<PAGE>
ALLMERICA INVESTMENT TRUST
440 Lincoln Street
Worcester, Massachusetts 01653
(508) 855-1000
Allmerica Investment Trust (the "Trust") is a professionally managed,
open-end investment company designed to provide the underlying investment
vehicles for insurance related accounts. The investment objectives of the five
separate portfolios of the Trust (collectively, the "Funds", and, individually,
the "Fund") currently offered by this Prospectus are as follows:
SELECT INTERNATIONAL EQUITY FUND seeks maximum long-term total return
(capital appreciation and income) primarily by investing in common stocks of
established non-U.S. companies.
SELECT AGGRESSIVE GROWTH FUND seeks above-average capital appreciation
by investing primarily in common stocks of companies which are believed to
have significant potential for capital appreciation.
SELECT CAPITAL APPRECIATION FUND seeks long-term growth of capital in a
manner consistent with the preservation of capital. Realization of income is
not a significant investment consideration and any income realized on the
Fund's investments will be incidental to its primary objective.
SELECT GROWTH FUND seeks to achieve long-term growth of capital by
investing in a diversified portfolio consisting primarily of common stocks
selected on the basis of their long-term growth potential.
SELECT INCOME FUND seeks a high level of current income. The Fund will
invest primarily in investment grade, fixed-income securities.
Currently, shares of each Fund may only be purchased by separate accounts
("Separate Accounts") established by First Allmerica Financial Life Insurance
Company ("First Allmerica") for the purpose of funding group annuity contracts
issued by First Allmerica. The offering circular for the Separate Accounts
should be read in conjunction with this Prospectus.
This Prospectus sets forth concisely the information about the Trust that a
prospective investor ought to know before investing. Certain additional
information is contained in a Statement of Additional Information ("SAI") dated
April 29, 1996, which has been filed vith the Securities and Exchange
Commission, is incorporated herein by reference and is available upon request,
without charge, from the Trust, 440 Lincoln Street, Worcester, MA 01653, (508)
855-1000.
THIS PROSPECTUS SHOULD BE READ AND RETAINED FOR FUTURE REFERENCE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Dated April 29, 1996, as supplemented June 7, 1996
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FINANCIAL HIGHLIGHTS...................................................... 3
HOW ARE THE FUNDS MANAGED?................................................ 6
WHAT ARE THE INVESTMENT OBJECTIVES AND POLICIES?.......................... 6
Select International Equity Fund........................................ 7
Select Aggressive Growth Fund........................................... 7
Select Capital Appreciation Fund........................................ 8
Select Growth Fund...................................................... 9
Select Income Fund...................................................... 11
MANAGEMENT FEES AND EXPENSES.............................................. 12
FUND MANAGER INFORMATION.................................................. 13
HOW ARE SHARES VALUED?.................................................... 15
TAXES AND DISTRIBUTIONS TO SHAREHOLDERS................................... 15
SALE AND REDEMPTION OF SHARES............................................. 16
HOW IS PERFORMANCE DETERMINED?............................................ 16
ORGANIZATION AND CAPITALIZATION OF THE TRUST.............................. 17
INVESTMENT RESTRICTIONS................................................... 17
CERTAIN INVESTMENT STRATEGIES AND POLICIES................................ 17
APPENDIX.................................................................. 24
</TABLE>
2
<PAGE>
FINANCIAL HIGHLIGHTS
The following financial highlights have been audited by Price Waterhouse
LLP, independent accountants of the Trust. This information should be read in
conjunction with the financial statements and notes thereto which appear in the
Policyholders' Annual Report ("Annual Report") for the year ended December 31,
1995, and which are incorporated by reference in the Funds' SAI. Further
information about the performance of the Trust is contained in the Annual Report
which may be obtained without charge from the Trust, 440 Lincoln Street,
Worcester, MA 01653, (508) 855-1000.
3
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ALLMERICA INVESTMENT TRUST
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR
<TABLE>
<CAPTION>
SELECT INTERNATIONAL
EQUITY FUND SELECT AGGRESSIVE GROWTH FUND
------------------------- ------------------------------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
------------------------- ------------------------------------------------
1995 1994 (1) 1995 1994 1993 1992 (2)
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of year...... $ 0.963 $ 1.000 $ 1.397 $ 1.431 $ 1.197 $ 1.000
--------- --------- --------- --------- --------- ---------
Income from Investment Operations:
Net investment income (loss).......... 0.013 0.003(A) (0.001) (0.002) 0.001(B) 0.001(B)
Net realized and unrealized gain
(loss) on investments................ 0.176 (0.038) 0.452 (0.032) 0.234 0.197
--------- --------- --------- --------- --------- ---------
Total from Investment Operations.... 0.189 (0.035) 0.451 (0.034) 0.235 0.198
--------- --------- --------- --------- --------- ---------
Less Distributions:
Dividends from net investment
income............................... (0.011) (0.001) -- -- (0.001) (0.001)
Distributions from net realized
capital gains........................ (0.005) (0.001) -- -- -- --
--------- --------- --------- --------- --------- ---------
Total Distributions................. (0.016) (0.002) -- -- (0.001) (0.001)
--------- --------- --------- --------- --------- ---------
Net increase (decrease) in net asset
value.................................. 0.173 (0.037) 0.451 (0.034) 0.234 0.197
--------- --------- --------- --------- --------- ---------
Net Asset Value, End of year............ $ 1.136 $ 0.963 $ 1.848 $ 1.397 $ 1.431 $ 1.197
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Total Return (C)........................ 19.63% (3.49)%* 32.28% (2.31)% 19.51% 19.85%*
Ratios/Supplemental Data:
Net Assets, End of year (000's)......... $104,312 $ 40,498 $254,872 $136,573 $ 66,251 $ 9,270
Ratios to average net assets:
Net investment income (loss).......... 1.68% 0.87%+ (0.07)% (0.21)% 0.10% 0.34%+
Operating expenses.................... 1.24% 1.50%+(A) 1.09% 1.16% 1.19%(B) 1.35%+(B)
Gross management fee.................. 1.00% 1.00%+ 1.00% 1.00% 1.00% N/A
Net management fee.................... 1.00% 0.72%+ 1.00% 1.00% 0.96% N/A
Portfolio Turnover Rate................. 24% 19% 104% 100% 76% 33%
</TABLE>
- ----------------------------------
+ Annualized.
* Not Annualized.
(1) The Fund commenced operations on May 2, 1994.
(2) The Fund commenced operations on August 21, 1992.
(A) Net investment income per share and the annualized operating expense ratio
before reimbursement of fees by the investment adviser for the period ended
December 31, 1994 were $0.002 and 1.78%, respectively.
(B) Net investment income per share and the operating expense ratios before
reimbursement of fees by the investment adviser for the years ended December
31, 1993 and 1992 were $0.000 and 1.23% and $(0.001) and 1.88% (annualized),
respectively.
(C) Total Return does not reflect fees charged on the Separate Account level.
Refer to the prospectus of the specific insurance product for such fee
information.
See Notes to Financial Statements
4
<PAGE>
ALLMERICA INVESTMENT TRUST
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR
<TABLE>
<CAPTION>
<S>
Net Asset Value, Beginning of year......
Income from Investment Operations:
Net investment income (loss)..........
Net realized and unrealized gain
(loss) on investments................
Total from Investment Operations....
Less Distributions:
Dividends from net investment
income...............................
Distributions from net realized
capital gains........................
Distributions in excess of net
investment income....................
Total Distributions.................
Net increase (decrease) in net asset
value..................................
Net Asset Value, End of year............
Total Return (D)........................
Ratios/Supplemental Data:
Net Assets, End of year (000's).........
Ratios to average net assets:
Net investment income (loss)..........
Operating expenses....................
Gross management fee..................
Net management fee....................
Portfolio Turnover Rate.................
<CAPTION>
SELECT
INCOME
FUND
SELECT ---------
CAPITAL
APPRECIATION SELECT GROWTH FUND YEAR
FUND ------------------------------------------------ ENDED
------------ DECEMBER
PERIOD ENDED YEAR ENDED DECEMBER 31, 31,
DECEMBER 31, ------------------------------------------------ ---------
1995 (1) 1995 1994 1993 1992 (2) 1995
------------ --------- --------- --------- --------- ---------
<S>
Net Asset Value, Beginning of year...... $ 1.000 $ 1.099 $ 1.119 $ 1.111 $ 1.008 $ 0.930
------------ --------- --------- --------- --------- ---------
Income from Investment Operations:
Net investment income (loss).......... (0.001)(A) -- 0.003 0.001(B) 0.001(B) 0.060(C)
Net realized and unrealized gain
(loss) on investments................ 0.397 0.270 (0.020) 0.008 0.111 0.095
------------ --------- --------- --------- --------- ---------
Total from Investment Operations.... 0.396 0.270 (0.017) 0.009 0.112 0.155
------------ --------- --------- --------- --------- ---------
Less Distributions:
Dividends from net investment
income............................... -- -- (0.003) (0.001) (0.001) (0.060)
Distributions from net realized
capital gains........................ (0.027) -- -- -- -- --
Distributions in excess of net
investment income.................... -- -- -- -- -- (0.001)
------------ --------- --------- --------- --------- ---------
Total Distributions................. (0.027) -- (0.003) (0.001) (0.001) (0.061)
------------ --------- --------- --------- --------- ---------
Net increase (decrease) in net asset
value.................................. 0.369 0.270 (0.020) 0.008 0.111 0.094
------------ --------- --------- --------- --------- ---------
Net Asset Value, End of year............ $ 1.369 $ 1.369 $ 1.099 $ 1.119 $ 1.111 $ 1.024
------------ --------- --------- --------- --------- ---------
------------ --------- --------- --------- --------- ---------
Total Return (D)........................ 39.56%* 24.59% (1.49)% 0.84% 11.25%* 16.96%
Ratios/Supplemental Data:
Net Assets, End of year (000's)......... $ 41,376 $143,125 $ 88,263 $ 53,854 $ 9,308 $ 60,368
Ratios to average net assets:
Net investment income (loss).......... (0.25)%+ 0.02% 0.37% 0.15% 0.40%+ 6.24%
Operating expenses.................... 1.35%+(A) 0.97% 1.03% 1.05%(B) 1.20%+(B) 0.79%(C)
Gross management fee.................. 1.00%+ 0.85% 0.85% 0.85% N/A 0.60%
Net management fee.................... 0.93%+ 0.85% 0.85% 0.82% N/A 0.59%
Portfolio Turnover Rate................. 95% 51% 55% 65% 3% 131%
<CAPTION>
1994 1993 1992 (2)
--------- --------- ---------
Net Asset Value, Beginning of year...... $ 1.035 $ 0.988 $ 1.000
--------- --------- ---------
Income from Investment Operations:
Net investment income (loss).......... 0.055(C) 0.052(C) 0.018(C)
Net realized and unrealized gain
(loss) on investments................ (0.105) 0.055 (0.012)
--------- --------- ---------
Total from Investment Operations.... (0.050) 0.107 0.006
--------- --------- ---------
Less Distributions:
Dividends from net investment
income............................... (0.055) (0.052) (0.018)
Distributions from net realized
capital gains........................ -- -- --
Distributions in excess of net
investment income.................... -- -- --
--------- --------- ---------
Total Distributions................. (0.055) (0.060) (0.018)
--------- --------- ---------
Net increase (decrease) in net asset
value.................................. (0.105) 0.047 (0.012)
--------- --------- ---------
Net Asset Value, End of year............ $ 0.930 $ 1.035 $ 0.988
--------- --------- ---------
--------- --------- ---------
Total Return (D)........................ (4.82)% 10.95% 0.62%
Ratios/Supplemental Data:
Net Assets, End of year (000's)......... $ 40,784 $ 25,302 $ 5,380
Ratios to average net assets:
Net investment income (loss).......... 6.07% 5.91% 5.38%+
Operating expenses.................... 0.83%(C) 0.91%(C) 1.00%(C)
Gross management fee.................. 0.60% 0.60% N/A
Net management fee.................... 0.58% 0.43% N/A
Portfolio Turnover Rate................. 105% 171% 119%
</TABLE>
- ----------------------------------
+ Annualized.
* Not Annualized.
(1) The Fund commenced operations on April 28, 1995.
(2) The Fund commenced operations on August 21, 1992.
(A) Net investment income per share and annualized operating expense ratio
before reimbursement of fees by the investment adviser for the period ended
December 31, 1995 were $(0.001) and 1.42%, respectively.
(B) Net investment income per share and the operating expense ratios before
reimbursement of fees by the investment adviser for the years ended December
31, 1993 and 1992 were $0.001 and 1.08% and $0.000 and 1.72% (annualized),
respectively.
(C) Net investment income per share and the operating expense ratios before
reimbursement of fees by the investment adviser for the years ended Decenber
31, 1995, 1994, 1993 and 1992 were $0.060 and 0.60%, $0.055 and 0.85%,
$0.050 and 1.08% amd $0.015 and 1.51% (annualized), respectively.
(D) Total Return does not reflect fees charged on the Separate Account level.
Refer to the prospectus of the specific insurance product for such fee
information.
See Notes to Financial Statements
5
<PAGE>
HOW ARE THE FUNDS MANAGED?
The overall responsibility for the supervision of the affairs of the Trust
vests in the Board of Trustees of the Trust who meet on a quarterly basis.
Allmerica Investment Management Company, Inc. (the "Manager") is responsible for
the management of the Trust's day-to-day business affairs and has general
responsibility for the management of the investments of the Funds. The Manager,
at its expense, has contracted with certain Sub-Advisers to manage the
investments of the Funds subject to the requirements of the Investment Company
Act of 1940 (the "1940 Act").
The Manager is a wholly-owned subsidiary of First Allmerica, a life
insurance company, which was organized in Massachusetts in 1844. The Manager,
organized August 19, 1985, also serves as manager of the Allmerica Funds, an
open-end investment company. The Manager and First Allmerica are located at 440
Lincoln Street, Worcester, Massachusetts 01653.
The Manager has entered into Sub-Adviser Agreements for the management of
the investments of each of the Funds. The Sub-Advisers, who have been selected
on the basis of various factors, including management experience, investment
techniques and staffing, are each authorized to engage in portfolio transactions
on behalf of the applicable Funds subject to such general or specific
instructions as may be given by the Trustees and/or the Manager. The terms of a
Sub-Adviser Agreement cannot be changed without the approval of a majority
interest of the shareholders of the affected Fund. The Sub-Advisers have been
selected by the Manager and the Trustees in consultation with Rogers, Casey &
Associates ("Rogers, Casey"), a leading pension consulting firm. The cost of
such consultation is borne by the Manager.
Rogers, Casey provides consulting services to pension plans representing
over $150 billion in total assets and, in its consulting capacity, monitors the
investment performance of over 1,000 investment advisers. From time to time
specific clients of Rogers, Casey and the Sub-Advisers will be provided in sales
materials. At times, Rogers, Casey assists in the development of asset
allocation strategies which may be used by shareholders in the diversification
of their portfolio across different asset classes.
Ongoing performance of the independent Sub-Advisers is monitored and
evaluated by a committee whose members may include senior officers of First
Allmerica, its affiliates or the Manager and an independent consultant.
Combined, the committee has over 150 years of investment experience. Historical
performance data for all of the Funds is set forth in the "Financial Highlights"
tables starting on Page 3. The Manager is solely responsible for the payment of
all fees to the Sub-Advisers. The Sub-Advisers for each of the Funds are as
follows:
<TABLE>
<S> <C>
Select International Equity Fund Bank of Ireland Asset Management (U.S.)
Limited
Select Aggressive Growth Fund Nicholas-Applegate Capital Management
Select Capital Appreciation Fund Janus Capital Corporation
Select Growth Fund Provident Investment Counsel (through
June 30, 1996)
Putnam Investment Management, Inc.
(commencing on or about July 1, 1996)
Select Income Fund Standish, Ayer & Wood, Inc.
</TABLE>
For a sample listing of the Sub-Advisers' clients, see "Investment
Management and Other Services" in the SAI. For more information on each of the
Sub-Advisers see "What Are the Investment Objectives and Policies?" and "Fund
Manager Information."
The Manager also has entered into an Administrative Services Agreement with
First Data Investor Services Group, Inc. ("First Data"), a wholly-owned
subsidiary of First Data Corporation, whereby First Data performs administrative
services for each of the Funds and is entitled to receive an administrative fee
and certain out-of-pocket expenses. The Manager is solely responsible for the
payment of the administrative fee to First Data.
WHAT ARE THE INVESTMENT OBJECTIVES AND POLICIES?
Each Fund has a separate investment objective and policies designed to meet
different investment and financial needs, as described below. There is no
assurance that a Fund will achieve its investment objective.
6
<PAGE>
Each Fund may invest up to 15% of its assets in securities which are
illiquid because they are subject to restriction on resale or for which market
quotations are not readily available. The Select Aggressive Growth Fund, Select
Growth Fund and Select Income Fund may each invest up to 25% of its assets in
foreign securities (not including its investments in American Depositary
Receipts ("ADRs")) and the Select International Equity Fund and the Select
Capital Appreciation Fund may each invest any percentage of its assets in
foreign securities. See "Certain Investment Strategies and Policies." The Select
Growth Fund may invest up to 35% of its assets in fixed-income securities,
including not more than 15% in lower-rated securities, commonly known as "junk
bonds." The Select Capital Appreciation Fund may invest up to 35% of its assets
in such lower-rated securities. Fixed-income securities rated in the fourth
highest grade by Moody's Investors Service, Inc. ("Moody's") or Standard &
Poor's Ratings Service, a division of McGraw-Hill Companies, Inc. ("S&P") (Baa
and BBB, respectively) are investment grade but are considered to have some
speculative characteristics. Lower-rated securities or "junk bonds" (rated Ba/BB
or lower) involve the risks discussed under "Certain Investment Strategies and
Policies." For more information concerning the rating categories of fixed-income
securities see the Appendix.
A Fund's investment objective is fundamental and may not be changed without
shareholder approval. Unless otherwise indicated, a Fund's investment policies
are not fundamental and may be changed without shareholder approval.
SELECT INTERNATIONAL EQUITY FUND
INVESTMENT OBJECTIVE: The Select International Equity Fund seeks maximum
long-term total return (capital appreciation and income) primarily by investing
in common stocks of established non-U.S. companies.
SUB-ADVISER: Bank of Ireland Asset Management (U.S.) Limited ("BIAM")
serves as Sub-Adviser for the Select International Equity Fund. BIAM is an
indirect wholly-owned subsidiary of Bank of Ireland. Its main offices are at 26
Fitzwilliam Place, Dublin 2, Ireland. Its U.S. offices are at Two Greenwich
Plaza, Greenwich, C T 06830. Bank of Ireland provides investment management
services through a network of sister companies, including BIAM which represents
North American clients. As of December 31, 1995, Bank of Ireland managed
approximately $15 billion in global securities for Irish, United Kingdom,
European and U.S. clients.
INVESTMENT POLICIES: To achieve its objective, the Select International
Equity Fund will invest primarily in common stocks of established non-U.S.
companies. Under normal market conditions, at least 65 % of the Fund's total
assets will be invested in the securities of companies domiciled in at least
five foreign countries, not including the United States. The Fund may also
acquire fixed income debt securities. It will do so, at the discretion of BIAM,
primarily for defensive purposes.
The Fund's investments may include ADRs which may be sponsored or
unsponsored by the underlying issuer. The Fund may also utilize European
Depositary Receipts ("EDRs"), which are similar to ADRs, in bearer form,
designed for use in the European securities markets and Global Depositary
Receipts ("GDRs"). Investments in foreign securities carry additional risks not
present in domestic securities. See "Certain Investment Strategies and Policies-
Foreign Securities. " The Fund may, for hedging purposes, engage in the options
and futures strategies described under "Certain Investment Strategies and
Policies." Certain state insurance regulations may impose additional
restrictions on the Fund's holdings of foreign securities.
For the fiscal year ended December 31, 1995, the portfolio turnover rate for
the Fund was 24%. The portfolio turnover rate for the Fund may vary greatly from
year to year.
SELECT AGGRESSIVE GROWTH FUND
INVESTMENT OBJECTIVE: The Select Aggressive Growth Fund seeks above-average
capital appreciation by investing primarily in common stocks of companies which
are believed to have significant potential for capital appreciation.
SUB-ADVISER: Nicholas-Applegate Capital Management ("NACM") serves as
Sub-Adviser to the Select Aggressive Growth Fund. NACM is an investment manager
supervising accounts with approximately $29 billion in total assets as of
December 31, 1995. NACM's clients are primarily major corporate employee benefit
funds, public employee retirement plans, foundations and endowment funds,
investment companies and individuals. Founded in 1984, NACM is located at 600
West Broadway, Suite 2900, San Diego, California 92101.
7
<PAGE>
INVESTMENT POLICIES: Under normal circumstances, at least 65% of the assets
of the Select Aggressive Growth Fund will be invested in equity securities,
consisting of common stocks, securities convertible into common stocks
(including bonds, notes and preferred stocks) and warrants. The Fund's assets
may also be invested in other debt securities and preferred stocks when such
securities are believed appropriate in light of the Fund's investment objective
and market conditions.
The selection of securities is made solely on the basis of their potential
for capital appreciation. Dividend and interest income, if any, from portfolio
securities is incidental to the Fund's investment objective. While investments
may be made in well-known and established companies, a significant portion of
the Fund's investments is expected to be in securities of newer and relatively
unseasoned companies or companies which represent new or changing industries.
At any given point a substantial portion of the Fund's equity investments
may be in securities which are not listed for trading on national securities
exchanges and which, although publicly traded, may be less liquid than
securities issued by larger, more seasoned companies which trade on national
securities exchanges. Up to 15% of the Fund's assets may be invested in
restricted or illiquid securities.
Securities of newer companies may be closely held with only a small portion
of their outstanding securities owned by the general public. Newer companies may
have relatively small revenue, lack depth of management and have a small share
of the market for their products or services; thus, they may be more vulnerable
to changes in economic conditions, market fluctuations and other factors
affecting the profitability or marketability of companies. Due to these and
other factors, the price movement of the securities held by the Fund can be
expected to be more volatile than is the case for the market as a whole, and the
net asset value of a share of the Fund may fluctuate significantly.
Consequently, the Fund should not be considered suitable for investors who are
unable or unwilling to assume the risk of loss inherent in an aggressive growth
portfolio, nor should investment in the Fund be considered a balanced or
complete investment proram.
When NACM determines that market conditions warrant a temporary defensive
position, the Fund may invest without limitation in high-grade, fixed-income
securities, U.S. Government securities, or hold assets in cash or cash
equivalents. The Fund may, for hedging purposes, engage in the options and
futures strategies described under "Certain Investment Strategy and Policies."
For the fiscal year ended December 31, 1995, the portfolio turnover rate for
the Fund was 104%. The portfolio turnover rate was 104% because the
Sub-Adviser's investment approach typically results in above-average portfolio
turnover as securities are sold when the Sub-Adviser believes the reasons for
their initial purchase are no longer valid or when it believes that the sale of
a security owned by the Fund and the purchase of another security can enhance
return. A security may be sold to avoid a prospective decline in market value or
purchased in anticipation of a market rise. Although it is not possible to
predict future portfolio turnover rates accurately, and such rates may vary
greatly from year to year, NACM anticipates that the annual portfolio turnover
generally will not exceed 100%. A high portfolio turnover rate will likely
result in greater brokerage costs to the Fund.
SELECT CAPITAL APPRECIATION FUND
INVESTMENT OBJECTIVE: The Select Capital Appreciation Fund seeks long-term
growth of capital in a manner consistent with the preservation of capital.
Realization of income is not a significant investment consideration and any
income realized on the Fund's investments will be incidental to its primary
objective.
SUB-ADVISER: Janus Capital Corporation ("JCC") serves as Sub-Adviser to the
Select Capital Appreciation Fund. JCC has served as investment adviser to the
Janus Fund since 1969 and currently serves as investment adviser to all of the
Janus retail funds, as well as adviser or sub-adviser to other mutual funds and
individual, corporate, charitable and retirement accounts. Kansas City Southern
Industries, Inc. ("KCSI") owns approximately 83% of the outstanding voting stock
of JCC. KCSI is a publicly traded holding company whose primary subsidiaries are
engaged in transportation and financial services. As of December 31, 1995, JCC
had approximately $30 billion in total assets under management. JCC is located
at 100 Fillmore Street, Denver, Colorado 80206-4923.
INVESTMENT POLICIES: The Fund invests in common stocks when the Sub-Adviser
believes that the relevant market environment favors profitable investing in
those securities. The Fund pursues its objective by normally
8
<PAGE>
investing at least 50% of its equity assets in securities issued by medium-sized
companies. Medium-sized companies are those whose market capitalizations fall
within the range of companies in the S&P MidCap 400 Index (the "MidCap Index").
Companies whose capitalization falls outside this range after the Fund's initial
purchase continue to be considered medium-sized companies for the purpose of
this policy. As of December 29, 1995, the MidCap Index included companies with
capitalizations between approximately $118 million to $7.5 billion. The range of
the MidCap Index is expected to change on a regular basis. Subject to the above
policy, the Fund may also invest in smaller or larger issuers. Common stock
investments are selected in industries and companies that the Sub-Adviser
believes are experiencing favorable demand for their products and services, and
which operate in a favorable competitive environment and regulatory climate. The
Sub-Adviser's analysis and selection process focuses on stocks with earnings
growth potential that may not be recognized by the market. Such securities are
selected solely for their capital growth potential; investment income is not a
consideration. Medium-sized companies may suffer more significant losses as well
as realize more substantial growth than larger issues; thus, investments in such
companies tend to be more volatile and somewhat speculative.
The selection criteria for domestic issuers apply equally to stocks of
foreign issuers. In addition, factors such as expected levels of inflation,
government policies influencing business conditions, the outlook for currency
relationships, and prospects for relative economic growth among countries,
regions or geographic areas may warrant greater consideration in selecting
foreign stocks. The Fund may invest without limitation in foreign securities.
The Fund may invest directly in foreign securities denominated in foreign
currency and not publicly traded in the United States. The Fund also may
purchase foreign securities through ADRs, EDRs, GDRs and other types of receipts
or shares evidencing ownership of the underlying foreign securities. In
addition, the Fund may invest indirectly in foreign securities through foreign
investment funds or trusts (including passive foreign investment companies).
Certain state insurance regulations may impose additional restrictions on the
Fund's holdings of foreign securities. Investments in foreign securities carry
additional risks not present in domestic securities. See "Certain Investment
Strategies and Policies -- Foreign Securities."
Although the Fund normally invests primarily in common stocks, the Fund's
cash position may increase when the Sub-Adviser is unable to locate investment
opportunities with desirable risk/reward characteristics. The Fund also may
invest in preferred stocks, warrants, government securities, corporate bonds and
debentures, high-grade commercial papers, certificates of deposit, other debt
securities or repurchase agreement or reverse repurchase agreements when the
Sub-Adviser perceives an opportunity for capital growth from such securities or
so that the Fund may receive a return on its idle cash. The Fund also may invest
in debt securities rated below investment grade, which involve risks discussed
under "Certain Investment Strategies and Policies." When the Fund invests in
such securities, investment income will increase and may constitute a large
portion of the return realized by the Fund and the Fund probably will not
participate in market advances or declines to the extent that it would if it
remained fully invested in common stocks.
The Fund may invest in "special situations" from time to time. A special
situation arises when, in the opinion of the Sub-Adviser, the securities of a
particular issuer will be recognized and appreciate in value due to a specific
development with respect to that issuer. Developments creating a special
situation might include, among others, a new product or process, a technological
breakthrough, a management change or other extraordinary corporate event, or
differences in market supply of and demand for the security. Investment in
special situations may carry an additional risk of loss in the event that the
anticipated development does not occur or does not attract the expected
attention.
The Fund may, for hedging purposes, engage in options and futures strategies
and may utilize forward contracts, interest rate swaps and swap-related
products. See "Certain Investment Strategies and Policies."
For the fiscal period April 28, 1995 (commencement of operations) to
December 31, 1995, the portfolio turnover rate for the Fund was 95%. The
portfolio turnover rate for the Fund may vary from year to year.
SELECT GROWTH FUND
INVESTMENT OBJECTIVE: The Select Growth Fund seeks to achieve long-term
growth of capital by investing in a diversified portfolio consisting primarily
of common stocks selected on the basis of their long-term growth potential.
SUB-ADVISER: Provident Investment Counsel ("PIC") serves as Sub-Adviser to
the Select Growth Fund. PIC has been an investment manager for over 40 years. As
of December 31, 1995, PIC had assets under management of
9
<PAGE>
approximately $18 billion. PIC provides investment advisory services to major
corporate retirement plans, public employee retirement plans, investment
companies and foundation and endowment funds. PIC, located at 300 North Lake
Avenue, Pasadena, California 91101, is a wholly owned subsidiary of United Asset
Management Corporation, a Boston-based professional services holding company
listed on the New York Stock Exchange.
Effective on or about July 1, 1996, Putnam Investment Management, Inc.
("Putnam Management") will replace PIC as Sub-Adviser to the Select Growth Fund
pursuant to a new Sub-Adviser Agreement which has been approved by the Trustees
of the Trust. A special meeting of the Fund's shareholders will be held prior to
October 28, 1996, to approve the Sub-Adviser Agreement between Putnam Management
and the Manager.
Putnam Management and its affiliates managed over $142 billion in assets as
of April 30, 1996. Putnam Management has been managing mutual funds since 1937.
Putnam Management serves as the investment manager for the funds in the Putnam
family, with approximately $107 billion in assets in over 5.7 million
shareholder accounts as of April 30, 1996. The Putnam Advisory Company, Inc., an
affiliate, manages domestic and foreign institutional accounts and foreign
mutual funds. Another affiliate, Putnam Fiduciary Trust Company, provides
investment advice to institutional clients under its banking and fiduciary
powers.
Putnam Management's principal offices are located at One Post Office Square,
Boston, Massachusetts 02109. Putnam is a wholly-owned subsidiary of Putnam
Investments, Inc., a holding company which is in turn wholly owned by Marsh &
McLennan Companies, Inc., a publicly owned holding company whose principal
businesses are international insurance and reinsurance brokerage, employee
benefit consulting and investment management.
INVESTMENT POLICIES: The Select Growth Fund seeks to attain its objective
by investing in securities of companies that appear to have favorable long-term
growth characteristics. Potential for long-term growth is the determinative
factor in the selection of portfolio securities. Although the Fund may invest in
dividend-paying stocks, the generation of current income is not an objective of
the Fund. Any income that is received is incidental to the Fund's objective of
long-term growth of capital. When choosing securities for the portfolio, the
Sub-Adviser focuses on companies that display strong financial characteristics
and earnings growth potential.
At least 65% of the Fund's assets under normal conditions will consist of
growth-oriented common stocks. The Fund may invest in common stock of large
well-known companies as well as smaller growth companies, which generally
include companies with a market capitalization of $500 million or less ("Smaller
Growth Companies"). The stocks of Smaller Growth Companies may involve a higher
degree of risk than other types of securities and the price movement of such
securities can be expected to be more volatile than is the case of the market as
a whole. The Fund may hold stocks traded on one or more of the national
exchanges as well as in the over-the-counter markets. Because opportunities for
capital growth may exist not only in new and expanding areas of the economy but
also in mature and cyclical industries, the Fund's portfolio investments are not
limited to any particular type of company or industry. The Fund may also
purchase convertible bonds and preferred stocks, warrants and debt securities if
the Fund's Sub-Adviser believes they would help achieve the Fund's objective of
long-term growth.
The Fund may invest up to 35% of its assets in both higher-rated and
lower-rated fixed-income securities in seeking its objective of long-term growth
of capital. The dollar average weighted maturity of the Fund's fixed-income
securities will vary depending on, among other things, current market
conditions. The Fund may invest up to 15% of its assets in lower-rated
securities, commonly known as "junk bonds", which involve risks discussed under
"Certain Investment Strategies and Policies." For more information concerning
the rating categories of corporate debt securities see the Appendix to the
Prospectus.
When the Sub-Adviser determines that market conditions warrant a temporary
defensive position, the Fund may invest without limitation in high-grade,
fixed-income securities, U.S. Government securities, or hold assets in cash or
cash equivalents. To the extent the Fund is so invested it is not achieving its
objective to the same degree as under normal conditions. The Fund may, for
hedging purposes, engage in the options and futures strategies described under
"Certain Investment Strategies and Policies".
The Select Growth Fund's objective of seeking long-term growth of capital
means that its assets generally will be subject to greater risk than may be
involved in investing in securities that are not selected for growth potential.
10
<PAGE>
For the fiscal year ended December 31, 1995, the portfolio turnover rate for
the Fund was 51%. The portfolio turnover for the Fund may vary greatly from year
to year.
SELECT INCOME FUND
INVESTMENT OBJECTIVE: The Select Income Fund seeks a high level of current
income. The Fund will invest primarily in investment grade, fixed-income
securities.
SUB-ADVISER: Standish, Ayer & Wood, Inc. ("SAW") serves as Sub-Adviser to
the Select Income Fund. SAW was founded in 1933 to provide investment management
services to high net worth individuals and institutions. As of December 31,
1995, total client assets exceeded $29.4 billion. SAW manages fixed-income
portfolios for major corporate and governmental pension plans, financial
institutions and endowment and foundation funds. Through its affiliate, Standish
International Investment Management Company, L.P., SAW offers international
investment services. SAW is an independent investment counseling firm owned by
its twenty-three directors who are active with the firm. SAW is located at One
Financial Center, Boston, Massachusetts 02111.
INVESTMENT POLICIES: Under normal circumstances, at least 65% of the Select
Income Fund's assets, at the time of investment, will be invested in investment
grade corporate debt securities and securities issued or guaranteed as to
principal or interest by the U.S. Government or its agencies or
instrumentalities. Investment grade corporate debt securities are: (a) assigned
a rating within the four highest grades (Baa/BBB or higher) by either Moody's or
S&P; (b) equivalently rated by another nationally recognized statistical rating
organization ("NRSRO"); or (c) unrated securities but determined by the
Sub-Adviser to be of comparable quality. Securities rated in the fourth highest
grade (rated Baa and BBB by Moody's and S&P, respectively) are considered to
have some speculative characteristics. The Fund will not invest in debt
securities rated below investment grade (Ba/BB or lower) by both Moody's and
S&P. For more information concerning the rating categories of corporate debt
securities and commercial paper, see the Appendix to the Prospectus. The types
of securities in which the Fund invests are corporate debt obligations such as
bonds, notes and debentures, and obligations convertible into common stock;
"money market" instruments, such as bankers acceptances, or negotiable
certificates of deposit issued by the 25 largest U.S. banks (in terms of
deposits); commercial paper rated Prime-1 by Moody's or A-1 by S&P; obligations
issued or guaranteed by the U.S. Government, its agencies or instrumentalities;
asset-backed securities; mortgage-backed securities) and stripped
mortgage-backed securities. The Fund may also invest in U.S. dollar obligations
of, or guaranteed by, the government of Canada or a province of Canada or any
instrumentality or political subdivision thereof, and U.S. dollar obligations of
supranational entities such as the World Bank, European Investment Bank and
African Development Bank. For more information about asset-backed securities and
mortgage-backed securities and stripped mortgage-backed securites see "Certain
Investment Strategies and Policies".
The Fund's investments in corporate debt securities are not limited to any
particular type of company or industry. The Fund will invest in corporate debt
obligations primarily of companies having a market capitalization of more than
$500 million at the time of investment.
The Fund's dollar average weighted maturity and the mix of permitted
portfolio securities as described above will vary from time to time depending,
among other things, on current market and economic conditions and the
comparative yields on instruments in different sectors, such as corporate and
Treasuries, and with different maturities. The dollar average weighted maturity
of the portfolio, excluding money market instruments, is expected to range
between 5 and 20 years under normal market conditions. The Fund may invest up to
35% of its assets in money market instruments under normal conditions. Although
the Fund does not invest for short-term trading purposes, portfolio securities
may be sold from time to time without regard to the length of time they have
been held. The value of the Fund's portfolio securities will generally vary
inversely with changes in prevailing interest rates, declining as interest rates
rise and increasing as rates decline. The value will also be affected by other
market and economic factors. There is the risk with corporate debt securities
that the issuers may not be able to meet their obligations on interest and
principal payments.
The Fund may, for hedging purposes, engage in the options and futures
strategies described under "Certain Investment Strategies and Policies".
11
<PAGE>
For the fiscal year ended December 31, 1995, the portfolio turnover rate for
the Fund was 131%. The portfolio turnover rate exceeded 100% due to the need to
make significant changes in the structure of the portfolio's mortgage and
corporate bond holdings. The portfolio turnover rate for the Fund may vary from
year to year. A high portfolio turnover rate may result in greater brokerage
costs to the Fund.
MANAGEMENT FEES AND EXPENSES
Under its Management Agreement with the Trust, the Manager is obligated to
perform certain administrative and management services for the Trust, furnishes
to the Trust all necessary office space, facilities, and equipment, and pays the
compensation, if any, of officers and Trustees who are affiliated with the
Manager. Other than the expenses specifically assumed by the Manager under the
Management Agreement, all expenses incurred in the operation of the Trust are
borne by the Trust, including fees and expenses associated with the registration
and qualification of the Trust's shares under the Securities Act of 1933, other
fees payable to the Securities and Exchange Commission, independent accountant
fees, legal and custodian fees, association membership dues, taxes, interest,
insurance premiums, brokerage commissions, fees and expenses of the Trustees who
are not affiliated with the Manager, expenses for proxies, prospectuses, and
reports to shareholders, Fund recordkeeping expenses and other expenses. The
Manager has voluntarily agreed to absorb any charges and expenses associated
with Fund recordkeeping that exceed 0.10% of a Fund's average net assets.
<TABLE>
<CAPTION>
SELECT
SELECT SELECT CAPITAL
INTERNATIONAL AGGRESSIVE APPRECIATION
EQUITY FUND GROWTH FUND FUND
------------- ----------- ------------
<S> <C> <C> <C>
Manager Fee.......................................................................... 1.00% 1.00% 1.00%
<CAPTION>
SELECT SELECT
GROWTH INCOME
FUND FUND
--------- ---------
<S> <C> <C>
Manager Fee.......................................................................... 0.85% 0.60%
</TABLE>
The Manager is solely responsible for the payment of all fees to the
Sub-Advisers. The Manager pays each Sub-Adviser fees computed daily at an annual
rate based on the average daily net asset value of each Fund as set forth below.
In certain Funds, Sub-Adviser fees vary according to the level of assets in such
Funds, which will reduce the fees paid by the Manager as Fund assets grow but
will not reduce the operating expenses of such Funds.
<TABLE>
<CAPTION>
SELECT
SELECT SELECT CAPITAL
INTERNATIONAL AGGRESSIVE APPRECIATION
EQUITY FUND GROWTH FUND FUND
------------- ----------- ------------
<S> <C> <C> <C>
Sub-Adviser Fee...................................................................... (1) 0.60% (2)
<CAPTION>
SELECT SELECT
GROWTH INCOME
FUND FUND
--------- ---------
<S> <C> <C>
Sub-Adviser Fee...................................................................... (3) 0.20%
</TABLE>
(1) For its services, BIAM will receive a fee computed daily at an annual rate
based on the average daily net assets of the Select International Equity
Fund under the following schedule:
<TABLE>
<CAPTION>
ASSETS RATE
- -------------------------------------------------- ---------
<S> <C>
First $50 Million................................. 0.45%
Next $50 Million.................................. 0.40%
Over $100 Million................................. 0.30%
</TABLE>
(2) For its services, JCC will receive a fee computed daily at an annual rate
based on the average daily net assets of the Select Capital Appreciation
Fund, under the following schedule:
<TABLE>
<CAPTION>
ASSETS RATE
- -------------------------------------------------- ---------
<S> <C>
First $100 Million................................ 0.60%
Over $100 Million................................. 0.55%
</TABLE>
(3) For its services, PIC (on or about July 1, 1996, Putnam Management) will
receive a fee computed daily at an annual rate based on the average daily
net assets of the Select Growth Fund under the following schedule:
<TABLE>
<CAPTION>
ASSETS RATE
- -------------------------------------------------- ---------
<S> <C>
First $50 Million................................. 0.50%
Next $100 Million................................. 0.45%
Next $100 Million................................. 0.35%
Next $100 Million................................. 0.30%
Over $350 Million................................. 0.25%
</TABLE>
12
<PAGE>
For the fiscal year ended December 31, 1995, the Funds paid the Manager
gross fees before reimbursement at a rate based on the Funds' average daily net
assets under the following schedule:
<TABLE>
<CAPTION>
FUND RATE
- -------------------------------------------------- ---------
<S> <C>
Select International Equity Fund.................. 1.00%
Select Aggressive Growth Fund..................... 1.00%
Select Capital Appreciation Fund.................. 1.00%+
Select Growth Fund................................ 0.85%
Select Income Fund................................ 0.60%
</TABLE>
+ Annualized
The following table shows voluntary expense limitations which the Manager
has declared for each Fund and the operating expenses incurred for the fiscal
year ended December 31, 1995 for each Fund:
<TABLE>
<CAPTION>
PERCENTAGE OF AVERAGE DAILY NET ASSETS
----------------------------------------
VOLUNTARY EXPENSE
FUND LIMITATIONS OPERATING EXPENSES
- ------------------------------------------------------- ----------------- ---------------------
<S> <C> <C>
Select International Equity Fund....................... 1.50% 1.24%
Select Aggressive Growth Fund.......................... 1.35% 1.09%
Select Capital Appreciation Fund....................... 1.35% 1.35%+*
Select Growth Fund..................................... 1.20% 0.97%
Select Income Fund..................................... 1.00% 0.79%*
</TABLE>
+ Annualized
* After reimbursements and reductions
The Manager will voluntarily reimburse its fees and any expenses above the
expense limitations. The expense limitations are voluntary but will remain in
effect through the end of the first full fiscal year that a Fund has been in
operation. The expense limitations may be removed at any time thereafter,
without prior notice to existing shareholders (although the Prospectus will be
revised accordingly). For the year ended December 31, 1995, the Manager
voluntarily agreed to reimburse the Select Capital Appreciation Fund and Select
Income Fund in the amounts of $8,720 and $2,547, respectively. The Manager
reserves the right to recover from a Fund any fees, within a current fiscal year
period, which were reimbursed in that same year to the extent that total annual
expenses did not exceed the applicable expense limitation. Non-recurring and
extraordinary expenses are generally excluded in the determination of expense
ratios of the Funds for purposes of determining any required expense
reimbursement. Quotations of yield or total return for any period when an
expense limitation is in effect will be greater than if the limitation had not
been in effect.
FUND MANAGER INFORMATION
The following individuals are primarily responsible for the day-to-day
management of the particular Funds as indicated below:
The following portfolio managers are involved in the investment process
utilized for the SELECT INTERNATIONAL EQUITY FUND:
Denis Donovan, Director Portfolio Management, received an MBA from
University College Dublin. Prior to joining Bank of Ireland in 1985, he spent
more than thirteen years in the money market and foreign exchange operations of
the Central Bank of Ireland, the Irish equivalent of the U.S. Federal Reserve.
He has overall responsibility for the portfolio management function for all of
BIAM's client base.
Geraldine Deighan, an economics graduate of Trinity College, Dublin, with an
MBA from University College, Dublin. She joined Bank of Ireland in 1987.
13
<PAGE>
John O'Callaghan, is a graduate of Trinity College, Dublin and is a
Chartered Financial Analyst. He joined Bank of Ireland in 1987.
Peter Wood, joined Bank of Ireland in 1985 after spending five years with
another leading investment management firm. He is responsible for portfolio
construction.
The following individuals have served as members of a committee of fund
managers for the SELECT AGGRESSIVE GROWTH FUND since March 1994, with the
exception of Mr. Nicholas, who has served as a fund manager since the Fund's
inception in August 1992:
Arthur E. Nicholas, Partner and Chief Investment Officer at NACM, is the
co-founder of NACM. Prior to NACM, Mr. Nicholas was Managing Director and Chief
Investment Officer of Pacific Century Advisers. He was also associated with
Security Pacific Bank for over two years and with San Diego Trust & Savings Bank
for ten years.
Lawence S. Speidell is a Partner and Director of Global/Systematic Portfolio
Management at NACM. Prior to joining NACM in 1994, Mr. Speidell spent ten years
with Batterymarch Financial Management ("Batterymarch"). He was also Senior Vice
President and Portfolio Manager at Putnam Management Company from 1971 to 1983.
John J. Kane, Senior Portfolio Manager, Global at NACM, has twenty-six years
of economic/ investment experience. Prior to NACM, Mr. Kane was employed by ARCO
Investment Management Company and General Electric Company.
Craig R. Occhialini, Vice President and Portfolio Manager, is a member of
the domestic portfolio management and research group at NACM. Prior to joining
NACM in 1991, Mr. Occhialini was employed by Wilshire Associates. Mr. Occhialini
has six years of investment experience.
The following individual has served as fund manager for the SELECT CAPITAL
APPRECIATION FUND since the Fund's inception in April 1995:
James P. Goff joined JCC in 1988 and has managed the Janus Enterprise Fund
since 1992 and has co-managed the Janus Venture Fund since December 1993. Mr.
Goff is a Chartered Financial Analyst.
Through June 30, 1996 the SELECT GROWTH FUND'S portfolio investments will be
managed by the following individuals who have served as members of a committee
of fund managers since the Fund's inception in August 1992, with the exception
of Mr. Powers, who has served on the committee since June 1994:
Jeffrey J. Miller, Managing Director, has been with PIC for over twenty
years and is a Chartered Financial Analyst and a Chartered Investment Counselor.
Larry D. Tashjian, Managing Director, has over fourteen years of investment
management experience, ten of which have been with PIC, Mr. Powers was a member
of the Interest Rate Swaps Group for a major West Coast bank.
Michael W. Powers, Senior Vice President, has been with PIC since 1991 and
is a Chartered Financial Analyst. Prior to joining PIC, Mr. Powers was a member
of the Interest Rate Swaps Group for a major West Coast bank.
Effective on or about July 1, 1996, Carol C. McMullen, a Managing Director
of Putnam Management, C. Beth Cotner, a Senior Vice President of Putnam
Management, and Manuel Weiss, a Senior Vice President of Putnam Management, will
be primarily responsible for the day-to-day management of the Select Growth
Fund. Ms. McMullen, Ms. Cotner and Mr. Weiss have been employed as investment
professionals by Putnam Management since 1995, 1995 and 1987, respectively.
Prior to 1995, Ms. McMullen was Senior Vice President of Baring Asset Management
and Ms. Cotner was Executive Vice President at Kemper Financial Services.
The following individuals have served as members of a committee of fund
managers for the SELECT INCOME FUND since the Fund's inception in August 1992:
14
<PAGE>
Edward H. Ladd, Chairman and Managing Director, joined SAW in 1962 and is
the firm's economist. He also assists clients in establishing investment
strategies. Mr. Ladd is a Director of the Federal Reserve Bank of Boston, New
England Electric System, Greylock Management and Harvard Management Corporation
and a member of SAW's Executive Committee.
George W. Noyes, President and Managing Director, joined SAW in 1970 and
directs bond policy formulation and manages institutional bond portfolios as
SAW. Mr. Noyes is Vice Chairman of the ICFA Research Foundation and serves on
SAW's Executive Committee.
Dolores S. Driscoll, Managing Director, joined SAW in 1974 and manages
fixed-income portfolios with specific emphasis on mortgage pass-throughs and
original issue discount bonds. Ms. Driscoll also serves on SAW's Executive
Committee.
Richard C. Doll, Manager, joined SAW in 1984 and is a portfolio manager with
research responsibilities in convertible bonds. Prior to joining SAW, Mr. Doll
was a Vice President with the Bank of New England.
Maria D. Furman, Vice President and Director, joined SAW in 1976 and is head
of the tax-exempt area and manages insurance and pension fund accounts. Ms.
Furman currently serves on SAW's Executive Committee.
HOW ARE SHARES VALUED
The net asset value of the shares of each Fund is determined once daily as
of the close of the New York Stock Exchange (the "Exchange") on each day on
which the Exchange is open for trading.
Equity securities are valued on the basis of their market value, if market
quotations are readily available. In other cases they are valued at their fair
value as determined in good faith by the Trustees, although the actual
calculations may be made by persons acting pursuant to the direction of the
Trustees. Debt securities (other than short-term obligations) are normally
valued on the basis of valuations formulated by a pricing service which utilizes
data processing methods to determine valuations for normal, institutional-size
trading units of such securities. Such methods include the use of market
transactions for comparable securities and various relationships between
securities which are generally recognized by institutional traders. Debt
obligations in Funds having a remaining maturity of 60 days or less are valued
at amortized cost when it is determined that amortized cost approximates fair
value. Short-term obligations of Funds having a remaining maturity of more than
60 days are marked to market based upon readily available market quotations for
such obligations or similar securities.
The net asset value of the Funds will fluctuate.
TAXES AND DISTRIBUTIONS TO SHAREHOLDERS
It is the policy of the Trust to comply with the provisions of the Internal
Revenue Code applicable to regulated investment companies so that the Trust will
not be subject to federal income tax on any net income and any capital gains to
the extent they are distributed or are deemed to have been distributed to
shareholders. Dividends out of net investment income will be declared and paid
quarterly in the case of the Select Income Fund; and annually in the case of the
Select International Equity Fund, Select Aggressive Growth Fund, Select Capital
Appreciation Fund and Select Growth Fund. Distributions of net capital gains, if
any, for the year are made annually. All dividends and capital gain
distributions are applied to purchase additional Fund shares at net asset value
as of the payment date. Fund shares are held by the Separate Accounts and any
distributions are automatically reinvested by the Separate Accounts. Tax
consequences to investors in the Separate Accounts which are invested in the
Trust are described in the prospectus or offering circular for such Accounts.
15
<PAGE>
SALE AND REDEMPTION OF SHARES
Shares of the Funds are sold in a continuous offering and currently may be
purchased only by Separate Accounts established by First Allmerica. The Separate
Accounts are the funding mechanisms for group annuity contracts. The Separate
Accounts invest in shares of one or more of the Funds. Shares of each Fund are
sold at their net asset value as next computed after receipt of the purchase
order without the addition of any selling commission or "sales load".
Shares of the Trust are also currently being issued to Separate Accounts of
Allmerica Financial Life Insurance and Annuity Company ("Allmerica Life"), a
subsidiary of First Allmerica, First Allmerica and other subsidiaries of First
Allmerica which issue variable or group annuity policies or variable premium
life insurance policies ("mixed funding"). Although neither Allmerica Life nor
the Trust currently foresees any disadvantage, it is conceivable that in the
future such mixed funding may be disadvantageous for variable or group annuity
policyowners or variable premium life insurance policyowners ("Policyowners").
The Trustees of the Trust intend to monitor events in order to identify any
conflicts that may arise between such Policyowners and to determine what action,
if any, should be taken in response thereto. If the Trustees were to conclude
that separate funds should be established for variable annuity, group annuity,
and variable premium life separate accounts, Allmerica Life will pay the
attendant expenses.
The Trust redeems shares of each Fund at their net asset value as next
computed after receipt of the request for redemption. The redemption price may
be more or less than the shareholder's cost. No fee is charged by the Trust on
redemption. The group contracts funded through the Separate Accounts are sold
subject to certain fees and charges which may include sales and redemption
charges, described in the prospectus or offering circular for such Separate
Account.
Redemption payments will be paid within seven days after receipt of the
written request therefor by the Trust, except that the right of redemption may
be suspended or payments postponed whenever permitted by applicable law and
regulations.
HOW IS PERFORMANCE DETERMINED?
The Funds' performance may be quoted in advertising. A Fund's performance
may be compared to the performance of other investments or relevant indices. All
performance information is based on historical results and is not intended to
indicate future performance.
A Fund's "yield" is calculated by dividing the Fund's annualized net
investment income per share during a recent 30-day period by the net asset value
per share on the last day of that period.
Total returns are based on the overall dollar or percentage change in value
of a hypothetical investment in a Fund assuming all dividends and capital gain
distributions are reinvested. Cumulative total return reflects the Fund's
performance over a stated period of time. Average annual total return reflects
the hypothetical annually compounded return that would have produced the same
cumulative return if the Fund's performance had been constant over the entire
period. Because average annual returns tend to smooth out variations in the
Fund's return, they are not the same as actual year-by-year results.
YIELDS AND TOTAL RETURNS QUOTED FOR THE FUNDS INCLUDE THE EFFECT OF
DEDUCTING THE FUNDS' EXPENSES, BUT MAY NOT INCLUDE CHARGES AND EXPENSES
ATTRIBUTABLE TO A PARTICULAR INSURANCE PRODUCT. SINCE SHARES OF THE FUNDS CAN BE
PURCHASED ONLY THROUGH A GROUP ANNUITY, YOU SHOULD CAREFULLY REVIEW THE OFFERING
CIRCULAR FOR THE SEPARATE ACCOUNTS FOR INFORMATION ON RELEVANT CHARGES AND
EXPENSES. INCLUDING THESE CHARGES IN THE QUOTATIONS OF THE FUNDS' YIELD AND
TOTAL RETURN WOULD HAVE THE EFFECT OF DECREASING PERFORMANCE. PERFORMANCE
INFORMATION FOR THE FUNDS MUST ALWAYS BE ACCOMPANIED BY, AND BE REVIEWED WITH,
PERFORMANCE INFORMATION FOR THE SEPARATE ACCOUNTS WHICH INVEST IN THE FUNDS.
16
<PAGE>
ORGANIZATION AND CAPITALIZATION OF THE TRUST
The Trust was established as a Massachusetts business trust under the laws
of Massachusetts by an Agreement and Declaration of Trust dated October 11, 1984
(the "Trust Declaration"). A copy of the Trust Declaration is on file with the
Secretary of the Commonwealth of Massachusetts.
The Trust has an unlimited authorized number of shares of beneficial
interest which may be divided into an unlimited number of series of such shares,
and which are presently divided into twelve series of shares, one series
underlying each Fund. The five Funds described in this Prospectus may be
purchased by the Separate Accounts established by First Allmerica. The Trust's
shares are entitled to one vote per share (with proportional voting for
fractional shares). The rights accompanying Fund shares are legally vested in
the Separate Accounts. As a matter of policy, however, holders of group annuity
contracts funded through the Separate Accounts have the right to instruct the
Separate Accounts as to voting Fund shares on all matters to be voted on by Fund
shareholders. Voting rights of the participants in the Separate Accounts are
more fully set forth in the prospectus or offering circular relating to those
Accounts. See "Organization of the Trust" in the SAI for a definition of a
"majority vote" of shareholders.
The Trust is not required to hold annual meetings of shareholders. The
Trustees or shareholders holding at least 10% of the outstanding shares may call
special meetings of shareholders.
FUND RECORDKEEPING AGENT
First Data, a wholly-owned subsidiary of First Data Corporation, calculates
net asset value per share and maintains general accounting records for each
Fund. First Data is entitled to receive an annual Fund recordkeeping fee based
on Fund assets and certain out-of-pocket expenses.
CUSTODIAN
Bankers Trust Company, 130 Liberty Street, New York, New York 10006, is the
Custodian of the investment securities and other assets of the Trust.
INVESTMENT RESTRICTIONS
The following is a description of certain investment restrictions which are
fundamental and may not be changed with respect to a Fund without shareholder
approval. For a description of certain other investment restrictions, reference
should be made to the SAI.
1. No Fund will concentrate its investments in particular industries, including
debt obligations of supranational entities and foreign governments, but a
Fund may invest up to 25% of the value of its total assets in a particular
industry. The restriction does not apply to investments in obligations
issued or guaranteed by the United States of America, its agencies or
instrumentalities.
2. As to 75% of the value of its total assets, no Fund will invest more than 5%
of the value of its total assets in the securities of any one issuer (other
than securities issued by or guaranteed as to principal or interest by the
United States Government or any agency or instrumentality thereof) or
acquire more than 10% of the voting securities of any issuer. The remaining
25% of assets may be invested in the securities of one or more issuer
without regard to such limitations.
These limitations apply as of the time of purchase. If through market action
the percentage limitations are exceeded, the Fund will not be required to reduce
the amount of its holding in such investments.
CERTAIN INVESTMENT STRATEGIES AND POLICIES
REPURCHASE AGREEMENTS (APPLICABLE TO ALL FUNDS) AND REVERSE REPURCHASE
AGREEMENTS (APPLICABLE TO THE SELECT CAPITAL APPRECIATION FUND)
Each Fund may invest in repurchase agreements, under which the Fund acquires
ownership of a security (ordinarily U.S. Government Securities) but the seller
agrees, at the time of sale, to purchase
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the security at a mutually agreed upon time and price. Should any seller of a
repurchase agreement fail to repurchase the underlying security, or should any
seller become insolvent or involved in a bankruptcy proceeding, a Fund could
incur disposition costs and losses. Repurchase agreements maturing in more than
seven days are subject to the 15% limit on illiquid securities.
When the Select Capital Appreciation Fund invests in a reverse repurchase
agreement, it sells a security to another party such as a banker or
broker-dealer, in return for cash, and agrees to buy the security back at a
future date and price. Reverse repurchase agreements may be used to provide cash
to satisfy unusually heavy redemption requests or for other temporary or
emergency purposes without the necessity of selling portfolio securities or to
earn additional income on portfolio securities, such as treasury bills and
notes.
"WHEN-ISSUED" SECURITIES (APPLICABLE TO ALL FUNDS)
Each Fund may purchase securities on a when-issued or delayed delivery
basis. Delivery and payment normally take place 15 to 45 days after the
commitment to purchase. No income accrues on when-issued securities prior to
delivery. Purchase of when-issued securities involves the risk that yields
available in the market when delivery occurs may be higher than those available
when the when-issued order is placed resulting in a decline in the market value
of the security. There is also the risk that under some circumstances the
purchase of when-issued securities may act to leverage the Fund.
LENDING OF SECURITIES (APPLICABLE TO ALL FUNDS)
For the purpose of realizing additional income, the Funds may lend portfolio
securities to broker-dealers or financial institutions amounting to not more
than 30% of their respective total assets taken at current value. While any such
loan is outstanding, a Fund will continue to receive amounts equal to the
interest or dividends paid by the issuer on the securities, as well as interest
(less any rebates to be paid to the borrower) on the investment of the
collateral or a fee from the borrower. Each Fund will have the right to call
each loan and obtain the securities. Lending portfolio securities involves
certain risks, including possible delays in receiving additional collateral or
in the recovery of the securities or possible loss of rights in the collateral
should the borrower fail financially. Loans will be made in accordance with
guidelines established by the Board of Trustees.
FOREIGN SECURITIES (APPLICABLE TO ALL FUNDS)
Investments in foreign markets involve substantial risks not typically
associated with investing in the U. S. which should be carefully considered by
the investor. Such risks may include political and economic instability,
differing accounting and financial reporting standards, higher commission rates
on foreign portfolio transactions, less readily available public information
regarding issuers, potential adverse changes in tax and exchange control
regulations and the potential for restrictions on the flow cf international
capital. Foreign securities also involve currency risks. Accordingly, the
relative strength of the U.S. dollar may be an important factor in the
performance of that Fund, depending on the extent of such Fund's foreign
investments. Some foreign securities exchanges may not be as developed or
efficient as those in the U.S. and securities traded on foreign securities
exchanges are generally subject to greater price volatility. There is also the
possibility of adverse changes in investment or exchange control regulations,
expropriation or confiscatory taxation and limitations on the removal of funds
or other assets. Investments in emerging countries involve exposure to economic
structures that are generally less diverse and mature than in the U. S., and to
political systems which may be less stable. In addition, securities of issuers
located in emerging countries may have limited marketability and may be subject
to more abrupt or erratic price fluctuations.
Each Fund may buy or sell foreign currencies and foreign currency forward
contracts, options on foreign currencies and foreign currency futures contracts
and options thereon. Although such instruments may reduce the risk of loss due
to a decline in the value of the currency that is sold, they also
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limit any possible gain which might result should the value of the currency
increase. Such instruments will be used primarily to protect a Fund from adverse
currency movements, however, they also involve the risk that anticipated
currency movements will not be accurately predicted, thus adversely affecting a
Fund's total return. See "Options and Futures Transactions."
The Funds' investments may include ADRs. For many foreign securities, there
are U.S. dollar-denominated ADRs which are traded in the United States on
exchanges or over the counter. ADRs represent the right to receive securities of
foreign issuers deposited in a domestic bank or a correspondent bank. An ADR may
be sponsored by the issuer of the underlying foreign security, or it may be
issued in unsponsored form. The holder of a sponsored ADR is likely to receive
more frequent and extensive financial disclosure concerning the foreign issuer
than the holder of an unsponsored ADR and will generally bear lower transaction
charges. The Funds will invest in both sponsored and unsponsored ADRs. The
Select International Equity Fund and the Select Capital Appreciation Fund also
may utilize EDRs, which are designed for use in European securities markets and
also may invest in GDRs.
Obligations in which the Select Income Fund may invest include debt
obligations of supranational entities. Supranational entities include
international organizations designated or supported by governmental entities to
promote economic reconstruction or development and international banking
institutions and related government agencies. Obligations of supranational
entities may be supported by appropriated but unpaid commitments of their member
countries, and there is no assurance that these commitments will be undertaken
or met in the future. The Fund may not invest more than 25% of its assets in
debt obligations of supranational entities.
OPTIONS AND FUTURES TRANSACTIONS (APPLICABLE TO ALL FUNDS) AND FORWARD CONTRACTS
AND SWAPS (APPLICABLE TO THE SELECT CAPITAL APPRECIATION FUND)
Through the writing and purchase of put and call options on its securities,
financial indices and foreign currencies and the purchase and sale of futures
contracts and related options with respect to securities, financial indices and
(in the case of the Select Capital Appreciation Fund) foreign currencies in
which it may invest, each Fund may at times seek to hedge against fluctuations
in net asset value. Each Fund's ability to engage in options and futures
strategies will depend on the availability of liquid markets in such
instruments. It is impossible to predict the amount of trading interest that may
exist in various types of options or futures contracts. Therefore, there is no
assurance that a Fund will be able to utilize these instruments effectively for
the purposes stated above.
Additionally, the Select Capital Appreciation Fund may invest in forward
contracts and swaps which may expose the Fund to additional investment risks and
transaction costs.
Risks inherent in the use of futures and options ("derivative instruments")
include (1) the risk that interest rates, securities prices and currency markets
will not move in the directions anticipated; (2) imperfect correlation between
the price of derivative instruments and movements in the prices of the
securities, interest rates or currencies being hedged; (3) the fact that skills
needed to use these strategies are different from those needed to select
portfolio securities; (4) the possible absence of a liquid secondary market for
any particular instrument at any time; and (5) the possible need to defer
closing out certain hedged positions to avoid adverse tax consequences.
The Funds will purchase futures and options only on exchanges or boards of
trade when there appears to be an active secondary market, but there can be no
assurance that a liquid secondary market will exist for any futures or options
at any particular time.
In connection with transactions in futures and related options, the Funds
will be required to deposit as "initial margin" an amount of cash and/or
securities. Thereafter, subsequent payments are made to and from the broker to
reflect changes in the value of the futures contract.
A more detailed explanation of futures, options, and other derivative
instruments, and the risks associated with them, is included in the SAI.
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RESTRICTED SECURITIES (APPLICABLE TO ALL FUNDS)
The Funds may purchase fixed-income securities that are not registered under
the Securities Act of 1933 ("1933 Act") ("restricted securities"), but can be
offered and sold to "qualified institutional buyers" under Rule 144A of the 1933
Act. However, each Fund will not invest more than 15% of its assets in
restricted securities (as defined in its investment restrictions) unless the
Funds' Board of Trustees determines, based upon a continuing review of the
trading markets for the specific restricted security, that such restricted
securities are liquid. The Board of Trustees has adopted guidelines and
delegated to the Manager the daily function of determining and monitoring
liquidity of restricted securities. The Board, however, will retain sufficient
oversight and be ultimately responsible for the determinations. Since it is not
possible to predict with assurance exactly how this market for restricted
securities sold and offered under Rule 144A will develop, the Board will
carefully monitor the Funds' investments in securities, focusing on such
important factors, among others, as valuation, liquidity and availability of
information. This investment practice could have the effect of increasing the
level of illiquidity in the Funds to the extent that qualified institutional
buyers become for a time uninterested in purchasing these restricted securities.
As a result, the Funds might not be able to sell these securities when their
Sub-Adviser wishes to do so, or might have to sell them at less than fair value.
In addition, market quotations are less readily available. Therefore judgment
may at times play a greater role in valuing these securities than in the case of
unrestricted securities.
INVESTMENTS IN MONEY MARKET SECURITIES (APPLICABLE TO ALL FUNDS)
Each Fund may hold at least a portion of its assets in cash equivalents or
money market instruments. There is always the risk that the issuer of a money
market instrument may be unable to make payment upon maturity.
Pursuant to an exemptive order granted by the Securities and Exchange
Commission, the Select Capital Appreciation Fund and other funds advised by
Janus Capital may transfer daily uninvested cash balances into one or more joint
trading accounts. Assets in the joint trading accounts are invested in money
market instruments and the proceeds are allocated to the participating funds on
a pro rata basis.
HIGH YIELD SECURITIES (APPLICABLE TO THE SELECT CAPITAL APPRECIATION FUND AND
SELECT GROWTH FUND)
Corporate debt securities purchased by the Select Capital Appreciation and
the Select Growth Fund will be rated at the time of purchase B or better by
Moody's or S&P, or equivalently rated by another NRSRO, or unrated but believed
by the Sub-Adviser to be of comparable quality under guidelines established for
the Funds. The Select Growth Fund may not invest more than 15% of its assets and
the Select Capital Appreciation Fund may not invest more than 35% of its assets
at the time of investment in securities rated below Baa by Moody's or BBB by
S&P, or equivalently rated by another NRSRO, or unrated but believed by the
Sub-Adviser to be of comparable quality. Securities rated B by Moody's or S&P
(or equivalently by another NRSRO) are below investment grade and are
considered, on balance, to be predominantly speculative with respect to capacity
to pay interest and repay principal and will generally involve more credit risk
than securities in the higher rating categories.
Periods of economic uncertainty and changes can be expected to result in
increased volatility of market prices of lower-rated securities, commonly known
as "high yield" securities or "junk bonds", and the asset value of the Select
Capital Appreciation Fund and the Select Growth Fund. Many issuers of high yield
corporate debt securities are substantially leveraged, which may impair their
ability to meet debt service obligations. Also, during an economic downturn or
substantial period of rising interest rates, highly leveraged issuers may
experience financial stress.
The lack of a liquid secondary market in certain lower-rated securities may
have an adverse impact on their market price and the ability of a Fund to
dispose of particular issues when necessary to meet its liquidity needs or in
response to a specific economic event such as a deterioration in the
credit-worthiness of the issuer. In addition, a less liquid market may interfere
with the ability of a
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Fund to accurately value high yield securities and, consequently, value the
Fund's assets. Furthermore, adverse publicity and investor perceptions may
decrease the value and liquidity of high yield securities. It is reasonable to
expect any recession to severely disrupt the market for high yield fixed-income
securities, have an adverse impact on the value of such securities and adversely
affect the ability of the issuers of such securities to repay principal and pay
interest thereon. The market price of lower-rated securities are generally less
sensitive to interest rate changes than higher-rated investments, but more
sensitive to adverse economic or political changes, or individual developments
specific to the issuer. Periods of economic or political uncertainty and change
can be expected to result involatility of price of these securities.
The Funds also may invest in unrated debt securities of foreign and domestic
issuers. Unrated debt, while not necessarily of lower quality than rated
securities, may not have as broad a market. Sovereign debt of foreign
governments is generally rated by country. Because these ratings do not take
into account individual factors relevant to each issue and may not be updated
regularly, the Sub-Adviser may treat such securities as unrated debt. Unrated
debt securities and securities with different ratings from more than one agency
will be included in the 15% and 35% limits of the Funds as stated above, unless
such Fund's Sub-Adviser deems such securities to be the equivalent of investment
grade securities. See the Appendix for a description of the bond ratings.
ASSET-BACKED SECURITIES AND MORTGAGE-BACKED SECURITIES (APPLICABLE TO SELECT
INCOME FUND)
The Fund may purchase asset-backed securities, which represent a
participation in, or are secured by and payable from, a stream of payments
generated by particular assets, frequently a pool of assets similar to one
another. Assets generating such payments include instruments such as motor
vehicle installment purchase obligations, credit card receivables and home
equity loans. Payment of principal and interest may be guaranteed for certain
amounts and time periods by a letter of credit issued by a financial institution
unaffiliated with the issuer of the securities. The estimated life of an
asset-backed security varies with the prepayment experience of the underlying
debt instruments. The rate of such prepayments, and hence the life of the
asset-backed security, will be primarily a function of current market rates,
although other economic and demographic factors will be involved. Under certain
interest rates and prepayment rate scenarios, the Fund may fail to recoup fully
their investment in asset-baked securities. The Fund will not invest more than
10% of its total assets in asset-backed securities.
The Fund also may invest in mortgage-backed securities which are debt
obligations secured by real estate loans and pools of loans on single family
homes, multi-family homes, mobile homes, and in some cases, commercial
properties. The Fund may acquire securities representing an interest in a pool
of mortgage loans that are issued or guaranteed by a U.S. government agency such
as the Government National Mortgage Association ("Ginnie Mae"), the Federal
National Mortgage Association ("Fannie Mae") and the Federal Home Loan Mortgage
Corporation ("Freddie Mac").
Mortgage-backed securities are in most cases "pass-through" instruments,
through which the holder receives a share of all interest and principal payments
from the mortgages underlying the certificate. Because the prepayment
characteristics of the underlying mortgages vary, it is not possible to predict
accurately the average life or realized yields of a particular issue of
pass-through certificates. During periods of declining interest rates,
prepayment of mortgages underlying mortgage-backed securities can be expected to
accelerate. When the mortgage obligations are prepaid, the Fund reinvests the
prepaid amounts in securities, the yield of which reflects interest rates
prevailing at the time. Moreover, prepayment of mortgages that underlie
securities purchased at a premium could result in losses.
The Fund also may invest in multiple class securities issued by U.S.
government agencies and instrumentalities such as Fannie Mae, Freddie Mac and
Ginnie Mae, including guaranteed collateralized mortgage obligations ("CMOs")
and Real Estate Mortgage Investment Conduit ("REMIC") pass-through or
participation certificates, when consistent with the Fund's investment
objective, policies and limitations. A CMO is a type of bond secured by an
underlying pool of mortgages or mortgage
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pass-through certificates that are structured to direct payment on underlying
collateral to different series or classes of obligations. A REMIC is a CMO that
qualifies for special tax treatment under the Internal Revenue Code and invests
in certain mortgages principally secured by interests in real property and other
permitted investments.
CMOs and guaranteed REMIC pass-through certificates ("REMIC Certificates")
issued by Fannie Mae, Freddie Mac and Ginnie Mae are types of multiple
pass-through securities. Investors may purchase beneficial interests in REMICs,
which are known as "regular" interests or "residual" interests. The Fund does
not currently intend to purchase residual interests in REMICs. The REMIC
Certificates represent beneficial ownership interests in a REMIC trust,
generally consisting of mortgage loans or Fannie Mae, Freddie Mac or Ginnie Mae
guaranteed mortgage pass-through certificates. The obligations of Fannie Mae,
Freddie Mac or Ginnie Mae under their respective guaranty of the REMIC
Certificates are obligations solely of Fannie Mae, Freddie Mac or Ginnie Mae,
respectively.
Fannie Mae REMIC Certificates are issued and guaranteed as to timely
distribution of principal and interest by Fannie Mae. In addition, Fannie Mae
will be obligated to distribute the principal balance of each class of REMIC
Certificates in full, whether or not sufficient fund are otherwise available.
For Freddie Mac REMIC Certificates, Freddie Mac guarantees the timely payment of
interest, and also guarantees the payment of principal as payments are required
to be made on the underlying mortgage participation certificates ("PCs"). PCs
represent undivided interest in specified residential mortgages or participation
therein purchases by Freddie Mac and placed in a PC pool. With respect to
principal payments on PCs, Freddie Mac generally guarantees ultimate collection
of all principal of the related mortgage loans without offset or deduction.
Freddie Mac also guarantees timely payment of principal on certain PCs referred
to as "Gold PCs."
Ginnie Mae REMIC Certificates guarantee the full and timely payment of
interest and principal on each class of securities (in accordance with the terms
of those classes, as specified in the related offering circular supplement).
This Ginnie Mae guarantee is backed by the full faith and credit of the United
States of America.
REMIC Certificates issued by Fannie Mae, Freddie Mac and Ginnie Mae are
treated as U.S. government securities for purposes of investment policies. There
can be no assurance that the United States government will continue to provide
financial support to Fannie Mae, Freddie Mac or Ginnie Mae in the future.
STRIPPED MORTGAGE-BACKED SECURITIES (APPLICABLE TO THE SELECT INCOME FUND)
The Fund may invest in Stripped Mortgage-Backed Securities ("SMBS"). SMBS
are derivative multiclass mortgage securities. SMBS may be issued by agencies or
instrumentalities of the U.S. Government or by private originators of, or
investors in, mortgage loans, including savings and loan associations, mortgage
banks, commercial banks, investment banks and special purpose entitles of the
foregoing.
SMBS are usually structured with two classes that receive different
proportions of the interest and principal distributions on a pool of mortgage
assets. One type of SMBS will have one class receiving some of the interest and
most of the principal from the mortgage assets, while the other class will
receive most of the interest and the remainder of the principal. In some cases,
one class will receive all of the interest (the interest-only or "IO" class),
while the other class will receive all of the principal (the principal-only or
"PO" class). The yield to maturity on a IO class is extremely sensitive to the
rate of principal payments (including prepayment on the related underlying
mortgage assets), and a rapid rate of principal payments may have a material
adverse effect on a portfolio yield to maturity from these securities. If the
underlying mortgage assets experience greater than anticipated prepayments of
principal, the Fund may fail to fully recoup their initial investment in these
securities even if the security is in one of the highest rating categories.
Certain SMBS may be deemed "illiquid" and subject to the Fund's limitations on
investment in illiquid securities. The market value of the PO class generally is
unusually volatile in response to changes in interest rates. The yields on a
class of
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SMBS that receives all or most of the interest from mortgage assets are
generally higher than prevailing market yields in other mortgage-backed
securities because their cash flow patterns are more volatile and there is a
grater risk that the initial investment will not be fully recouped. The Sub-
Adviser will seek to manage these risks (and potential benefits) by investing in
a variety of such securities and by using certain hedging techniques.
HEDGING TECHNIQUES AND INVESTMENT PRACTICES (APPLICABLE TO THE SELECT
INTERNATIONAL EQUITY FUND AND SELECT CAPITAL APPRECIATION FUND)
The Select International Equity Fund and Select Capital Appreciation Fund
may employ certain strategies in order to manage exchange rate risks. For
example, each Fund may hedge some or all of its investments denominated in a
foreign currency against a decline in the value of that currency. Each Fund may
enter into contracts to sell that foreign currency for U.S. dollars (not
exceeding the value of the Fund's assets denominated in that currency) or by
participating in options or futures contracts with respect to such currency
("position hedge"). Each Fund also could hedge that position by selling a second
currency, which is expected to perform similarly to the currency in which
portfolio investments are denominated, for U.S. dollars ("proxy hedge"). Each
Fund also may enter into a forward contract to sell the currency in which the
security is denominated for a second currency that is expected to perform better
relative to the U.S. dollar if its Sub-Adviser believes there is a reasonable
degree of correlation between movements in the two currencies ("cross-hedge").
As an operational policy, each Fund will not commit more than 10% of its assets
to the consummation of cross-hedge contracts and will either cover currency
hedging transactions with liquid portfolio securities denominated in the
applicable currency or segregate high-grade, liquid assets in the amount of such
commitments. In addition, when a Fund anticipates purchasing securities
denominated in a particular currency, the Fund may enter into a forward contract
to purchase such currency in exchange for the dollar or another currency
("anticipatory hedge").
These strategies minimize the effect of currency appreciation as well as
depreciation, but do not protect against a decline in the underlying value of
the hedged security. In addition, such strategies may reduce or eliminate the
opportunity to profit from increases in the value of the original currency and
may adversely impact the Fund's performance if its Sub-Adviser's projection of
future exchange rates is inaccurate.
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APPENDIX
Description of Moody's Investors Service, Inc. ("Moody's") and Standard and
Poor's Ratings Service, a division of McGraw-Hill Companies, Inc. ("S&P")
commercial paper and bond ratings:
COMMERCIAL PAPER RATINGS
MOODY'S EMPLOYS THREE DESIGNATIONS, ALL JUDGED TO BE INVESTMENT GRADE, TO
INDICATE THE RELATIVE REPAYMENT CAPACITY OF RATED ISSUERS. THE TWO HIGHEST
DESIGNATIONS ARE AS FOLLOWS:
Issuers rated Prime- 1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations.
Prime-l repayment capacity will normally be evidenced by the following
characteristics:
-- Leading market positions in well-established industries.
-- High rates of return on funds employed
-- Conservative capitalization structures with moderate reliance on debt
and ample asset protection
-- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
-- Well-established access to a range of financial markets and assured
sources of alternate liquidity.
Issuers rated Prime-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This normally
will be evidenced by many of the characteristics cited above, but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be
more subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
S&P COMMERCIAL PAPER RATINGS ARE GRADED INTO SEVERAL CATEGORIES, RANGING
FROM "A-1" FOR THE HIGHEST QUALITY OBLIGATIONS TO "D" FOR THE LOWEST. THE TWO
HIGHEST RATING CATEGORIES ARE DESCRIBED AS FOLLOWS:
A-1 -- This highest category indicates that the degree of safety
regarding timely payment is strong. Those issues determined to possess
extremely strong safety characteristics are denoted with a plus (+) sign
designation.
A-2 -- Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
MUNICIPAL OBLIGATIONS
Moody's ratings for state and municipal and other short-term obligations
will be designated Moody's Investment Grade ("MIG"). This distinction is in
recognition of the differences between short-term credit risk and long-term
risk. Factors affecting the liquidity of the borrower are uppermost in
importance in short-term borrowing, while various factors of the first
importance in long-term borrowing risk are of lesser importance in the long run.
Symbols used will be as following
MIG-1 -- This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
MIG-2 -- This designation denotes high quality. Margins of protection
are ample although not so large as in the preceding group.
A short-term rating may also be assigned on an issue having a demand
feature. Such ratings will be designated as VMIG to reflect such characteristics
as payment upon periodic demand rather than fixed maturity dates and payment
relying on external liquidity. Additionally, investors should be alert
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to the fact that the source of payment may be limited to the external liquidity
with no or limited legal recourse to the issuer in the event the demand is not
met. VMIG- 1 and VMIG-2 ratings carry the same definitions as MIG-1 and MIG-2,
respectively.
DESCRIPTION OF MOODY'S BOND RATINGS
AAA -- Bonds that are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge. " Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
AA -- Bonds that are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group, they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A -- Bonds that are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
that suggest a susceptibility to impairment some time in the future.
BAA -- Bonds that are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
BA -- Bonds that are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B -- Bonds that are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or maintenance of other
terms of the contract over any long period of time may be small.
Those bonds within the Aa, A, Baa, Ba and B categories that Moody's believes
possess the strongest credit attributes within those categories are designated
by the symbols Aa1, A1, Baa1, Ba1 and B1.
DESCRIPTION OF S&P'S DEBT RATINGS
AAA -- Debt rated AAA has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
AA -- Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from AAA issues only in a small degree.
A -- Debt rated A has a strong capacity to pay interest and repay principal,
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB -- Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Where as it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
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BB-- Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments The BB rating
category is also used for debt subordinated to senior debt that is assigned an
actual or implied BBB- rating.
B-- Debt rated B has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB or BB- rating.
PLUS (+) OR (-): The ratings from AA to B may be modified by the addition
of a plus or minus sign to show relative standing within the major categories.
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