the applicable Portfolio Trust as to that
Portfolio or by a vote of a majority of the outstanding voting securities of
that Portfolio, and, in either case, by a majority of the Trustees of the
Portfolio Trust who are not parties to the Submanagement Agreement or interested
persons of any such party, at a meeting called for the purpose of voting on the
Submanagement Agreement.
Subject to shareholder approval, the Submanagement Agreement with Mutual
Management Corp. will continue in effect until January 22, 2001, and thereafter
indefinitely as long as such continuance is specifically approved at least
annually by the Board of Trustees of the Portfolio Trust as to Large Cap Value
Portfolio or by a vote of a majority of the outstanding voting securities of
that Portfolio, and, in either case, by a majority of the Trustees of the
Portfolio Trust who are not parties to the Submanagement Agreement or interested
persons of any such party, at a meeting called for the purpose of voting on the
Submanagement Agreement.
Subject to shareholder approval, the Submanagement Agreement with Salomon
Brothers Asset Management Limited will continue in effect until March 1, 2001,
and thereafter indefinitely as long as such continuance is specifically approved
at least annually by the Board of Trustees of the Portfolio Trust as to Foreign
Bond Portfolio or by a vote of a majority of the outstanding voting securities
of that Portfolio, and, in either case, by a majority of the Trustees of the
Portfolio Trust who are not parties to the Submanagement Agreement or interested
persons of any such party, at a meeting called for the purpose of voting on the
Submanagement Agreement.
Each Submanagement Agreement provides that the applicable Subadviser may
render services to others. Each Submanagement Agreement is terminable as to any
Portfolio without penalty on not more than 60 days' nor less than 30 days'
written notice by the applicable Portfolio Trust, when authorized either by a
vote of a majority of the outstanding voting securities of the applicable
Portfolio or by a vote of a majority of the Board of Trustees of the applicable
Portfolio Trust, or by Citibank on not more than 60 days' nor less than 30 days'
written notice, and will automatically terminate in the event of its assignment.
Each Submanagement Agreement may be terminated by the applicable Subadviser on
not less than 90 days' written notice. Each Submanagement Agreement provides
that neither the Subadviser nor its personnel shall be liable for any error of
judgment or mistake of law or for any loss arising out of any investment or for
any act or omission in the execution of security transactions for any Portfolio,
except for willful misfeasance, bad faith or gross negligence or reckless
disregard of its or their obligations and duties under the Submanagement
Agreement.
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 of 0.75% of each Fund's average daily net assets.
Franklin Advisory Services, Inc.
0.55% on first $250 million
0.50% on remaining assets
Mutual Management Corp.
0.65% on the first $10 million
0.50% on the next $10 million
0.40% on the next $10 million
0.30% on assets in excess of $30 million
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
Salomon Brothers Asset Management Limited
0.30% on the first $200 million
0.25% on assets in excess of $200 million
The aggregate fees paid to each of the Subadvisers under prior
submanagement agreements were as follows:
JUNE 17, 1996
(SEPTEMBER 3, 1996
FOR ASSET ALLOCATION
PORTFOLIO 500)
(COMMENCEMENT OF JANUARY 1, 1997
OPERATIONS) TO TO
SUBADVISER: DECEMBER 31, 1996: OCTOBER 31, 1997:
- ----------- ------------------ -----------------
Franklin Advisory Services, Inc. $123,189 $716,245
Hotchkis and Wiley $160,913 $290,312
Pacific Investment Management Company(1) $123,950 $474,072
Miller Anderson & Sherrerd, LLP(2) $90,990 $580,234
The aggregate fees paid to each of the Subadvisers under the
Submanagement Agreements during the period from November 1, 1997 to October 31,
1998 were as follows:
SUBADVISER:
- -----------
Franklin Advisory Services, Inc. $1,091,403
Hotchkis and Wiley $1,082,007
Pacific Investment Management Company(1) $900,099
Miller Anderson & Sherrerd, LLP(2) $511,730
(1) Pacific Investment Management Company served as Subadviser to Foreign Bond
Portfolio prior to March 1, 1999. Since March 1, 1999, Salomon Brothers Asset
Management Limited, an affiliate of Citibank, has managed the Foreign Bond
Portfolio.
(2) Miller Anderson & Sherrerd, LLP, served as Subadviser to Large Cap Value
Portfolio prior to January 22, 1999. Since January 22, 1999, Mutual Management
Corp., an affiliate of Citibank, has managed the Large Cap Value Portfolio.
DISTRIBUTOR
CFBDS, 21 Milk Street, Boston, MA 02109, serves as the Distributor of
each Fund's shares pursuant to Distribution Agreements with the Trust with
respect to each class of shares of the Funds (each, a "Distribution Agreement").
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. Under
the Distribution Agreements, CFBDS is obligated to use its best efforts to sell
shares of each class of the Funds.
Either party may terminate a Distribution Agreement on not less than
thirty days' nor more than sixty days' written notice to the other party. Unless
otherwise terminated each Distribution Agreement will continue from year to year
upon annual approval by the Trust's Board of Trustees and by the vote of a
majority of the Board of Trustees of the Trust who are not parties to the
Distribution Agreement or interested persons of any party to the Distribution
Agreement, cast in person at a meeting called for the purpose of voting on such
approval. Each Distribution Agreement will terminate in the event of its
assignment, as defined in the 1940 Act.
Each class of each Fund has a Service Plan (each, a "Service Plan")
adopted in accordance with Rule 12b-1 under the 1940 Act. Under the Plan related
to Class A shares, a Fund may pay monthly fees at an annual rate not to exceed
0.50% of the average daily net assets of the Fund attributable to that class.
Under the Plan related to Class B shares, CitiSelect Folio 200 and CitiSelect
Folio 300 may pay monthly fees at an annual rate not to exceed 0.75% of the
average daily net assets of the Fund attributable to that class, and CitiSelect
Folio 400 and CitiSelect Folio 500 may pay monthly fees at an annual rate not to
exceed 1.00% of the average daily net assets of the Fund attributable to that
class. Such fees may be used to make payments to the Distributor for
distribution services, to securities dealers and other industry professionals
(called Service Agents) that have entered into service agreements with the
Distributor and others in respect of the sale of shares of the Funds, and to
other parties in respect of the sale of shares of the Funds, and to make
payments for advertising, marketing or other promotional activity, and payments
for preparation, printing, and distribution of prospectuses, statements of
additional information and reports for recipients other than regulators and
existing shareholders. The Funds also may make payments to the Distributor,
Service Agents and others for providing personal service or the maintenance of
shareholder accounts. The amounts paid by the Distributor to each recipient may
vary based upon certain factors, including, among other things, the levels of
sales of Fund shares and/or shareholder services provided. Recipients may
receive different compensation for sales for Class A and Class B shares.
The Service Plan with respect to Class A shares also provides that the
Distributor, broker-dealers, banks and other financial intermediaries may
receive the sales charge paid by Class A investors as partial compensation for
their services in connection with the sale of shares. The Service Plan with
respect to Class B shares provides that the Distributor, dealers, and others may
receive all or a portion of the deferred sales charges paid by Class B
investors.
The Service Plans permit 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 by the applicable Plan, 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, and others until the applicable Plan or Distribution Agreement
is terminated or not renewed. In that event, the Distributor's or other
recipient's expenses in excess of fees received or accrued through the
termination date will be the Distributor's or other recipient's sole
responsibility and not obligations of the Fund. In their annual consideration of
the continuation of the Service Plans for each Fund, the Trustees will review
the Service Plans and the expenses for each Fund separately.
Each Service Plan continues in effect if such continuance is specifically
approved at least annually by a vote of both a majority of the Trust's Trustees
and a majority of the Trustees who are not "interested persons" of the Trust and
who have no direct or indirect financial interest in the operation of the
Service Plan or in any agreement related to the Plan (for purposes of this
paragraph "Qualified Trustees"). Each Service Plan requires that the Trust and
the Distributor provide to the Board of Trustees, and the Board of Trustees
review, at least quarterly, a written report of the amounts expended (and the
purposes therefor) under the Service Plan. Each Service Plan further provides
that the selection and nomination of the Qualified Trustees is committed to the
discretion of such Qualified Trustees then in office. A Service Plan may be
terminated with respect to any class of a Fund at any time by a vote of a
majority of the Trust's Qualified Trustees or by a vote of a majority of the
outstanding voting securities of that class. A Service Plan may not be amended
to increase materially the amount of a class's permitted expenses thereunder
without the approval of a majority of the outstanding securities of that class
and may not be materially amended in any case without a vote of a majority of
both the Trustees and Qualified Trustees. The Distributor will preserve copies
of any plan, agreement or report made pursuant to the Service Plans for a period
of not less than six years, and for the first two years the Distributor will
preserve such copies in an easily accessible place.
As contemplated by the Service Plans, CFBDS acts as the agent of the
Trust in connection with the offering of shares of the Funds pursuant to the
Distribution Agreements. For the periods from June 17, 1996 (September 3, 1996
for CitiSelect Folio 500), commencement of operations of the Funds, to December
31, 1996, January 1, 1997 to October 31, 1997, and November 1, 1997 to October
31, 1998, the fees paid to CFBDS, after waivers, under the Distribution
Agreement for Class A shares were as follows: CitiSelect Folio 200, $158,021,
$548,279 and $1,026,202, respectively; CitiSelect Folio 300, $307,039,
$1,102,327 and $1,796,242, respectively; CitiSelect Folio 400, $394,103,
$1,499,752 and $2,318,563, respectively; and CitiSelect Folio 500, $83,802,
$603,033 and $1,003,503, respectively.
The Distributor may enter into agreements with Service Agents and may pay
compensation to such Service Agents for accounts for which the Service Agents
are holders of record. Payments may be made to the Service Agents or for other
distribution expenses out of the distribution fees received by the Distributor
and out of the Distributor's past profits or any other source available to it.
EXPENSES
In addition to amounts payable under the Management Agreements and the
Service Plans, 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 communication with
shareholders, interest expense, and insurance premiums. The Prospectus for each
Fund contains more information about the expenses of each Fund.
TRANSFER AGENT AND CUSTODIAN
The Trust has entered into a Transfer Agency and Service Agreement with
State Street Bank and Trust Company ("State Street") pursuant to which State
Street acts as transfer agent for each Fund. The Trust also has entered into a
Custodian Agreement and a Fund Accounting Agreement with State Street, pursuant
to which custodial and fund accounting services, respectively, are provided for
each Fund. Among other things, State Street calculates the daily net asset value
for the Funds. Securities may be held by a sub-custodian bank approved by the
Trustees.
Each Portfolio Trust, on behalf of the Portfolios, has entered into a
Custodian Agreement with State Street pursuant to which State Street acts as
custodian for each Portfolio. Each Portfolio Trust, on behalf of the Portfolios,
has entered into a Fund Accounting Agreement with State Street Cayman Trust
Company, Ltd. ("State Street Cayman") pursuant to which State Street Cayman
provides fund accounting services for each Portfolio. State Street Cayman also
provides transfer agency services to each Portfolio.
The principal business address of State Street is 225 Franklin Street,
Boston, Massachusetts 02110. The principal business address of State Street
Cayman is P.O. Box 2508 GT, Grand Cayman, British West Indies.
AUDITORS
PricewaterhouseCoopers LLP are the independent accountants for the Trust,
providing audit services and assistance and consultation with respect to the
preparation of filings with the SEC. The address of PricewaterhouseCoopers LLP
is 160 Federal Street, Boston, Massachusetts 02110.
COUNSEL
Bingham Dana LLP, 150 Federal Street, Boston, Massachusetts 02110, is
counsel for each Fund.
9. PORTFOLIO TRANSACTIONS
The Trust trades securities for a Fund if it believes that a transaction
net of costs (including custodian charges) will help achieve the Fund's
investment objective. Changes in the Fund's investments are made without regard
to the length of time a security has been held, or whether a sale would result
in the recognition of a profit or loss. Therefore, the rate of turnover is not a
limiting factor when changes are appropriate. Specific decisions to purchase or
sell securities for each Fund are made by a portfolio manager who is an employee
of Citibank or a Subadviser and who is appointed and supervised by senior
officers of Citibank or by a Subadviser. The portfolio manager or Subadviser may
serve other clients in a similar capacity.
In connection with the selection of brokers or dealers and the placing of
portfolio securities transactions, brokers or dealers may be selected who also
provide brokerage and research services (as those terms are defined in Section
28(e) of the Securities Exchange Act of 1934) to a Fund and/or the other
accounts over which the Manager, the Subadvisers or their affiliates exercise
investment discretion. The Manager and the Subadvisers are authorized to pay a
broker or dealer who provides such brokerage and research services a commission
for executing a portfolio transaction for the Fund which is in excess of the
amount of commission another broker or dealer would have charged for effecting
that transaction if the Manager or the applicable Subadviser determines in good
faith that such amount of commission is reasonable in relation to the value of
the brokerage and research services provided by such broker or dealer. This
determination may be viewed in terms of either that particular transaction or
the overall responsibilities which the Manager, the Subadvisers and their
affiliates have with respect to accounts over which they exercise investment
discretion.
The management fee that each Fund pays to Citibank or a Subadviser will
not be reduced as a consequence of Citibank's or the Subadviser's receipt of
brokerage and research services. While such services are not expected to reduce
the expenses of Citibank or the Subadviser, Citibank would, through the use of
the services, avoid the additional expenses which would be incurred if it should
attempt to develop comparable information through its own staff or obtain such
services independently.
In certain instances there may be securities that are suitable as an
investment for a Fund as well as for one or more of Citibank's or a Subadviser's
other clients. Investment decisions for each Fund and for Citibank's and the
Subadvisers' other clients are made with a view to achieving their respective
investment objectives. It may develop that a particular security is bought or
sold for only one client even though it might be held by, or bought or sold for,
other clients. Likewise, a particular security may be bought for one or more
clients when one or more clients are selling the same security. Some
simultaneous transactions are inevitable when several clients receive investment
advice from the same investment adviser, particularly when the same security is
suitable for the investment objectives of more than one client. When two or more
clients are simultaneously engaged in the purchase or sale of the same security,
the securities are allocated among clients in a manner believed to be equitable
to each. It is recognized that in some cases this system could adversely affect
the price of or the size of the position obtainable in a security for a Fund.
When purchases or sales of the same security for a Fund and for other portfolios
managed by Citibank or a Subadviser occur contemporaneously, the purchase or
sale orders may be aggregated in order to obtain any price advantages available
to large volume purchases or sales.
For the period from November 1, 1997 to October 31, 1998, Large Cap Value
Portfolio paid brokerage commissions of $259,902.64; Small Cap Value Portfolio
paid brokerage commissions of $464,356.80; International Portfolio paid
brokerage commissions of $575,319.99; Large Cap Growth Portfolio paid brokerage
commissions of $855,647.86; and Small Cap Growth Portfolio paid brokerage
commissions of $214,400.62. For the period from November 1, 1997 to October 31,
1998, Intermediate Income Portfolio, Short-Term Portfolio and Foreign Bond
Portfolio paid no brokerage commissions. Prior to November 1, 1997, CitiSelect
Folio 200, CitiSelect Folio 300, CitiSelect Folio 400 and CitiSelect Folio 500
invested their assets in, respectively, Asset Allocation Portfolio 200, Asset
Allocation Portfolio 300, Asset Allocation Portfolio 400, and Asset Allocation
Portfolio 500. For the periods from June 17, 1996 (September 3, 1996 for Asset
Allocation Portfolio 500), commencement of operations, to December 31, 1996 and
January 1, 1997 to October 31, 1997, Asset Allocation Portfolios paid brokerage
commissions in the following amounts: Asset Allocation Portfolio 200, $89,479
and $111,725, respectively; Asset Allocation Portfolio 300, $241,111 and
$301,201, respectively; Asset Allocation Portfolio 400, $453,048 and $561,555,
respectively; and Asset Allocation Portfolio 500, $185,397 and $308,557,
respectively.
10. DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Trust's Declaration of Trust permits the Trust to issue an unlimited
number of full and fractional shares of beneficial interest (without par value)
of each series, to divide or combine the shares of any series into a greater or
lesser number of shares of that series without thereby changing the
proportionate beneficial interests in that series and to divide such shares into
classes. The Trust has reserved the right to create and issue additional series
and classes of shares. Each share of each class represents an equal
proportionate interest in that Fund with each other share of that class. Shares
of each series participate equally in the earnings, dividends and distribution
of net assets of the particular series upon liquidation or dissolution (except
for any differences between classes of shares of a series). Shares of each
series are entitled to vote separately to approve management agreements or
changes in investment policy, and shares of a class are entitled to vote
separately to approve any distribution or service arrangements relating to that
class, but shares of all series may vote together in the election or selection
of Trustees and accountants for the Trust. In matters affecting only a
particular Fund or class, only shares of that particular Fund or class are
entitled to vote.
Shareholders are entitled to one vote for each share held on matters on
which they are entitled to vote. Shareholders in the Trust do not have
cumulative voting rights, and shareholders owning more than 50% of the
outstanding shares of the Trust may elect all of the Trustees of the Trust if
they choose to do so and in such event the other shareholders in the Trust would
not be able to elect any Trustee. The Trust is not required to hold, and has no
present intention of holding, annual meetings of shareholders but the Trust will
hold special meetings of shareholders when in the judgment of the Trustees it is
necessary or desirable to submit matters for a shareholder vote. Shareholders
have, under certain circumstances (e.g., upon the application and submission of
certain specified documents to the Trustees by a specified number of
shareholders), the right to communicate with other shareholders in connection
with requesting a meeting of shareholders for the purpose of removing one or
more Trustees. Shareholders also have under certain circumstances the right to
remove one or more Trustees without a meeting by a declaration in writing by a
specified number of shareholders. No material amendment may be made to the
Trust's Declaration of Trust without the affirmative vote of the holders of a
majority of the outstanding shares of each series affected by the amendment.
(See "Investment Restrictions.")
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.
The Trust may enter into a merger or consolidation, or sell all or
substantially all of its assets (or all or substantially all of the assets
belonging to any series of the Trust), if approved by a vote of the holders of
two-thirds of the Trust's outstanding shares, voting as a single class, or of
the affected series of the Trust, as the case may be, except that if the
Trustees of the Trust recommend such sale of assets, merger or consolidation,
the approval by vote of the holders of a majority of the Trust's or the affected
series outstanding shares would be sufficient. The Trust or any series of the
Trust, as the case may be, may be terminated (i) by a vote of a majority of the
outstanding voting securities of the Trust or the affected series or (ii) by the
Trustees by written notice to the shareholders of the Trust or the affected
series. If not so terminated, the Trust will continue indefinitely.
The Funds' Transfer Agent maintains a share register for shareholders of
record. Share certificates are not issued.
The Trust is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders of such a business trust
may, under certain circumstances, be held personally liable as partners for its
obligations and liabilities. However, the Declaration of Trust of the Trust
contains an express disclaimer of shareholder liability for acts or obligations
of the Trust and provides for indemnification and reimbursement of expenses out
of Trust property for any shareholder held personally liable for the obligations
of the Trust. The Declaration of Trust of the Trust also provides that the Trust
may maintain appropriate insurance (e.g., fidelity bonding and errors and
omissions insurance) for the protection of the Trust, its shareholders,
Trustees, officers, employees and agents covering possible tort and other
liabilities. Thus, 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.
The Trust's Declaration of Trust further provides that obligations of the
Trust are not binding upon the Trustees individually but only upon the property
of the Trust and that the Trustees will not be liable for any action or failure
to act, but nothing in the Declaration of Trust of the Trust protects a Trustee
against any liability to which he or she would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his or her office.
Each Fund invests in multiple Portfolios. Each Portfolio is a series of
one of the Portfolio Trusts, which are organized as New York trusts.
Each investor in a Portfolio, including the corresponding Fund, may add
to or withdraw from its investment in the applicable Portfolio on each Business
Day. As of the close of regular trading on each Business Day, the value of each
investor's beneficial interest in each Portfolio is determined by multiplying
the net asset value of the Portfolio by the percentage, effective for that day,
that represents that investor's share of the aggregate beneficial interests in
the Portfolio. Any additions or withdrawals that are to be effected on that day
are then effected. The investor's percentage of the aggregate beneficial
interests in the Portfolio is then re-computed as the percentage equal to the
fraction (i) the numerator of which is the value of such investor's investment
in the Portfolio as of the close of regular trading on such day plus or minus,
as the case may be, the amount of any additions to or withdrawals from the
investor's investment in the Portfolio effected on such day, and (ii) the
denominator of which is the aggregate net asset value of the Portfolio as of the
close of regular trading on such day plus or minus, as the case may be, the
amount of the net additions to or withdrawals from the aggregate investments in
the Portfolio by all investors in the Portfolio. The percentage so determined is
then applied to determine the value of the investor's interest in the Portfolio
as of the close of regular trading on the next following Business Day.
11. TAX MATTERS
TAXATION OF THE FUNDS AND THE PORTFOLIO TRUSTS
FEDERAL TAXES. Each Fund is treated as a separate entity for federal
income tax purposes under the Internal Revenue Code of 1986, as amended (the
"Code"). Each Fund has elected to be treated, and intends to qualify each year,
as a "regulated investment company" under Subchapter M of the Code by meeting
all applicable requirements of Subchapter M, including requirements as to the
nature of the Fund's gross income, the amount of Fund distributions, and the
composition of the Fund's portfolio assets. Provided all such requirements are
met, no U.S. federal income or excise taxes generally will be required to be
paid by the Funds. If a Fund should fail to qualify as a "regulated investment
company" for any year, the Fund would incur a regular corporate federal income
tax upon its taxable income and Fund distributions would generally be taxable as
ordinary income to shareholders. The Portfolio Trusts believe the Portfolios
also will not be required to pay any U.S. federal income or excise taxes on
their income.
FOREIGN TAXES. Investment income and gains received by a Fund from
non-U.S. securities may be subject to non-U.S. taxes. The U.S. has entered into
tax treaties with many other countries that may entitle a Fund to a reduced rate
of tax or an exemption from tax on such income. Each Fund intends to qualify for
treaty reduced rates where applicable. It is not possible, however, to determine
a Fund's effective rate of non-U.S. tax in advance since the amount of the
Fund's assets to be invested within various countries is not known.
If a Fund holds more than 50% of its assets in foreign stock and
securities at the close of its taxable year, the Fund may elect to "pass
through" to the Fund's shareholders foreign income taxes paid. If the Fund so
elects, shareholders will be required to treat their pro rata portion of the
foreign income taxes paid by the Fund as part of the amounts distributed to them
by the Fund and thus includable in their gross income for federal income tax
purposes. Shareholders who itemize deductions would then be allowed to claim a
deduction or credit (but not both) on their federal income tax returns for such
amounts, subject to certain limitations. Shareholders who do not itemize
deductions would (subject to such limitations) be able to claim a credit but not
a deduction. No deduction for such amounts will be permitted to individuals in
computing their alternative minimum tax liability. If a Fund does not qualify or
elect to "pass through" to the Fund's shareholders foreign income taxes paid by
it, shareholders will not be able to claim any deduction or credit for any part
of the foreign taxes paid by the Fund.
TAXATION OF SHAREHOLDERS
TAXATION OF DISTRIBUTIONS. Shareholders of a Fund will generally have to
pay federal income taxes and any state or local taxes on the dividends and
capital gain distributions they receive from the Fund. Dividends from ordinary
income and any distributions from net short-term capital gains are taxable to
shareholders as ordinary income for federal income tax purposes, whether the
distributions are made in cash or in additional shares. Distributions of net
capital gains (i.e., the excess of net long-term capital gains over net
short-term capital losses), whether made in cash or in additional shares, are
taxable to shareholders as long-term capital gains without regard to the length
of time the shareholders have held their shares. Any Fund dividend that is
declared in October, November, or December of any calendar year, that is payable
to shareholders of record in such a month, and that is paid the following
January, will be treated as if received by the shareholders on December 31 of
the year in which the dividend is declared.
Any Fund distribution will have the effect of reducing the per share net
asset value of shares in the Fund by the amount of the distribution.
Shareholders purchasing shares shortly before the record date of any
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.
DIVIDENDS-RECEIVED DEDUCTION. The portion of each Fund's ordinary income
dividends attributable to dividends received in respect of equity securities of
U.S. issuers is normally eligible for the dividends received deduction for
corporations subject to U.S. federal income taxes. Availability of the deduction
for particular shareholders is subject to certain limitations, and deducted
amounts may be subject to the alternative minimum tax and result in certain
basis adjustments.
SPECIAL CONSIDERATIONS FOR NON-U.S. PERSONS. The Funds will withhold tax
payments at a rate of 30% (or any lower applicable tax treaty rate) on taxable
dividends and other payments subject to withholding taxes that are made to
persons who are not citizens or residents of the United States. Distributions
received from the Funds by non-U.S. persons also may be subject to tax under the
laws of their own jurisdiction.
BACKUP WITHHOLDING. The account application asks each new shareholder to
certify that the shareholder's Social Security or taxpayer identification number
is correct and that the shareholder is not subject to 31% backup withholding for
failing to report income to the IRS. The Funds may be required to withhold (and
pay over to the IRS for the shareholder's credit) 31% of certain distributions
and redemption proceeds paid to shareholders who fail to provide this
information or who otherwise violate IRS regulations.
DISPOSITION OF SHARES. In general, any gain or loss realized upon a
taxable disposition of shares of a Fund by a shareholder that holds such shares
as a capital asset will be treated as a long-term capital gain or loss if the
shares have been held for more than twelve months and otherwise as a short-term
capital gain or loss. However, any loss realized upon a disposition of shares in
a Fund held for six months or less will be treated as a long-term capital loss
to the extent of any distributions of net capital gain made with respect to
those shares. Any loss realized upon a disposition of shares may also be
disallowed under rules relating to wash sales. Gain may be increased (or loss
reduced) upon a redemption of Class A Fund shares held for 90 days or less
followed by any purchase of shares of a Fund or another of the CitiFunds,
including purchases by exchange or by reinvestment, without payment of a sales
charge which would otherwise apply because of any sales charge paid on the
original purchase of the Class A Fund shares.
EFFECTS OF CERTAIN INVESTMENTS AND TRANSACTIONS
CERTAIN DEBT INVESTMENTS. Any investment by a Fund in zero coupon bonds,
deferred interest bonds, payment-in-kind bonds, certain stripped securities, and
certain securities purchased at a market discount will cause the Fund to
recognize income prior to the receipt of cash payments with respect to those
securities. In order to distribute this income and avoid a tax on the Fund, the
Fund may be required to liquidate portfolio securities that it might otherwise
have continued to hold, potentially resulting in additional taxable gain or loss
to the Fund. An investment by a Fund in residual interests of a CMO that has
elected to be treated as a real estate mortgage investment conduit, or "REMIC,"
can create complex tax problems, especially if the Fund has state or local
governments or other tax-exempt organizations as shareholders.
OPTIONS, ETC. Each Fund's transactions in options, futures and forward
contracts will be subject to special tax rules that may affect the amount,
timing and character of Fund income and distributions to shareholders. For
example, certain positions held by each Fund on the last business day of each
taxable year will be marked to market (i.e., treated as if closed out) on that
day, and any gain or loss associated with the positions will be treated as 60%
long-term and 40% short-term capital gain or loss. Certain positions held by a
Fund that substantially diminish its risk of loss with respect to other
positions in its portfolio may constitute "straddles," and may be subject to
special tax rules that would cause deferral of Fund losses, adjustments in the
holding periods of Fund securities, and conversion of short-term into long-term
capital losses. Certain tax elections exist for straddles that may alter the
effects of these rules. Each Fund intends to limit its activities in options,
futures and forward contracts to the extent necessary to meet the requirements
of Subchapter M of the Code.
FOREIGN INVESTMENTS. The Funds may make non-U.S. investments. Special tax
considerations apply with respect to such investments. Foreign exchange gains
and losses realized by a Fund will generally be treated as ordinary income and
loss. Use of non-U.S. currencies for non-hedging purposes and investment by a
Fund in certain "passive foreign investment companies" may have to be limited in
order to avoid a tax on a Fund. A Fund may elect to mark to market any
investments in "passive foreign investment companies" on the last day of each
taxable year. This election may cause the Fund to recognize ordinary income
prior to the receipt of cash payments with respect to those investments; in
order to distribute this income and avoid a tax on the Fund, the Fund may be
required to liquidate portfolio securities that it might otherwise have
continued to hold potentially resulting in additional taxable gain or loss to
the Fund.
12. CERTAIN 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.
13. FINANCIAL STATEMENTS
The audited financial statements of CitiSelect Folio 200, CitiSelect
Folio 300, CitiSelect Folio 400, and CitiSelect Folio 500 (Statement of Assets
and Liabilities at October 31, 1998, Statement of Operations for the year ended
October 31, 1998, Statement of Changes in Net Assets for the year ended October
31, 1998, the ten months ended October 31, 1997 and the period from June 17,
1996 (commencement of operations, or as applicable, September 3, 1996,
commencement of operations of CitiSelect Folio 500) to December 31, 1996, and
Financial Highlights for the year ended October 31, 1998, the ten months ended
October 31, 1997 and the period from June 17, 1996 (commencement of operations,
or as applicable, September 3, 1996, commencement of operations of CitiSelect
Folio 500) to December 31, 1996, Notes to Financial Statements and Independent
Auditors' Report), which are included in the Annual Report to Shareholders, are
incorporated by reference into this Statement of Additional Information and have
been so incorporated in reliance upon the reports of PricewaterhouseCoopers LLP,
independent accountants, on behalf of those Funds.
A copy of the Annual Report for the Funds accompanies this Statement of
Additional Information.
